UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number____________
SUMMIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1545493
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
10900 Red Circle Drive
Suite 100
Minnetonka, MN 55343
612-939-2200
(Address including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and has been subject to such filing requirements
for the past 90 days. X Yes No
--- ---
The number of shares outstanding of the Registrant's Common Stock on June 30,
1997 was
10,376,575 shares $.01 Par Value
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated statements of financial position--June 30, 1997 and
December 31, 1996
Consolidated statements of operations -- Three months ended June 30,
1997 and 1996
Six months ended June 30,
1997 and 1996
Consolidated statements of cash flows -- Six months ended June 30,
1997 and 1996
Notes to consolidated financial statements -- June 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Termination Agreement Regarding Distribution of Software Programs
By And Between SCIMED Life Systems, Inc, Boston Scientific
Corporation and Summit Medical Systems, Inc., dated June 25, 1997
10.2 Agreement dated August 14, 1997 By and Between Summit Medical
Systems, Inc., Charles L. McIntosh and Gail J. Greenberg.
11.1 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K, filed June 9, 1997 (File No. 0-26390), reporting the
Company's decision to discontinue using Ernst & Young LLP as the
Company's independent accountants. Form 8-K, filed June 11, 1997
(File No. 0-26390) reporting the Company's engagement of Arthur
Anderson LLP as the Company's independent public accountants.
Signatures
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. These forward-looking
statements include statements regarding intent, belief or current expectations
of Summit Medical Systems, Inc. (the "Company") and its management and involve
risks and uncertainties that may cause the Company's actual results to differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such differences include, but are not limited to, failure of
the Company's client/server database products, CQS program or on-line registries
to achieve market acceptance, significant delays in the development of the
client/server products and registries, discovery of technical difficulties or
defects in the client/server products and registries, and failure of the Company
to expense reductions or increased revenues from current customers. The forward-
looking statements herein are qualified in their entirety by the cautions and
risk factors set forth in Exhibit 99, under the caption "Cautionary Statement,"
to the Company's Annual Report on Form 10-K, as amended pursuant to amendments
filed on April 4, 1997 and April 30, 1997, respectively. A copy of the Form 10-K
may be obtained from the Public Reference Branch of the SEC at 450 Fifth Street
NW, Washington, DC at prescribed rates.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
June 30, December 31,
1997 1996
(unaudited)
----------------------------
ASSETS
Current assets
Cash and cash equivalents $ 7,593,224 $ 9,386,069
Short-term investments 25,971,448 35,243,624
Accounts receivable (net of allowance of
652,812 at June 30, 1997; $650,000 at December
31, 1996) 3,524,172 3,776,351
Other current assets 982,416 678,627
----------------------------
Total current assets 38,071,260 49,084,671
Equipment and fixtures, net 3,107,348 3,203,931
Computer software costs, net 1,008,653 1,198,573
----------------------------
Total assets $42,187,261 $53,487,175
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,906,390 $ 3,617,718
Accrued compensation 816,648 1,236,118
Accrued royalties 50,682 375,332
Deferred revenue and payables 3,016,345 1,867,006
Income taxes payable 26,248 7,648
Notes payable and convertible debentures -- 100,000
Line of credit -- 150,000
Current portion of long-term debt 13,493 23,628
----------------------------
Total current liabilities 6,829,806 7,377,450
Long-term debt 23,553 26,525
Shareholders' equity
Common Stock, $.01 par value:
Authorized shares -- 38,933,333
Issued and outstanding shares -- 10,376,575
at June 30, 1997; 10,343,830 at December 31, 1996 103,766 103,438
Additional paid-in capital 69,757,865 69,700,376
Accumulated deficit (34,527,729) (23,720,614)
----------------------------
Total shareholders' equity 35,333,902 46,083,200
----------------------------
Total liabilities and shareholders' equity $ 42,187,261 $ 53,487,175
============================
The accompanying notes are an integral part of these financial statements.
1
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------------------------
1997 1996 1997 1996
(unaudited) (restated) (unaudited) (restated)
------------------------------------------------------------
Revenue
Software licenses $ 106,425 $ 2,298,106 $ 1,294,612 $ 4,007,934
Support and service 1,027,913 1,544,543 1,858,535 2,976,380
Consulting fees 1,988,064 1,500,673 3,983,059 3,047,340
--------------------------- ---------------------------
Total revenue 3,122,402 5,343,322 7,136,206 10,031,654
Cost of Sales
Software licenses 292,057 179,703 856,315 528,967
Support and service 1,054,550 638,411 1,911,762 1,219,044
Consulting fees 1,462,248 984,646 2,820,253 1,795,051
--------------------------- ---------------------------
Total cost of sales 2,808,855 1,802,760 5,588,330 3,543,062
Gross profit 313,547 3,540,562 1,547,876 6,488,592
Operating expenses
Selling and marketing 1,819,748 2,188,286 3,603,510 4,126,073
Research and development 704,794 657,651 1,817,062 1,018,955
General and administrative 4,610,865 1,214,025 8,023,621 2,397,089
--------------------------- ---------------------------
Total operating expenses 7,135,407 4,059,962 13,444,193 7,542,117
--------------------------- ---------------------------
Loss from operations (6,821,860) (519,400) (11,896,317) (1,053,525)
Interest income, net 514,565 297,204 1,093,911 597,216
--------------------------- ---------------------------
Loss before income taxes (6,307,295) (222,196) (10,802,406) (456,309)
Income tax expense 1,773 14 4,709 17,305
--------------------------- ---------------------------
Net loss $(6,309,068) $ (222,210) $(10,807,115) $ (473,614)
--------------------------- ---------------------------
Net loss per share:
Primary and fully diluted $ (0.61) $ (0.02) $ (1.04) $ (0.06)
--------------------------- ---------------------------
Weighted average shares outstanding:
Primary and fully diluted 10,359,065 9,153,849 10,353,351 8,512,379
--------------------------- ---------------------------
The accompanying notes are an integral part of these financial statements.
2
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
-----------------------------
1997 1996
(unaudited) (restated)
-----------------------------
Operating activities:
Net loss $(10,807,115) $ (473,614)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 655,128 336,235
Amortization 192,000 45,846
Changes in operating assets and liabilities:
Accounts receivable (net of allowance of $652,812
and $110,331 in 1997 and 1996, respectively) 252,179 136,694
Advances to officers 47,500
Other current assets (303,789) (416,153)
Accounts payable and accrued expenses (711,328) (777,579)
Accrued compensation (419,470) 324,659
Accrued royalties (324,650) 54,011
Income tax payable 18,600
Deferred revenue 1,149,339 (114,441)
-----------------------------
Net cash used in operating activities (10,299,106) (836,842)
Investing activities:
Purchase of short-term investments (14,758,285) (17,383,262)
Sales and maturities of short-term investments 24,030,461 19,469,110
Purchases of equipment and fixtures (563,350) (884,605)
Sales of equipment and fixtures 4,805 25,534
Capitalized software cost (2,080)
-----------------------------
Net cash provided by investing activities 8,711,551 1,226,777
Financing activities:
Proceeds from long-term debt 51,431
Principal payments on long-term debt (13,107) (42,061)
Principal payments on notes payable & convertible
debentures (100,000) (15,000)
Net proceeds from line of credit (150,000) (20,000)
Payments on note payable -- officer (17,991)
Distributions to shareholders (250,000)
Net proceeds from common stock transactions 239,266
Net proceeds from exercise of common stock options 57,817 105,957
-----------------------------
Net cash provided by (used in) financing
activities (205,290) 51,602
Increase (decrease) in cash and cash equivalents (1,792,845) 441,537
Cash and cash equivalents at beginning of period 9,386,069 2,202,004
-----------------------------
Cash and cash equivalents at end of period $ 7,593,224 $ 2,643,541
-----------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 5,352 $ 6,916
The accompanying notes are an integral part of these financial statements.
3
Summit Medical Systems, Inc.
Notes to Consolidated Financial Statements
June 30, 1997
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instruction to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto for the year ended December 31, 1996
included in the Annual Report of the Company.
Note B - Cash, Cash Equivalents and Investments
Cash in excess of current operating needs is invested in highly liquid money
market and/or marketable debt securities in accordance with the Company's
investment policy. Cash equivalents are highly liquid investments with
remaining maturities of 90 days or less at the time of purchase. Other highly
liquid investments with remaining maturities of one year or less at the time of
purchase are considered short-term investments.
Note C - New Accounting Pronouncement
In March 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which
requires the disclosure of basic earnings per share and diluted earnings per
share information. The Company expects to adopt SFAS 128 at the end of 1997 and
anticipates it will not have a material impact on previously reported earnings
per share.
4
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
- --------
Summit Medical Systems, Inc. (the "Company") is a leading provider of
clinical information systems and consulting services to the healthcare industry.
The Company's database software enables healthcare providers to monitor, manage
and report detailed clinical information on medical procedures, diseases and
patient outcomes. The Company currently offers database products primarily on
two technology platforms, Crescendo! and Vista. The Crescendo! platform is
designed for use in hospital cardiac and cardiovascular surgery centers. In the
second half of 1996, the Company introduced Crescendo! Forte, a client/server,
relational database product for use in high volume cardiac and cardiovascular
surgery centers. In June 1997, the Company also introduced the first release of
a Crescendo! product for medium and low volume centers ("Crescendo! 1.0"), which
provides core functionality, simplified installation and reduced pricing
compared to Crescendo! Forte. The Vista platform is a Windows based, flat file
application, covering a product line of over 40 database software modules that
is primarily used in five medical specialties including: cardiac and thoracic
surgery, cardiology, ophthalmology, urology and orthopaedics. The Company also
provides a range of consulting services through its subsidiaries, C.L. McIntosh
& Associates ("CLMA") and BSM Consulting Group ("BSM"). In late 1996, the
Company introduced registry services designed to evaluate the efficacy of
specific medical devices or drug therapies utilizing Crescendo technology and
on-line data collection through the World Wide Web.
Second Quarter 1997 Results - The Company incurred an operating loss of
---------------------------
$6.8 million during the three months ended June 30, 1997, which included special
charges for payments and reserves amounting to approximately $3.2 million,
primarily covering:
(i) A charge of $2.8 million covering agreements reached with the
parties, including members of management, who received Company stock,
options or warrants in connection with the Company's December 1996
acquisitions of CLMA and 100% of the equity interest in the
Cordillera L.L.C. ("Cordillera") joint venture. The agreements
involve payments of cash and common stock of the Company to these
parties and repricing of warrants issued in connection with the
Cordillera acquisition. In return, the Company has received, or will
receive, a general release from these parties against certain
possible claims arising since the acquisitions, primarily related to
their shareholdings. The Board of Directors authorized the agreements
based on the importance and unique position of CLMA and the
Crescendo! technology developed by Cordillera to the Company's future
operations. In order to preserve the value to the Company of the CLMA
and Cordillera operations and their assets, the Board determined that
it was in the best interest of the Company and its shareholders to
resolve these issues promptly. The agreement with the CLMA parties
was concluded, and related payments made in June 1997. The Company
has reached an agreement-in-principle with the Cordillera parties
which is expected to be completed in August 1997, subject to
agreement on definitive terms and conditions;
(ii) A reserve for an obligation included in the Company's headquarters
lease requiring the Company to make a $350,000 penalty payment if it
fails to exercise an option to lease additional space at such
facility by mid 1998, a currently unoccupied portion of the building.
At this time, Company believes it is unlikely that it will require
this additional space; and
(iii) Severance costs, including estimated costs associated with the
departure of the Company's former Chief Executive Officer.
Revenues in the second quarter 1997 were below recent quarters as software
sales continued to be adversely impacted by the transition from the Vista
product line to the Crescendo! product line. The Company de-emphasized the
direct marketing of its Vista product line for cardiology and cardiovascular and
thoracic surgery in first quarter 1997, effectively removing itself from the
software market until the introduction of its client/sever, relational database
product line ("Crescendo!"). While the Company introduced Crescendo! Forte in
the second half of 1996 for use in a limited number of high volume cardiac
catheterization and cardiovascular surgery centers, Crescendo! 1.0 was not
introduced until June 1997.
Installation and training on the first three beta sites for Crescendo! 1.0
commenced in July 1997, and is expected to be substantially completed during
third and fourth quarter 1997. The Company has contracts for nine additional
Crescendo! 1.0 sites, the majority of which are also expected to be
substantially installed by the end of fourth quarter 1997. The total contract
value of these twelve Crescendo! contracts is $1.3 million, which includes
support and maintenance revenues that will be recognized over the next three
years.
In addition, the four Crescendo! Forte installations that commenced in 1996
represent a total contract value of approximately $900,000 over three years. As
of June 30, 1997, the Company had not recorded any revenue associated with
these contracts. While substantial work has been performed at these
installations to date, and core software modules have been installed,
obligations remain to provide additional modules and interfaces which had not
yet been developed. Certain Crescendo! Forte customers have expressed concerns
with delays in providing such modules and interfaces, and the Company is working
with them to address those concerns. In accordance with its revenue recognition
policy, the Company will not record any
5
revenues on these contracts until all such obligations are substantially
fulfilled, which may not be until 1998.
The Company has concluded that the market for Crescendo! Forte is limited
and the support and service requirements are prohibitively expensive. Therefore,
the Company has decided to no longer market Crescendo! Forte, and has not sold
any additional Crescendo! Forte contracts beyond the four charter sites. The
Company has decided to focus its marketing activities on Crescendo! 1.0, which
it believes is better suited to its target market and more effectively installed
and integrated with customer's existing systems.
The Company has been selling Crescendo! 1.0 for several months in order to
provide reference sites and validation of the technology. A full scale marketing
and promotional effort will not be initiated until implementation of the initial
beta sites is completed. The Company anticipates that revenues from Crescendo!
1.0 will be modest through the remainder of 1997, reflecting a longer sales and
implementation cycle associated with more complex, higher priced client/server
products, uncertainty as to the market demand for such products and lack of
referenceable accounts.
The Company is currently considering initiatives for increasing revenues
derived from its existing base of DOS and Vista customers, including upgrading
DOS users to Vista, cross-selling additional modules and consulting services to
Vista users and increasing annual support and maintenance fees. The Company's
CLMA subsidiary is also bidding to perform broader data mangement services for
medical device manufacturers. In addition, the Company is reviewing the
performance of each of its product lines and business units to evaluate their
prospects and significance to the Company's core business. The Company also
plans to review its expense base for opportunities to reduce the current run
rate of expenses. The initiatives outlined above are not yet fully developed and
have not been tested in the market. Accordingly, there can be no assurance that
these initiatives will result in increased revenues or reduced expenses.
First Half 1997 Results - The $11.9 million loss from operations for the
-----------------------
six months ended June 30, 1997 included special charges for payments and
reserves amounting to approximately $5.2 million. This amount included $3.2
million recorded in the second quarter, as summarized above, and $2.0 million
recorded in the first quarter covering primarily:
(i) Accounting fees incurred in connection with the Company's restatement
of revenues;
(ii) Reserves for legal fees expected to be incurred in connection with
various shareholder lawsuits and investigations by the Securities
and Exchange Commission ("SEC");
(iii) The cost of renegotiating various development contracts involving
certain medical specialties. In April 1997, the Company decided to
significantly reduce its involvement in a number of medical specialty
markets that were not central to its near term strategy, and to focus
more directly on the cardiology and cardiovascular medical specialty
markets. The Company determined that the near term revenue potential
associated with these medical specialties, including vascular,
electrophysiology (EP), urology and critical care, did not warrant
the related development and marketing expenses. The Company has
revised or terminated commitments made in 1995 and 1996 under
development and support agreements
6
with various subsidiaries of Boston Scientific Corporation related to
these specialty markets, and has partially refunded amounts received
under these agreements, including amounts received for contract
development work performed in prior years. In June, 1997, The Company
executed an agreement with Boston Scientific Corporation to market
the Company's Crescendo! product line on a non-exclusive basis; and
(iv) Severance costs associated with a downsizing that occurred in
March 1997.
Revenues in the first half of 1997 suffered due to the transition from the
Viata to Crescendo! product line as discussed in "Second Quarter 1997 Results"
above.
Expenses in the first half of 1997 increased in part, due to the dual
development of the Crescendo! products and Vista Elite, resulting in greater
research and development and marketing expense. Efforts to develop Vista Elite
were de-emphasized in first quarter 1997. Expenses also increased as the Company
added support and implementation personnel to support the more complex
Crescendo! 1.0 and Crescendo!Forte products. In March 1997, the Company
implemented a cost reduction program to reduce the workforce throughout the
Company, except at BSM and CLMA. Twenty-nine positions were eliminated as a
result, reducing the number of full-time employees from 208 at December 31, 1996
to 179 following the reduction. As of August 13, 1997, the number of full-time
employees was 163 .
Result of Operations
- --------------------
Total Revenue. The Company's revenue for the second quarter of 1997 was
derived primarily from annual support and maintenance services related to its
Vista products and consulting services provided by its BSM and CLMA
subsidiaries. Revenues totaled $3.1 million for the second quarter of 1997, a
decrease of $2.2 million, or 42%, as compared with second quarter of 1996,
reflecting (i) de-emphasis of direct marketing efforts for Vista products, (ii)
delays in recognizing revenue under the existing Crescendo! Forte agreements and
(iii) lack of revenues arising from sales of Crescendo! 1.0 until the end of
second quarter of 1997. Revenue of $7.1 million for the first six months ending
June 30, 1997 represented a 29% decrease over the same period in 1996 that was
also largely due to these factors. Software license revenues were $1.3 million
in the first six months of 1997, $2.7 million or 68% below the first half of
1996 as a result of the various factors discussed above.
Software License Revenue. The Company's software license revenue primarily
consists of sales of database software licenses, software upgrades and
networking fees. Sales of software licenses were $106,000 for the second
quarter of 1997, $2.2 million or 95%, below the second quarter of 1996 as a
result of the various factors discussed. Software license revenues were $1.3
million in the first six months of 1997, $2.7 million or 68% below the first
half of 1996 as a result of the factors discussed above.
The Company has recorded no revenues to date related to its Crescendo!
products. As discussed more fully in the "Overview" section, Crescendo! 1.0 was
not introduced until June 1997 and the Company has not yet fully completed the
installation of a Crescendo! 1.0 site. While substantial work has been performed
on the four Crescendo! Forte installations under way since 1996, obligations to
develop and provide additional software modules and interfaces remain. Certain
Crescendo! Forte customers have expressed concerns with delays in providing such
modules and interfaces, and the Company is working with them to address those
concerns. The
7
Company will not record any revenues on these contracts until all such
obligations are substantially fulfilled, which may not be until 1998.
In February 1997, the Company entered into an agreement with Eli Lilly
Company ("Eli Lilly") to participate in a pilot program for a registry to
collect, analyze and report on the use of a platelet aggregation inhibitor
during coronary interventions. This agreement has a contract value of $400,000,
and involves installation of an on-line data capture system at ten pilot
catheterization labs, utilizing Crescendo! technology. During August 1997, the
Company successfully completed development of an internet version of this on-
line system, which utilizes a World Wide Web-based front-end installed at the
lab site. Seven labs have been selected as pilot sites to date, of which three
have signed participation agreements, and all ten sites are expected to be
selected and installed during the third and fourth quarters of 1997. The Company
will record revenue under this contract when installation of the pilot sites is
completed, on a pro rata basis.
Software license revenue from sales to marketing partners comprised 21% of
total software revenue in first half of 1997. In June 1997, the Company
terminated an existing joint marketing agreement with Boston Scientific
Corporation ("Boston Scientific") that provided Boston Scientific exclusive
third party rights to market selected Vista software modules in return for
certain minimum purchase commitments. At that time, a new agreement was executed
with Boston Scientific granting them a nonexclusive right to market the
Company's Crescendo! product line.
Support and Service Revenue. Support and service revenue primarily
includes fees from annual support and service agreements, training, consulting,
module development and hardware. Support and service revenue was $1.0 million
for the second quarter of 1997, a 33% decrease from second quarter 1996 due to
lower software sales and attrition among existing customers. Support and service
revenue for the six months ended June 30, 1997 was $1.9 million, a 38% decrease
over the same period in 1996 which was also attributable to these factors.
Consulting Revenue. Consulting revenue consists of fees received by BSM
for providing strategic development, financial analysis and systems planning
services to health care providers and vendors and fees received by CLMA for
regulatory affairs services provided primarily to manufacturers of new medical
device and biologic products in order to secure Food and Drug Administration
("FDA") approval. CLMA services include regulatory strategy for FDA
submissions, clinical trials and statistical analysis. Consulting revenue was
$2.0 million for the second quarter of 1997, an increase of $487,000 or 32%
over the second quarter of 1996. This increase was primary due to revenue
generated from expanded consulting services provided by CLMA and from an
increase in services provided to existing customers at BSM. Consulting revenues
for the first six months of 1997 were $4.0 million, a 31% increase over the
first six months of 1996 due primarily to expanded consulting services provided
by CLMA.
8
Total Cost of Sales. Cost of sales as a percentage of total revenue was
90% in second quarter 1997, compared to 34% in second quarter 1996, reflecting
the impact of fixed personnel costs on a lower revenue base and the addition of
support and implementation personnel to support the Crescendo! product line. A
portion of this increase reflected personnel costs in the implementation area
that were classified as operating expense in second quarter 1996 rather than
cost of sales. For the first six months of 1997, cost of sales was 78% of
revenues as compared with 35% of revenues in the same period of 1996. This
increase was attributable mainly to a lower revenue base in 1997.
Cost of Software License Revenue. Cost of software license revenue consists
of expenses directly related to sales of software licenses, including royalties,
freight, user guides, diskettes, amortization of capitalized software and an
allocation of costs incurred by the client relations department for various
software related activities. Amortization of capitalized software amounted to
$96,000 in the second quarter of 1997, compared to $15,000 in the second quarter
of 1996. This increase reflects three year amortization of $1.2 million in
capitalized software acquired in connection with the acquisition of 100%
interest in Cordillera L.L.C. ("Cordillera") at December 31, 1996.
The following table sets forth, for the periods indicated, the relationship
of cost of license fees and license fees and license fee revenues:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) (in thousands)
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
License fee revenue $ 106 $2,298 $1,295 $4,008
Cost of license fees 292 180 856 529
Cost of license fees as a percentage
of software license fee revenues 274% 8% 66% 13%
The increase in cost of license fees as a percent of license fee revenue
during second quarter and first half of 1997 primarily reflects a reduction in
license fee revenue in those periods as compared to the same periods in 1996.
Cost of Support and Service Revenue. Cost of support and service revenue
consists of expenses directly related to sales of support and service, including
royalties, customer service personnel costs, and expenses for training and
clinical data services. The following table sets forth, for the periods
indicated, the relationship of cost of support and services and support and
service revenues:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) (in thousands)
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Support and service revenue $1,028 $1,545 $1,859 $2,976
Cost of support and service 1,055 638 1,912 1,219
Cost of support and service as a percentage
of support and service revenues 103% 41% 103% 41%
9
The increase in cost of support and service as a percent of support and
service revenue during second quarter and first half of 1997 reflects a
reduction in support and service revenue in that quarter as compared to the same
periods in 1996 and to increased staffing in the implementation and technical
services departments as discussed. A portion of this increase reflected
personnel costs for eight employees in the implementation and technical services
areas that were classified as operating expense in first half of 1996 rather
than cost of sales.
Cost of Consulting Revenue. Cost of consulting revenue consists of
personnel costs and related expenses associated with the BSM and CLMA. The
following table sets forth, for the periods indicated, the relationship of the
cost of consulting and consulting revenue:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) (in thousands)
------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
Consulting revenue $1,988 $1,501 $3,983 $3,047
Cost of consulting 1,462 985 2,820 1,795
Cost of consulting as a percentage
of consulting revenues 74% 66% 71% 59%
Cost of consulting increased to 74% of consulting revenue in second quarter
1997 from 66% in second quarter 1996, due to increased staffing at CLMA and BSM.
The percentage increase to 71% in the first half of 1997 from 59% in the first
half of 1996 was also due to increased staffing.
Selling and Marketing Expenses. Selling and marketing expenses were $1.8
million during the second quarter of 1997, a decrease of $368,000 or 17%
compared to the same quarter of 1996 due primarily to personnel costs in the
implementation area that were classified as marketing expense in second quarter
1996 and cost of sales in 1997. This reclassification also accounts for a 13%
decline in selling and marketing expenses during the first half of 1997 as
compared to the first half of 1996.
Research and Development Expenses. Research and development expense was
$705,000 in the second quarter of 1997, an increase of $47,000 or 7% compared to
the second quarter of 1996 as the Company increased its development staff and
its use of outside consultants to develop its Crescendo! product line. Research
and development expense for the first six months of 1997 amounted to $1.8
million as compared to $1.0 million for the comparable period in 1996. The dual
development of the Crescendo! products and Vista Elite also resulted in greater
research and development expense during the first half of 1997. As discussed
above, efforts to develop Vista Elite were discontinued in first quarter 1997.
In March 1997, the Company eliminated eight positions in the research and
development department as part of a Company-wide cost reduction program.
10
General and Administrative Expenses. General and administrative expense was
$4.6 million for second quarter 1997, an increase of $3.4 million over second
quarter 1996. The increase is due primarily to charges amounting to
approximately $3.2 million to cover costs discussed under "Overview". General
and administrative expense was $8.0 million for the six months ended June 30,
1997 as compared to $2.4 million for the first half of 1996. The $5.6 million
increase includes second quarter charges of $3.2 million as described above and
first quarter charges of approximately $2.0 million as discussed under
"Overview".
Interest Income. Interest income, net, increased to $515,000 in second
quarter 1997 from $297,000 in second quarter 1996 as proceeds from the Company's
July 1996 secondary stock offering were invested in short term securities.
Interest income, net, for the first half of 1997 amounted to $1.1 million as
compared to $597,000 in the first half of 1996.
Income Tax Expense. To date, the Company has not incurred any substantial
income tax liability because of its historical operating losses. The deferred
tax asset related to operating loss carry forwards generated in the first half
of 1997 and 1996 were fully offset by an increase in the valuation allowance
because of the Company's history of operating losses.
Liquidity and Capital Resources
- -------------------------------
During the six months ended June 30, 1997, the Company's cash and cash
equivalents decreased by $1.8 million reflecting $10.3 million used in operating
activities and $563,000 used for the purchase of computer and networking
equipment, offset by net reduction in investments of $9.3 million.
Cash provided by investing activities was $8.7 million in the first half of
1997 which consisted primarily of the sale or maturity of short-term investments
of $24.0 million partially offset by the purchase of short-term investments in
the amount of $14.8 million . Cash used in financing activities of $205,000
represented repayment of long term debt.
As of June 30, 1997, the Company had net working capital of $31.2 million,
compared to $41.7 million at December 31, 1996. The $10.5 million decrease in
working capital resulted primarily from operating losses of $11.9 million during
the first half of 1997, including one time charges amounting to approximately
$5.2 million as discussed in the "Overview" section.
The Company believes that the continued expenditure of funds will be
necessary to support its future operations, and that cash and short-term
investments of $33.6 million on hand at June 30, 1997 will be sufficient to fund
its operations, capital requirements, potential settlement payments as discussed
above and expansion needs for the foreseeable future.
As of August 10, 1997, cash and short term investments totaled $32.2
million.
The Board of Directors has authorized a stock repurchase program under
which up to 10 million shares of the Company's common stock may be repurchased.
The Company may purchase such common stock from time to time at prevailing
prices in the open market, by purchases or in private transactions. The Company
intends to fund such repurchases with its available cash and cash equivalents.
As of June 30, 1997, there are approximately $10.4 million shares of the
Company's common stock issued and outstanding.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
None
Part II. Other Information
Item 1. Legal Proceedings
The Company was named as a defendant in ten federal court securities
actions venued in the United States District Court, District of Minnesota. Nine
of the ten actions are putative class actions, including: Jong E. Lee v. Summit
Medical Systems, Inc., filed on March 10, 1997; Mathias Faue, George E. and
Patricia E. Faue, Janice McQuiston v. Summit Medical Systems, Inc. et. al.,
filed on March 26, 1997; Judith Anne Jacobson v. Summit Medical systems, Inc.,
filed on March 31, 1997; Gordon E. Bennett, Desirea Swan, Randolph G. Sunder,
Darcie Molitor, and C. William Brown, M.D., trustee on behalf of C. William
Brown, M.D., v. Summit Medical Systems, Inc. et. al., filed May 7, 1997; Brian
Poffenberger v. Summit Medical Systems, Inc., et. al., filed May 8, 1997, Joseph
Cooper, Charles Fisher and Contractor's East, Inc. v. Summit Medical Systems,
Inc., et. al., filed May 9, 1997; Todd M. Adams v. Summit Medical Systems, Inc.
et. al., filed May 9, 1997; Ranjit C. Desai et. al. v. Summit Medical Systems,
filed May 12, 1997 and Phillip Thomas et. al. v. Summit Medical Systems, Inc.
et. al., filed May 12, 1997. The remaining action captioned, Teachers'
Retirement System of Louisiana v. Summit Medical Systems, Inc. et. al., was
filed on April 16, 1997 and is not a class action. Each action alleges, in
essence, that the Company made misleading public disclosures relating to its
financial statements and seeks compensatory damages for losses incurred as a
result of each alleged misleading public disclosure. In each of the putative
class actions, the plaintiffs seek declaration that the action be certified as a
class. As to federal securities law claims, each of the actions is subject to
the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
judge has ordered the consolidation of the putative actions, has named certain
plaintiffs as lead plaintiffs, and has ordered such lead plaintiffs to file an
amended consolidated complaint. The Teachers' Retirement System will remain as a
separate action because the plaintiff has stated in the Complaint that it does
not wish to participate in any class action. The Company believes it has
meritorious defenses to these actions and intends to defend against these
actions vigorously.
The Company has been informed by the Division of Enforcement of the
Securities and Exchange Commission (the "Commission"), through service of a
subpoena on March 25, 1997, that the Commission is conducting an investigation
of the Company, relating to the Company's restatement of certain financial
statements. The Company is cooperating fully with the Commission and its
investigation.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on June 12,
1997. There were 10,353,994 shares of common stock outstanding and entitled to
vote at the annual meeting, and a total of 6,906,907 were represented at the
meeting. Matters voted on were the following:
1. Proposal to elect five directors, each for a one year term:
For Withhold Authority
W. Hudson Connery, Jr. 6,505,022 401,885
Kevin R. Green 6,195,255 711,652
John M. Nehra 6,104,724 802,183
Kent J. Thiry 6,243,371 663,536
Edward F. Sweeney 6,242,056 664,851
2. Proposal to amend the 1993 Stock Option Plan to increase the number of
shares of common stock reserved for issuance upon exercize of options from
2,126,666 shares to 2,626,666 shares.
For Against Abstain Broker Non-Vote
5,314,032 1,568,498 24,377 0
12
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included herein:
10.1 Termination Agreement Regarding Distribution of Software Programs By
And Between SCIMED Life Systems, Inc, Boston Scientific Corporation
and Summit Medical Systems, Inc., dated June 25, 1997
10.2 Agreement dated August 14, 1997 By and Between Summit Medical
Systems, Inc., Charles L. McIntosh and Gail J. Greenberg.
11.1 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports on From 8-K
Form 8-K, filed June 9, 1997 (File No. 0-26390), reporting the
Company's decision to discontinue using Ernst & Young LLP as the
Company's independent accountants. Form 8-K, filed June 11, 1997
(File No. 0-26390) reporting the Company's engagement of Arthur
Anderson LLP as the Company's independent public accountants.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly
Summit Medical Systems, Inc.
----------------------------
Date August 14, 1997 /s/ Richard J. Willemin
- -------------------- ------------------------------------
Richard J. Willemin
Interim Chief Executive Officer
and Chief Financial Officer
13