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 March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to___________
Commission File Number____________
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)
ONE CARLSON PARKWAY
SUITE 120
MINNEAPOLIS, MN 55447
612-473-3250
(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 March 31,
1996 was
7,536,545 shares $.01 Par
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated statements of financial position--March 31, 1996 and
December 31, 1995
Consolidated statements of operations -- Three months ended March 31,
1996 and 1995
Consolidated statements of cash flows-- Three months ended March 31,
1996 and 1995
Notes to consolidated financial statements-- March 31, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
10.1 Agreement Regarding Distribution of Software Programs.
11.1 Computation of Earnings per Share
27 Financial Data Schedule
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 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 joint marketing
partners to market successfully the Company's database software; termination of
any of the Company's joint marketing arrangements; failure of new products from
the Company or its joint venture to achieve market acceptance or significant
delays in the introduction of these new products; termination of one or more of
the Company's agreements with national medical societies: lack of continued
market acceptance of the Company's clinical outcomes database software; failure
of the Company to maintain the integrity of its national databases; inability of
the Company to manage growth effectively and to establish effective financial
and management controls; failure of the Company to integrate the businesses of
its recently acquired subsidiaries and its joint venture into the Company's
operations; changes in government regulation; loss of key management personnel;
increased competition; and inability of the Company to obtain adequate
protection for the Company's proprietary technology. 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, dated March 28, 1996. A copy of the
Form 10-K may be obtained from the Public Reference Branch of the SEC at 450
Fifth Street, N.W., Washington, D.C. at prescribed rates.
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
ASSETS March 31, December 31,
1996 1995
----------- ------------
Currents assets
Cash and cash equivalents $ 2,368,656 $ 2,035,399
Short-term investments 20,140,280 20,718,674
Accounts receivable (net of allowance of $110,343 5,384,713 6,309,745
and $101,397 respectively)
Note receivable-officer 27,080 59,632
Other current assets 1,184,058 769,365
----------- -----------
Total currents assets 29,104,787 29,892,815
Equipment and fixtures, net 1,521,493 1,385,663
Computer software costs, net 80,284 103,207
----------- -----------
Total assets $30,706,564 $31,381,685
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 774,032 $ 1,154,728
Accrued compensation 780,998 498,057
Accrued royalties 264,107 332,773
Deferred revenue 1,229,069 1,334,967
Income taxes payable 8,062 110,062
Note payable - officer 0 17,991
Notes payable and convertible debentures 15,000 15,000
Current portion of long-term debt 0 13,278
----------- -----------
Total current liabilities 3,071,268 3,476,856
Long-term debt 12,431 20,580
Shareholders' equity:
Common stock, $.01 par value:
Authorized shares - 38,933,333
Issued and outstanding shares - 7,536,545
at March 31, 1996; 7,515,565 at
December 31, 1995 75,365 75,156
Additional paid-in capital 36,217,280 36,197,523
Accumulated deficit (8,669,780) (8,388,430)
----------- -----------
Total shareholders' equity 27,622,865 27,884,249
----------- -----------
Total liabilities and shareholders' equity $30,706,564 $31,381,685
=========== ===========
See accompanying notes
Page 1
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
March 31
-----------------------------
1996 1995
-----------------------------
Revenue
Software licenses $ 1,986,628 $ 1,465,829
Support and service 1,926,653 1,158,619
----------- -----------
Total revenue 3,913,281 2,624,448
Cost of sales
Software licenses 376,944 149,444
Support and service 857,570 726,058
----------- -----------
Total cost of sales 1,234,514 875,502
Gross profit 2,678,767 1,748,946
Operating expenses
Selling and marketing 1,901,340 1,254,924
Research and development 361,304 276,436
General and administrative 938,884 553,258
----------- -----------
Total operating expenses 3,201,528 2,084,618
----------- -----------
Loss from operations (522,761) (335,672)
Interest income, net 259,244 35,235
----------- ----------
Net loss before income taxes (263,517) (300,437)
Income tax expense 17,832 0
----------- ----------
Net loss ($281,349) ($300,437)
=========== ==========
Net loss per share
Primary ($0.04) ($0.09)
=========== ==========
Fully diluted ($0.04) ($0.07)
=========== ==========
Weighted average shares outstanding
Primary 7,527,314 3,378,874
=========== ==========
Fully diluted 7,527,314 4,445,530
=========== ==========
See accompanying notes
Page 2
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31
-------------------------------
1996 1995
---------- ----------
Operating activities:
Net loss ($281,349) ($300,437)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 148,991 112,340
Changes in operating assets and liabilities:
Accounts receivable 920,563 (79,267)
Other current assets (377,672) (3,220)
Accounts payable and accrued expenses (482,696) 107,671
Accrued compensation and royalties 214,275 38,685
Deferred revenue (105,898) (23,182)
---------- ----------
Net cash (used in) provided by operating activities 36,214 (147,410)
Investing activities
Purchase of short-term investments (9,203,645) (435,153)
Sales of short-term investments 9,782,039 1,027,457
Purchases of equipment and fixtures (287,433) (286,929)
Disposal of equipment and fixtures 25,534 -
---------- ----------
Net cash provided by investing activities 316,495 305,375
Financing activities
Proceeds from long-term debt 12,431 27,612
Principal payments on long-term debt (33,858) (7,426)
Principal payments on note payable - officer (17,991) -
Issuance of Common Stock - 105,008
Net proceeds from exercise of common stock options 19,966 10,000
---------- ----------
Net cash (used in) provided by financing activities (19,452) 135,194
Increase in cash and cash equivalents 333,257 293,159
Cash and cash equivalents at beginning of period 2,035,399 169,211
---------- ----------
Cash and cash equivalents at end of period $2,368,656 $462,370
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $6,455 $677
See accompanying notes.
Page 3
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions 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 three month period ended March 31,
1996, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 1995 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 - DISTRIBUTION AGREEMENTS
During the first quarter of 1996, the Company entered into a product
distribution agreement with Meadox Medicals, a division of Boston Scientific
Corporation ("BSC"). The agreement grants BSC an exclusive right and license to
market, sell, and distribute vascular and endovascular surgery programs
worldwide. In order to maintain exclusivity, BSC has agreed to purchase a
minimum number of programs over the next five years.
Page 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
- - -------
Summit Medical is a leading provider of clinical outcomes database software
and related products and services for selected medical specialties in the
healthcare industry. The Company's database software enables healthcare
providers to record, analyze and report detailed clinical, economic and patient-
reported outcomes data on medical procedures, diseases and patient functional
status.
RESULTS OF OPERATIONS
- - ---------------------
REVENUE:
- - --------
REVENUE was $3,913,000 for the first quarter of 1996, an increase of
$1,289,000 or 49% over the first quarter of 1995. Sales of software licenses
were $1,987,000 for the first quarter of 1996, an increase of $521,000 or 36%
over the first quarter of 1995, and accounted for 40% of the total revenue
growth. This increase is primarily attributable to increased unit volume in
cardiology and new subspecialty modules, a general price increase of cardiology
modules and increased sales to the Company's DOS customers of Windows Vista (R)
upgrades. Support and service revenue was $1,927,000 for the first quarter of
1996, an increase of $768,000 or 66% over the first quarter of 1995 and
accounted for 60% of total revenue growth. This increase is primarily
attributable to increased training and service fees related to the Company's
greater installed customer base, additional development fees from joint
marketing partners, and increased consulting and data conversion fees.
COST OF SALES:
- - --------------
TOTAL COST OF SALES was $1,235,000 in the first quarter of 1996, an
increase of $359,000 or 41% over the same period of 1995.
COST OF SOFTWARE LICENSE revenue was $377,000 for the first quarter of
1996, an increase of $228,000 or 153% over the first quarter of 1995. This
increase was primarily due to increased revenues and corresponding royalties and
freight.
COST OF SUPPORT AND SERVICE was $858,000 for the first quarter of 1996, and
increase of $132,000 or 18% compared to the first quarter of 1995. This increase
was due primarily to increased salary expense for permanent and temporary
personnel in customer service and data management areas.
Page 5
OPERATING EXPENSES:
- - -------------------
SELLING AND MARKETING expenses were $1,901,000 during the first quarter of
1996, an increase of $646,000 or 51% compared to the same quarter of 1995. This
increase is primarily due to an expansion of the domestic sales force, increased
sales and marketing cost at Summit Medical Europe, and hiring of marketing
personnel.
RESEARCH AND DEVELOPMENT expense was $361,000 in the first quarter of 1996,
an increase of $85,000 or 31% compared to the same quarter of 1995. The increase
is due primarily to the hiring of additional technical personnel to aid in the
development of new software.
GENERAL AND ADMINISTRATIVE expense was $939,000 for the first quarter of
1996, an increase of $386,000 or 70% compared to the first quarter of 1995. The
increase is due primarily to the hiring of additional executive and
administrative personnel, higher legal and accounting fees, and increased
insurance expense.
INTEREST INCOME, NET of interest expense and unrealized loss on short term
investments was $259,000 for the first quarter of 1995, an increase of $224,000
compared to the first quarter of 1995. This increase is due to the interest
income earned on proceeds received from the Company's August 1995 initial public
offering.
INCOME TAX EXPENSE. The Company recorded minimal income tax expense for the
first quarter of 1996 due to the current period loss. No income tax was recorded
for the first quarter of 1995 due to the Company's accumulated net operating
loss carryforward.
NET INCOME (LOSS). The Company recorded a net loss of $281,000 or $.04 per
share for the quarter ended March 31, 1996 compared to a net loss of $300,000 or
$.09 per share (Primary) for the quarter ended March 31, 1995. Primary earnings
per share reflect a decrease in the loss per share of $.05 due to the increase
in weighted average shares outstanding after the Company's initial public stock
offering.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
During the three months ended March 31, 1996, the Company's cash increased
$333,000 to $2,369,000. As of March 31, 1996, the Company had $5,385,000 in
accounts receivable including $2,216,000 in accounts receivable over 90 days
old.
Cash provided by operating activities was $36,000 for the three months ended
March 31, 1996. The primary sources of cash were a decrease in accounts
receivable of $921,000 due to collections exceeding revenues, and an increase in
accrued compensation and royalties of $214,000. These sources were partially
offset by a net loss of $281,000, an increase in other current assets of
$378,000 and a decrease in accounts payable and accrued expenses of $483,000.
Cash provided by investing activities was $316,000 which consists of the sales
of short-term investments of $9,782,000 and the purchase of equipment and
fixtures of $287,000, partially offset by the purchase of short-term investments
in the amount of $9,204,000.
Page 6
Cash used in financing activities for the three months ended March 31, 1996, was
$19,000 related to principal payments on notes payable-officer and retirement of
long term debt.
The Company does not have any material scheduled commitments for capital
expenditures. The Company believes that the cash and short-term investments of
$22,509,000 on hand at March 31, 1996, together with anticipated cash flows from
operations, will be sufficient to fund operating cash needs through at least
fiscal year 1996.
Page 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
The following exhibits are included herein:
Exhibit
No.
- - -------
(10.1) Agreement Regarding Distribution of Software Programs by and between
Meadox Medicals, a division of Boston Scientific Corporation and Summit
Medical Systems, Inc., dated as of March 26, 1996.
(11.1) Computation of Earnings Per Share
(27) Financial Data Schedule
Page 8
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 May 13, 1996 /s/ Anthony W. Rees
------------------------- ----------------------------
Anthony W. Rees
Chief Financial Officer
Page 9