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, 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 June 30,
1996 was
7,573,840 shares $.01 Par
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Consolidated statements of financial position--June 30, 1996 and
December 31, 1995
Consolidated statements of operations--Three and six months ended June
30, 1996 and 1995
Consolidated statements of cash flows--Six months ended June 30, 1996
and 1995
Notes to consolidated financial statements--June 30, 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
(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
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 29, 1996. 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.
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
ASSETS JUNE 30, DECEMBER 31,
1996 1995
--------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 2,328,060 $ 2,035,399
Short-term investments 18,622,853 20,718,674
Accounts receivable (net of
allowance of $110,331 and
$101,397 respectively) 7,147,035 6,309,745
Note receivable-officer 27,676 59,632
Other current assets 1,141,686 769,365
--------------- --------------
Total current assets 29,267,310 29,892,815
Equipment and fixtures, net 1,879,872 1,385,663
Computer software costs, net 65,000 103,207
--------------- --------------
Total assets $31,212,182 $31,381,685
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
expenses $468,937 $ 1,154,728
Accrued compensation 850,937 498,057
Accrued royalties 278,765 332,773
Deferred revenue 1,368,408 1,334,967
Income taxes payable 8,062 110,062
Note payable -- officer -- 17,991
Notes payable and convertible
debentures -- 15,000
Current portion of long-term
debt 15,799 13,278
--------------- --------------
Total current liabilities 2,990,908 3,476,856
LONG-TERM DEBT
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value: 35,112 20,580
Authorized shares -- 38,933,333
Issued and outstanding shares --
7,573,840 at June 30, 1996;
7,515,565 at December 31, 1995 75,738 75,156
Additional paid-in capital 36,542,164 36,197,523
Unrealized loss on investments (9,973) --
Accumulated deficit (8,421,767) (8,388,430)
--------------- --------------
Total shareholders' equity 28,186,162 27,884,249
--------------- --------------
Total liabilities and share-
holders' equity $31,212,182 $31,381,685
=============== ==============
See accompanying notes.
Page 1
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ------------------------
1996 1995 1996 1995
--------------------------- ------------------------
REVENUE
Software licenses $3,036,669 $1,726,814 $5,023,297 $3,192,643
Support and service 2,079,492 1,202,308 4,006,145 2,360,927
--------------------------- ------------------------
TOTAL REVENUE 5,116,161 2,929,122 9,029,442 5,553,570
COST OF SALES
Software licenses 253,559 251,480 630,503 400,924
Support and service 1,164,413 715,875 2,021,983 1,441,933
--------------------------- ------------------------
TOTAL COST OF SALES 1,417,972 967,355 2,652,486 1,842,857
GROSS PROFIT 3,698,189 1,961,767 6,376,956 3,710,713
OPERATING EXPENSES
Selling and marketing 2,173,713 1,444,026 4,075,054 2,698,950
Research and development 657,651 330,839 1,018,955 607,275
General and administrative 690,529 902,149 1,899,413 1,455,407
--------------------------- ------------------------
TOTAL OPERATING EXPENSES 3,791,893 2,677,014 6,993,422 4,761,632
--------------------------- ------------------------
LOSS FROM OPERATIONS (93,704) (715,247) (616,466) (1,050,919)
Interest income, net 341,188 28,461 600,432 63,696
--------------------------- ------------------------
NET INCME (LOSS) BEFORE INCOME TAXES 247,484 (686,786) (16,034) (987,223)
Income tax expense 14 0 17,302 0
--------------------------- ------------------------
NET INCOME (LOSS) $247,470 ($686,786) ($33,336) ($987,223)
=========================== ========================
NET INCOME (LOSS) PER SHARE
Primary $0.03 ($0.20) ($0.00) ($0.29)
=========================== ========================
Fully diluted $0.03 ($0.15) ($0.00) ($0.22)
=========================== ========================
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 8,285,069 3,384,432 7,535,926 3,381,679
=========================== ========================
Fully diluted 8,177,396 4,451,088 7,535,926 4,448,335
=========================== ========================
See accompanying notes
Page 2
SUMMIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30
--------------------------------
1996 1995
------------ -----------
OPERATING ACTIVITIES:
Net loss $ (33,336) $ (987,223)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 353,899 239,407
Changes in operating assets and liabilities:
Accounts receivable (837,290) (787,836)
Other current assets (340,366) (250,501)
Accounts payable and accrued expenses (787,791) 337,299
Accrued compensation and royalties 298,872 343,406
Deferred revenue 33,441 99,008
------------ -----------
Net cash used in operating activities (1,312,571) (1,006,440)
INVESTING ACTIVITIES
Purchase of short-term investments (17,383,262) (947,257)
Sales and maturities of short-term investments 19,469,110 2,601,142
Purchases of equipment and fixtures (835,435) (565,039)
Disposal of equipment and fixtures 25,534 -
------------ -----------
Net cash provided by investing activities 1,275,947 1,088,846
FINANCING ACTIVITIES
Proceeds from long-term debt 51,431 27,612
Principal payments on long-term debt (34,378) (7,948)
Principal payments on note payable - officer (17,991) -
Principal payments on convertable debentures (15,000) -
Issuance of Common Stock 239,266 165,008
Net proceeds from exercise of common stock options 105,957 10,000
------------ -----------
Net cash provided by financing activities 329,285 194,672
Increase in cash and cash equivalents 292,661 277,078
Cash and cash equivalents at beginning of period 2,035,399 168,211
------------ -----------
Cash and cash equivalents at end of period $ 2,328,060 $ 445,289
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 3,032 $ 1,022
See accompanying notes.
Page 3
SUMMIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 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 three and six month periods ended June
30, 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 - SUBSEQUENT EVENTS
In July 1996, the Company sold 1,752,000 shares of common stock in a secondary
offering for a net proceeds of approximately $29,300,000.
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 monitor, manage and report detailed clinical information on medical
procedures, diseases and patient outcomes.
RESULTS OF OPERATIONS
- ---------------------
REVENUE:
TOTAL REVENUE was $5,116,000 for the second quarter of 1996, an
increase of $2,187,000 or 75% over the second quarter of 1995. For the six
months ended June 30, 1996, total revenue increased 63% to $9,029,000 compared
to $5,554,000 during the comparable period of 1995.
SALES OF SOFTWARE LICENSES were $3,037,000 for the second quarter of
1996, an increase of $1,310,000 or 76% over the second quarter of 1995, and
accounted for 60% of the total revenue growth. This increase is attributable to
corporate partner orders, sales to provider networks, and international sales.
For the six months ended June 30, 1996, software license revenue increased 57%
to $5,023,000 compared to $3,193,000 for the same period of 1995. This increase
is attributable to increased unit volume in cardiology and new subspecialty
modules, a general price increase of cardiology modules, and the items mentioned
above.
SUPPORT AND SERVICE REVENUE was $2,079,000 for the second quarter of
1996, an increase of $870,000 or 72% over the second quarter of 1995 and
accounted for 40% of total revenue growth. For the six months ended June 30,
1996, support and service revenue increased 70% to $4,006,000 compared to
$2,361,000 for the comparable period of 1995. Both increases were attributable
to increased training and service fees related to the Company's greater
installed customer base, and increased consulting fees.
COST OF SALES:
- --------------
TOTAL COST OF SALES was $1,418,000 in the second quarter of 1996, an
increase of 47% or $451,000 over the same period of 1995. Total cost of sales
for the six months ended June 30, 1996 was $2,652,000, an increase of $809,000
or 44%. The increases in both periods relate to the increase in total revenue.
Page 5
COST OF SOFTWARE LICENSES was $254,000 for the second quarter of 1996, a
slight increase of $3,000 or 1% over the first quarter of 1995. This is a result
of recognizing a larger percentage of revenue from sources which do not incur a
royalty expense. For the six months ended June 30, 1996 cost of software
licenses was $630,000 an increase of $229,000 or 57% compared to the same period
in 1995, due to increased software revenue and corresponding freight.
COST SUPPORT AND SERVICE was $1,164,000 for the second quarter of 1996, an
increase of $448,000 or 63% compared to the second quarter of 1995. The cost of
support and service for the six months ended June 30, 1996 was $2,022,000, an
increase of $560,000 or 39%, compared to the same period in 1995. Both increases
were due primarily to increased customer support costs related to the increase
in the Company's installed base and increased salary expense for personnel in
the customer service and data management areas.
OPERATING EXPENSES:
- -------------------
SELLING AND MARKETING expenses were $2,174,000 during the second quarter of
1996, an increase of $730,000 or 51% compared to the same quarter of 1995. For
the six months ended June 30, 1996, selling and marketing expenses were
$4,075,000, an increase of $1,376,000 or 51% compared to the same period of
1995. The increases were primarily due to increased sales personnel and
commissions and the hiring of additional marketing personnel for new
subspecialty markets.
RESEARCH AND DEVELOPMENT expense was $658,000 in the second quarter of
1996, an increase of $327,000 or 99% compared to the same quarter of 1995. For
the six months ended June 30, 1996, research and development expense was
$1,019,000, an increase of $412,000 or 68% over the same period of 1995. The
increases were due primarily to the hiring of additional technical personnel and
contractors to aid in the development of the Company's new Vista 2 and point-of-
care longitudinal software systems.
GENERAL AND ADMINISTRATIVE expense was $960,000 for the second quarter of
1996, an increase of $58,000 or 6% compared to the second quarter of 1995. For
the six months ended June 30, 1996 general and administrative expense was
$1,899,000, an increase of $443,000 or 30% over the same period in 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 was $341,000 for the second
quarter of 1996, an increase of $313,000 compared to the second quarter of 1995.
Interest income, net of interest expense was $600,000 for the six months ended
June 30, 1996, an increase of $536,000 compared to the same period in 1995. Both
increases are 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 and second quarters of 1996 due to the year to date loss. No income tax
was recorded for 1995 due to the Company's accumulated net operating loss
carryforward.
Page 6
NET INCOME (LOSS). The Company recorded net income of $247,000 or $.03 per
share for the quarter ended June 30, 1996 compared to a net loss of $687,000 or
$.15 per share for the quarter ended June 30, 1995 (fully diluted). For the six
months ended June 30, 1996 the Company recorded a net loss of $33,000 or $.00
per share as compared to a net loss of $987,000 of $.22 per share (fully
diluted) for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the six months ended June 30, 1996, the Company's cash and short-term
investments decreased $1,803,000 to $20,951,000.
Cash used in operating activities was $1,313,000 for the six months ended June
30, 1996. The primary uses of cash included increases in accounts receivable of
$837,000 and other current assets of $340,000 and a decrease in accounts payable
and accrued expenses of $788,000. These were partially offset by an increase in
accrued compensation of $299,000 and depreciation and amortization recorded of
$354,000.
Cash provided by investing activities was $1,276,000 for the six months ended
June 30, 1996, which consists primarily of the sales and maturities of short-
term investments of $19,469,000 partially offset by the purchase of short-term
investments of $17,383,000 and the purchase of equipment and fixtures of
$835,000.
Cash provided by financing activities for the six months ended June 30, 1996,
was $329,000 related to issuance of common stock of $239,000, net proceeds from
stock options exercised of $106,000 and proceeds from long-term debt of $51,000.
In July 1996, the Company closed on a secondary offering which netted the
Company approximately $29,300,000.
The Company does not have any material scheduled commitments for capital
expenditures. The Company believes that the cash and short-term investments of
$20,951,000 at June 30, 1996, together with the prceeds from the recently
completed offering, plus anticipated cash flows from operations, will be
sufficient to fund its operations, capital requirements and expansion needs in
the foreseeable future.
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
Summit Medical Systems, Inc. held its annual meeting of shareholders on April
25, 1996. There were 7,536,545 shares of common stock outstanding and entitled
to vote at the annual meeting, and a total of 6,171,725 shares were represented
at the meeting in person or by proxy. Matters voted on were the following:
1. Proposal to elect five directors, each for a one year turn:
For Withhold Authority
--------- ------------------
Edward F. Sweeney 6,164,605 7,120
Kevin R. Green 6,164,605 7,120
Dennis H. Powers 6,162,271 9,454
John M. Nehra 6,164,605 7,120
Kent J. Thiry 6,164,605 7,120
2. Proposal to amend the 1993 Stock Option Plan to increase the number of shares
reserved for issuance upon exercise of options from 826,666 to 2,126,666 shares,
and to effect certain other changes.
For Against Abstain Broker Non-Vote
--------- --------- ------- ---------------
4,286,193 1,131,502 51,275 702,755
3. Proposal to appoint Ernst & Young LLP as independent public auditors for the
Company.
For Against Abstain Broker Non-Vote
--------- --------- ------- ---------------
6,169,079 1,280 1,366 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
The following exhibits are included herein:
(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 November 13, 1995 /s/ Anthony W. Rees
----------------- -----------------------
Anthony W. Rees
Chief Financial Officer
Page 9