<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-QSB
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] 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 0-13801
_______
QUALITY SYSTEMS, INC.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
California 95-2888568
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17822 East 17th Street, Tustin, California 92680
__________________________________________ __________
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (714) 731-7171
______________
NOT APPLICABLE
________________________________________________________________
(Former name, former address and former fiscal year, if changed,
since last year)
Indicate by check mark whether the issuer (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.
Yes XX No
_____ _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
5,963,337 shares of Common Stock, $.01 par value,
as of August 7, 1996
Page 1 of 21
<PAGE> 2
PART I. CONSOLIDATED FINANCIAL INFORMATION
------- ----------------------------------
Item 1. Financial Statements
------- --------------------
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $22,803,000 $27,872,000
Short-term investments 1,203,000 1,072,000
Accounts receivable, net 5,830,000 4,751,000
Inventories 672,000 853,000
Other current assets 119,000 135,000
----------- -----------
Total current assets 30,627,000 34,683,000
Equipment and Improvements, net 907,000 572,000
Capitalized Software Costs, net 559,000 599,000
Investment in Clinitec International, Inc. - 976,000
Excess of Cost Over Net Assets
of Acquired Business, net 3,003,000 -
Other Assets 1,510,000 442,000
----------- -----------
Total assets $36,606,000 $37,272,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,352,000 $ 1,706,000
Deferred service revenue 1,182,000 1,031,000
Estimated costs to complete system
installations 469,000 402,000
Income taxes payable 171,000 -
Other current liabilities 1,463,000 1,348,000
----------- -----------
Total current liabilities 4,637,000 4,487,000
Deferred Tax Liability 96,000 84,000
----------- -----------
Total liabilities 4,733,000 4,571,000
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value,
20,000,000 shares authorized, 5,963,337
and 5,653,491 shares issued and
outstanding, respectively 60,000 56,000
Additional paid-in capital 34,039,000 27,148,000
Unrealized loss on available-for-sale
securities - (44,000)
Retained earnings (accumulated deficit) (2,226,000) 5,541,000
----------- -----------
Total shareholders' equity 31,873,000 32,701,000
----------- -----------
Total liabilities and shareholders'
equity $36,606,000 $37,272,000
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 3
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies $ 2,829,000 $ 2,124,000
Maintenance and other services 1,926,000 1,680,000
----------- -----------
4,755,000 3,804,000
Cost of Products and Services 2,324,000 1,713,000
----------- -----------
Gross Profit 2,431,000 2,091,000
Selling, General and
Administrative Expenses 1,438,000 926,000
Research and Development Costs 457,000 355,000
Purchased In-Process Research and
Development 8,300,000 -
----------- -----------
Income (Loss) from Operations (7,764,000) 810,000
Investment Income 386,000 104,000
Equity in Loss of Clinitec
International, Inc. (31,000) (10,000)
----------- -----------
Income (Loss) before Provision for
Income Taxes (7,409,000) 904,000
Provision for Income Taxes 358,000 367,000
----------- -----------
Net Income (Loss) $(7,767,000) $ 537,000
=========== ===========
Net Income (Loss) per share $(1.34) $0.11
=========== ===========
Weighted average number of
shares outstanding 5,806,712 4,730,540
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
---------------------------
1996 1995
------------ -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(7,767,000) $ 537,000
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Purchased in-process research and
development 8,300,000 -
Depreciation and amortization 206,000 118,000
Gains on short-term investments (36,000) (95,000)
Equity in loss of Clinitec
International, Inc. 31,000 10,000
Deferred income taxes 98,000 29,000
Changes in:
Accounts receivable (678,000) (712,000)
Inventories 197,000 (60,000)
Other current assets 90,000 25,000
Accounts payable (630,000) 364,000
Deferred service revenue 90,000 30,000
Estimated costs to complete
system installations 27,000 11,000
Income taxes payable and taxes
related to equity accounts 171,000 (135,000)
Other current liabilities (10,000) (38,000)
------------ -----------
Net Cash Provided by Operating Activities 89,000 84,000
------------ -----------
Cash Flows from Investing Activities:
Proceeds from sales of short-term
investments 38,000 630,000
Purchases of short-term investments (55,000) (28,000)
Net additions to equipment and
improvements (129,000) (27,000)
Additions to capitalized software
costs (49,000) (87,000)
Purchase of Ownership Interests in
Clinitec International, Inc.
(excluding Common Stock issued in
the Acquisition) (4,946,000) (1,000,000)
Change in other assets (17,000) (6,000)
------------ -----------
Net Cash Used in Investing Activities (5,158,000) (518,000)
------------ -----------
Net Decrease in Cash and Cash Equivalents (5,069,000) (434,000)
Cash and Cash Equivalents, beginning of
period 27,872,000 6,085,000
------------ ----------
Cash and Cash Equivalents, end of period $22,803,000 $5,651,000
============ ===========
</TABLE>
Supplemental information - During the three months ended June 30, 1996
and 1995 the Company made income tax payments of $34,000 and $473,000,
respectively.
Detail of business acquired in
purchase transaction:
<TABLE>
<S> <C>
In-Process Research and Development $ 8,300,000
Fair Value of Assets Acquired (net
of previous investment) 4,023,000
Liabilities Assumed (483,000)
Common Stock Issued in the Acquisition (6,894,000)
------------
Cash Paid for the Acquisition,
net of cash acquired $ 4,946,000
============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements of Form 10-QSB and,
therefore, do not include all information and footnotes which would be
presented were such financial statements prepared in accordance with
generally accepted accounting principles, and should be read in
conjunction with the audited financial statements presented in the
Company's Annual Report for the fiscal year ended March 31, 1996. In
the opinion of management, the accompanying financial statements
reflect all adjustments which are necessary for a fair presentation of
the results of operations for the interim periods presented. The
results of operations for such interim periods are not necessarily
indicative of results of operations to be expected for the full year.
Certain amounts in the accompanying consolidated financial statements
have been reclassified to conform with the June 30, 1996 presentation.
NOTE 2 - ACQUISITION OF CLINITEC INTERNATIONAL, INC.
------ -------------------------------------------
In April 1995, the Company entered into a strategic relationship with
Clinitec International, Inc. ("Clinitec"), a developer of electronic
medical records software systems. In May 1995 in connection with this
relationship, the Company acquired a 25% percent ownership interest in
Clinitec for $1.0 million in cash. On May 17, 1996, the Company
acquired the remaining 75% of Clinitec for approximately $4.9 million
in cash plus 309,846 shares of QSI Common Stock and is operating
Clinitec as a wholly-owned subsidiary. For purposes of the May 1996
acquisition, the QSI Common Stock was valued at approximately $6.9
million, or $22.25 per share. For accounting purposes, the
acquisition was treated as a purchase transaction. In connection with
this treatment, the Company incurred an $8.3 million charge for
purchased in-process research and development during the quarter ended
June 30, 1996.
NOTE 3 - INCOME TAXES
------ ------------
The provision for income taxes for the three months ended June 30,
1996 differs from statutory rates primarily due to the non-deductible
charge for purchased in-process research and development.
<PAGE> 6
Item 2. Management's Discussion and Analysis of Financial Condition
------- -----------------------------------------------------------
and Results of Operations
-------------------------
RISK FACTORS
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-QSB are forward-looking
statements which involve risk and uncertainties, including but not
limited to economics, competitive, governmental and technological
factors affecting the Company's operations, markets, products,
services and prices and other factors discussed in the Company's
filings with the Securities and Exchange Commission.
DEPENDENCE ON PRINCIPAL PRODUCT AND NEW PRODUCT DEVELOPMENT - The
Company currently derives substantially all of its net revenues from
sales of its health care information systems and related services. The
Company believes that a primary factor in the market acceptance of its
systems has been its ability to meet the needs of users of health care
information systems. The Company's future financial performance will
depend in large part on the Company's ability to continue to meet the
increasingly sophisticated needs of its clients through the timely
development and successful introduction of new and enhanced versions
of its systems and other complementary products. The Company has
historically expended a significant amount of its net revenues on
product development and believes that significant continuing product
development efforts will be required to sustain the Company's growth.
There can be no assurance that the Company will be successful in its
product development efforts, that the market will continue to accept
the Company's existing or new products, or that products or product
enhancements will be developed in a timely manner, meet the
requirements of health care providers or achieve market acceptance.
If new products or product enhancements do not achieve market
acceptance, the Company's business, operating results and financial
condition could be adversely affected. At certain times in the past,
the Company has also experienced delays in purchases of its products
by clients anticipating the launch of new products by the Company.
There can be no assurance that material order deferrals in
anticipation of new product introductions will not occur.
COMPETITION - The market for health care information systems is
intensely competitive and the Company faces significant competition
from a number of different sources. In addition, several of the
Company's competitors have significantly greater financial,
technical, product development and marketing resources than the
Company. The industry is highly fragmented and includes numerous
competitors, none of which the Company believes dominates the overall
market for group practice management systems.
Among the Company's principal competitors are health care information
systems companies such as IDX Corporation, Medic Computer Systems,
Physician Computer Networks, Inc., and Cycare Systems, Inc.
Furthermore, the Company also competes indirectly and to varying
degrees with other major health care information companies,
information management companies generally, and other software
developers which may more directly enter the markets in which the
<PAGE> 7
Company competes. There can be no assurance that future competition
will not have a material adverse effect on the Company's business,
financial condition and results of operations. Competitive pressures
and other factors, such as new product introductions by the Company or
its competitors, may result in price erosion that could have a
material adverse effect on the Company's business, financial condition
and results of operations.
The Company believes that once a health care provider has chosen a
particular health care information system vendor, the provider will,
for a period of time, be more likely to rely on that vendor for its
future information system requirements. As the health care industry
undergoes further consolidation, each sale of the Company's systems
assumes even greater importance to the Company's business, financial
condition and results of operations. The Company's inability to make
initial sales of its systems to health care providers that are
replacing or substantially modifying their health care information
systems could have a material adverse effect on the Company's
business, financial condition and results of operations.
TECHNOLOGICAL CHANGE - The software market generally is characterized
by rapid technological change, changing customer needs, frequent new
product introductions and evolving industry standards. The
introduction of products incorporating new technologies and the
emergence of new industry standards could render the Company's
existing products obsolete and unmarketable. There can be no
assurance that the Company will be successful in developing and
marketing new products that respond to technological changes or
evolving industry standards. If the Company is unable, for
technological or other reasons, to develop and introduce new products
in a timely manner in response to changing market conditions or
customer requirements, the Company's business, results of operations
and financial condition could be materially adversely affected.
The Company is currently developing a new generation of its software
products that will be designed for the client/server environment.
There can be no assurance that the Company will successfully develop
these new software products or that these products will operate
successfully on the principal client/server operating systems, which
include UNIX, Microsoft Windows, Windows NT and Windows 95, or that
any such development, even if successful, will be completed
concurrently with or prior to introduction by competitors of products
designed for the client/server environment. Any such failure or delay
could adversely affect the Company's competitive position or could
make the Company's current product line designed for the UNIX
environment obsolete.
FLUCTUATION IN QUARTERLY OPERATING RESULTS - The Company's revenues
and operating results have in the past fluctuated, and may in the
future fluctuate, from quarter to quarter and period to period as a
result of a number of factors including, without limitation, the size
and timing of orders from clients; the length of sales cycles and
installation processes; the ability of the Company's clients to obtain
financing for the purchase of the Company's products; changes in
pricing policies or price reductions by the Company or its
competitors; the timing of new product announcements and product
introductions by the Company or its competitors; the availability and
cost of supplies; the financial stability of major clients; market
<PAGE> 8
acceptance of new products, applications and product enhancements; the
Company's ability to develop, introduce and market new products,
applications and product enhancements and to control costs; the
Company's success in expanding its sales and marketing programs;
deferrals of client orders in anticipation of new products,
applications or product enhancements; changes in Company strategy;
personnel changes; and general economic factors.
The Company's products are generally shipped as orders are received
and accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent on orders
booked and shipped in that quarter and are not predicatable with any
degree of certainty. In addition, the Company's initial contact with
a potential customer depends in significant part on the customer's
decision to replace, or substantially modify, its existing information
system. How and when to implement, replace or substantially modify an
information system are major decisions for health care providers.
Accordingly, the sales cycle for the Company's systems can vary
significantly and typically ranges from three to 12 months from
initial contact to contract execution and the installation cycle is
typically two to three months from contract execution to completion of
installation. Because a significant percentage of the Company's
expenses are relatively fixed, a variation in the timing of systems
sales and installations can cause significant variations in operating
results from quarter to quarter. As a result, the Company believes
that interim period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as
indications of future performance.
Further, the Company's historical operating results are not
necessarily indicative of future performance for any particular period
and there can be no assurance that the Company's recent revenue growth
or its profitability will continue on a quarterly or annual basis.
Due to all of the foregoing factors, it is possible that in some
future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially
adversely affected.
PROPRIETARY TECHNOLOGY - The Company is heavily dependent on the
maintenance and protection of its intellectual property and relies
largely on license agreements, confidentiality procedures and employee
nondisclosure agreements to protect its intellectual property. The
Company's software is not patented and existing copyright laws offer
only limited practical protection. There can be no assurance that the
legal protections and precautions taken by the Company will be
adequate to prevent misappropriation of the Company's technology or
that competitors will not independently develop technologies
equivalent or superior to the Company's. Further, the laws of some
foreign countries do not protect the Company's proprietary rights to
as great an extent as do the laws of the United States.
The Company does not believe that its operations or products infringe
on the intellectual property rights of others. However, there can be
no assurance that others will not assert infringement or trade secret
claims against the Company with respect to its current or future
products or that any such assertion will not require the Company to
enter into a license agreement or royalty arrangements with the party
<PAGE> 9
asserting the claim. As competing health care information systems
increase in complexity and overall capabilities and the functionality
of these systems further overlaps, providers of such systems may
become increasingly subject to infringement claims. Responding to and
defending any such claims may distract the attention of Company
management and have a material adverse effect on the Company's
business, financial condition and results of operations. In addition,
claims may be brought against third parties from which the Company
purchases software, and such claims could adversely affect the
Company's ability to access third party software for its systems.
CLINITEC INTERNATIONAL, INC. - A principal component of the Company's
business strategy is the acquisition of Clinitec International, Inc.
("Clinitec"). The Company's future financial results will depend in
part on the Company's ability to successfully integrate Clinitec's
business with the Company's, including Clinitec's ability to hire and
retain high quality personnel for its operations. There can be no
assurance that the Company will be able to successfully coordinate its
business activities with those of Clinitec. Furthermore, there can be
no assurance that the Company will be successful in integrating
Clinitec products with those of the Company or that the acquisition of
Clinitec will not have an adverse effect upon the Company's operating
results. In addition, Clinitec was formed in January 1994 to develop
and market electronic medical records software systems. Clinitec's
proprietary software products are new and Clinitec has sold only a
limited quantity of these products to date. There can be no assurance
that Clinitec's products will achieve broad market acceptance.
ABILITY TO MANAGE GROWTH - The Company has recently experienced a
period of growth and increased personnel which has placed, and will
continue to place, a significant strain on the Company's resources.
The Company anticipates expanding its overall software development,
marketing, sales, client management and training capacity. In the
event the Company is unable to identify, hire, train and retain
qualified individuals in such capacities within a reasonable time
frame, such failure could have a material adverse effect on the
Company. In addition, the Company's ability to manage future
increases, if any, in the scope of its operations or personnel will
depend on significant expansion of its research and development,
marketing and sales, management and financial and administrative
capabilities. The failure of the Company's management to effectively
manage expansion in its business could have a material adverse effect
on the Company's business, results of operations and financial
condition.
PRODUCT LIABILITY - Certain of the Company's products provide
applications that relate to patient medical information. Any failure
by the Company's products to provide accurate and timely information
could result in claims against the Company. The Company maintains
insurance to protect against claims associated with the use of its
products, but there can be no assurance that its insurance coverage
would adequately cover any claim asserted against the Company. A
successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations.
Even unsuccessful claims could result in the Company's expenditure of
funds in litigation and management time and resources. There can be
no assurance that the Company will not be subject to product liability
<PAGE> 10
claims, that such claims will not result in liability in excess of its
insurance coverage, that the Company's insurance will cover such
claims or that appropriate insurance will continue to be available to
the Company in the future at commercially reasonable rates. Such
claims could have a material adverse affect on the Company's business,
financial condition and results of operations.
UNCERTAINTY IN HEALTH CARE INDUSTRY; GOVERNMENT REGULATION - The
health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement processes and
operation of health care facilities. During the past several years,
the health care industry has been subject to an increase in
governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain legislators have announced
that they intend to examine proposals to reform certain aspects of the
U.S. health care system including proposals which may increase
governmental involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's clients.
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 systems and related services. Cost
containment measures instituted by health care providers as a result
of regulatory reform or otherwise could result in greater selectivity
in the allocation of capital funds. Such selectivity could have an
adverse effect on the Company's ability to sell its systems and
related services. The Company cannot predict what impact, if any,
such proposals or health care reforms might have on its business,
financial condition and results of operations.
The Company's software may be subject to regulation by the U.S. Food
and Drug Administration (the "FDA") as a medical device. Such
regulation could require the registration of the applicable
manufacturing facility and software/hardware products, application of
detailed recordkeeping and manufacturing standards, and FDA approval
or clearance prior to marketing. An approval or clearance could
create delays in marketing, and the FDA could require supplemental
filings or object to certain of these applications.
DEPENDENCE UPON KEY PERSONNEL - The Company's future performance also
depends in significant part upon the continued service of its key
technical and senior management personnel, many of whom have been with
the Company for a significant period of time. Because the Company has
a relatively small number of employees when compared to other leading
companies in the same industry, its dependence on maintaining its
employees is particularly significant. The Company is also dependent
on its ability to attract and retain high quality personnel,
particularly highly skilled software engineers for applications
development. The industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel.
There can be no assurance that the Company's current employees will
continue to work for the Company. Loss of services of key employees
could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company does not
maintain key man life insurance on any of its employees. The Company
may need to grant additional options to key employees and provide
other forms of incentive compensation to attract and retain such key
personnel.
<PAGE> 11
GENERAL
Since fiscal 1994, approximately one-half of the Company's revenues
have been derived from sales of computer systems, upgrades and
supplies, with the balance derived from systems maintenance agreements
and other support services. On sales of its systems, upgrades and
supplies, the Company recognizes revenues upon shipment of products.
Revenues attributable to the Company's software products included with
the systems are also recognized upon shipment, unless the Company's
installation obligations after shipment are significant, in which case
revenues are recognized on a percentage of completion basis. Revenues
from systems maintenance are typically recognized ratably over the
life of the contract. In the last five years, more than 90% of the
Company's clients have elected to purchase the Company's maintenance
and support services.
During the past five years, the Company's systems sales have been
impacted by a number of factors which have had the effect of reducing
systems sales and systems upgrade sales while at the same time
increasing the relative profitability of these sales. Historically,
the cost for the hardware components used in the Company's systems
have consistently declined while the performance and capacity of such
components have continually increased. Consistent with the
marketplace, the Company has adjusted its systems pricing to its
clients to reflect these decreased hardware costs. In addition, the
Company increasingly encounters prospective clients that already own,
or desire to acquire from third parties, significant quantities of
hardware which may be utilized with the Company's software. In such
instances, the sales generated from such clients are lower than they
otherwise would be.
As a result of these market changes, the Company has increasingly
focused its efforts on the sale of its software user licenses and
services, resulting in higher margins. Aiding these efforts has been
the continuing increase in the capacity of the hardware components
which the Company markets. The Company has had a growing market for
the sale of additional software user licenses to its existing clients
because such clients can often add more software user capacity to
their system with minimal or no change to their current central
processing unit. Such clients frequently also purchase hardware
peripherals from the Company for use with the newly purchased software
user licenses.
Health care providers, faced with economic pressures to reduce costs
and increase productivity, are increasingly aligning with health
maintenance organizations, hospitals and other health care
organizations as well as consolidating with other health care
providers into larger, more efficient business entities. This trend
results in an increase in the number of large and complex health care
organizations that are potential clients for the Company's
sophisticated systems. In addition, the continued growth of these
organizations after they become clients of the Company presents the
potential for the Company to increase sales of upgrades and additional
software user licenses. The Company's ability to address the complex
software requirements of such newly forming or growing business
entities, in particular in the area of managed care, is a key to
success in this changing health care delivery environment.
<PAGE> 12
The sales cycle for the Company's systems typically ranges from three
to 12 months from initial contact to contract execution. The
installation cycle is typically two to three months from contract
execution to completion of installation. Because a significant
percentage of the Company's expenses are relatively fixed, a variation
in the timing of systems sales and installations can cause significant
variations in operating results from quarter to quarter. The
Company's products are generally shipped as orders are received and
accordingly, the Company has historically operated with little
backlog. As a result, sales in any quarter are dependent on orders
booked and shipped in that quarter and are not predictable with any
degree of certainty. Thus, the Company believes that interim
period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as indications of
future performance.
The Company's research and development expenses consist primarily of
personnel and equipment costs required to conduct the Company's
product development effort. The Company believes that significant
investments in research and development are required to remain
competitive. As a consequence, in recent years, the Company has
increased the amount of its expenditures on research and development,
mainly through the employment of additional development personnel.
Development costs incurred in the research and development of new
software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any
additional development costs are capitalized and amortized over
periods ranging from three to five years.
In April 1995, the Company entered into a strategic relationship with
Clinitec, a developer of electronic medical records software systems.
In May 1995 in connection with this relationship, the Company acquired
a 25% percent ownership interest in Clinitec for $1.0 million in cash.
On May 17, 1996, the Company acquired the remaining 75% of Clinitec
for approximately $4.9 million in cash plus 309,846 shares of QSI
Common Stock and is operating Clinitec as a wholly-owned subsidiary.
For purposes of the May 1996 acquisition, the QSI Common Stock was
valued at approximately $6.9 million, or $22.25 per share. For
accounting purposes, the acquisition was treated as a purchase
transaction. In connection with this treatment, the Company incurred
an $8.3 million charge for purchased in-process research and
development during the quarter ended June 30, 1996.
Clinitec was formed in January 1994 to develop and market electronic
medical records software systems. The Clinitec software products are
complementary to the Company's existing medical and dental practice
management product solutions. Clinitec's software products have been
developed using a graphical user interface client/server platform
utilizing desktop, laptop or pen-based PC configurations for
compatibility with the UNIX, Microsoft Windows, Windows NT and Windows
95 operating systems and a relational database back end to permit
flexibility in screen customization and logic flow. Clinitec's
proprietary software products are new and Clinitec has sold only a
limited quantity of these products to date. There can be no assurance
that Clinitec's products will achieve broad market acceptance.
<PAGE> 13
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements
and related notes thereto included elsewhere herein. Historical
results of operations, percentage margin fluctuations and any trends
that may be inferred from the discussion below are not necessarily
indicative of the operating results for any future period.
RESULTS OF OPERATIONS
---------------------
The following table sets forth for the periods indicated, the
percentage of net revenues represented by each item in the Company's
consolidated statements of operations. The consolidated statements of
operations include the operations of Clinitec from May 17, 1996, the
date of acquisition, through June 30, 1996.
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
--------------
1996 1995
------ ------
<S> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies 59.5% 55.8%
Maintenance and other services 40.5 44.2
------ ------
100.0 100.0
Cost of Products and Services 48.9 45.0
------ ------
Gross Profit 51.1 55.0
Selling, General and
Administrative Expenses 30.2 24.3
Research and Development Costs 9.6 9.3
Purchased In-Process Research and
Development 174.5 -
------ ------
Income (Loss) from Operations (163.2) 21.4
Investment Income 8.1 2.7
Equity in Loss of Clinitec
International, Inc. (0.7) (0.3)
------ ------
Income (Loss) before Provision for
Income Taxes (155.8) 23.8
Provision for Income Taxes 7.5 9.7
------ ------
Net Income (Loss) (163.3)% 14.1%
====== ======
</TABLE>
<PAGE> 14
For the Three-Month Periods Ended June 30, 1996 and 1995.
---------------------------------------------------------
After recognizing an $8.3 million charge for purchased in-process
research and development in connection with the Clinitec acquisition,
the Company incurred a net loss of $(7.8) million, or $(1.34) per
share, for the three months ended June 30, 1996 as compared to net
income of $537,000, or $0.11 per share, for the three months ended
June 30, 1995. In computing the net loss per share for the quarter
ended June 30, 1996, the weighted average number of common shares
outstanding was 5,806,712 and any common share equivalents were
excluded from the calculation as their inclusion would have had an
anti-dilutive effect. The difference between primary and fully diluted
net income per share was not significant for the quarter ended June
30, 1995 and the weighted average number of common shares and common
share equivalents outstanding used to compute net income per share was
4,730,540 for the June 30, 1995 period.
Net Revenues. Net revenues for the three months ended June 30, 1996
increased 25.0% to $4.7 million from $3.8 million for the three months
ended June 30, 1995. Sales of computer systems, upgrades and supplies
increased 33.2% to $2.8 million from $2.1 million while net revenues
from maintenance and other services grew 14.6% to $1.9 million from
$1.7 million during the comparable periods. The increases in net
revenues from sales of computer systems, upgrades and supplies and
maintenance and other services were principally due to the
consolidation of Clinitec's net revenues during the portion of the
quarter ended June 30, 1996 following the acquisition of Clinitec
and a growing client base for recurring maintenance and other
services.
Cost of Products and Services. Costs of products and services for the
three months ended June 30, 1996 increased 35.7% to $2.3 million from
$1.7 million for the three months ended June 30, 1995 while costs of
products and services as a percentage of net revenues increased to
48.9% from 45.0% during the comparable periods. The increase in costs
of products and services in both amount and as a percentage of net
revenues during the June 30, 1996 quarter as compared to the June 30,
1995 quarter results from a combination of the effects of the increase
in net revenues from sales of computer systems and upgrades; a
reduced amount of higher margin proprietary software only sales as a
proportion of total net revenues during the June 30, 1996 quarter as
compared to the June 30, 1995 quarter; and, increased product
development, customer service, support, and training personnel during
the June 30, 1996 quarter reflecting the Company's recent growth in
annual sales volumes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1996
increased 55.3% to $1.4 million from $926,000 for the three months
ended June 30, 1995 primarily as a result of the consolidation of
Clinitec's selling, general and administrative expenses during the
portion of the quarter ended June 30, 1996 following the acquisition
of Clinitec and additional amortization expense related to certain
intangible assets acquired in the purchase of Clinitec. Also
contributing to the increase in selling, general and administrative
expenses are increases in the Company's selling efforts, sales
personnel and administrative infrastructure.
<PAGE> 15
Research and Development Costs. Research and development costs for
the three months ended June 30, 1996 increased 28.7% to $457,000 from
$355,000 for the three months ended June 30, 1995. The increase is
the result of increased research and development efforts by the
Company as well as consolidation of Clinitec's research and
development costs during the portion of the quarter ended June 30,
1996 following the purchase of Clinitec.
Purchased In-Process Research and Development. In connection with the
acquisition of Clinitec in May 1996, Clinitec's in-process research
and development for which technological feasibility had not been
established was valued at $8.3 million. In accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed,"
software development costs must be expensed until technological
feasibility has been established. Accordingly, the value of the
purchased in-process research and development was expensed during the
quarter ended June 30, 1996. There were no comparable transactions
during the quarter ended June 30, 1995.
Investment Income and Equity in Loss of Clinitec International, Inc.
Investment income for the three months ended June 30, 1996 increased
271.2% to $386,000 from $104,000 for the three months ended June 30,
1995 primarily as a result of an increase in funds available for
investment during the quarter ended June 30, 1996 arising from the
Company's $20.2 million secondary public offering completed in March
1996. The equity in loss of Clinitec increased to $(31,000) for the
three months ended June 30, 1996 from $(10,000) for the three months
ended June 30, 1995. The Company acquired a 25% ownership interest in
Clinitec in May 1995 which was increased to 100% in May 1996. During
the period that the Company owned 25% of Clinitec, its investment was
accounted for under the equity method of accounting whereby the
Company recorded its proportionate share of Clinitec's losses as
equity in loss of Clinitec. Commencing in May 1996 when the Company
acquired the remaining 75% of Clinitec, the Company consolidated
Clinitec's results with those of its own operations.
Provision for Income Taxes. The provision for income taxes for the
three months ended June 30, 1996 decreased 2.5% to $358,000 from
$367,000 for the three months ended June 30, 1995. The provision for
income taxes for the three months ended June 30, 1996 differs from
statutory rates primarily due to the non-deductible charge for
purchased in-process research and development.
LIQUIDITY AND CAPITAL RESOURCES.
--------------------------------
Cash and cash equivalents decreased $(5.1) million for the three
months ended June 30, 1996 principally as a result of the payment of
the cash portion of the purchase price for the remaining 75% ownership
interest in Clinitec in May 1996. Cash and cash equivalents decreased
$(434,000) for the three months ended June 30, 1995 principally as a
result of the Company's $1.0 million initial cash investment for a 25%
ownership interest in Clinitec in May 1995 partially offset by the
proceeds from sales of short-term investments.
<PAGE> 16
Net cash provided by operating activities for the three months ended
June 30, 1996 was $89,000 consisting principally of $533,000 of
income before the $8.3 million charge for purchased in-process
research and development in connection with the acquisition of
Clinitec plus amortization and depreciation expenses, a decrease in
inventories and an increase in income taxes payable offset by an
increase in accounts receivable and a decrease in accounts payable.
Net cash provided by operating activities for the three months ended
June 30, 1995 was $84,000 consisting principally of net income and an
increase in accounts payable offset by an increase in accounts
receivable and a decrease in income taxes payable and taxes related to
equity accounts.
Net cash used in investing activities for the three months ended June
30, 1996 was $(5.2) million consisting principally of the $4.9 million
cash portion of the May 1996 purchase price of the remaining 75%
ownership interest in Clinitec, related legal costs of the
acquisition, and additions to equipment and improvements and
capitalized software. Net cash used in investing activities for the
three months ended June 30, 1995 was $(518,000) consisting principally
of the Company's $1.0 million cash investment to acquire 25% of
Clinitec in May 1995 and additions to equipment and improvements and
capitalized software partially offset by the proceeds from sales of
short-term investments.
Net cash provided by (used in) financing activities was negligible
for both the three months ended June 30, 1996 and 1995.
At June 30, 1996, the Company had cash and cash equivalents of $22.8
million and short-term investments of $1.2 million. Short-term
investments included debt securities issued by foreign governments of
$357,000 and a $610,000 investment in a fund which trades in special
situation securities. The Company does not believe these investments
have significant risk; however, there can be no assurance that the
market for these securities will not change which could result in a
loss of principal.
Except for the Company's intention to expend funds on capitalized
software in connection with alternative versions of certain of its
products for the client/server environment to take advantage of more
powerful technologies and to enable a more seamless integration of the
Company's products, the Company has no significant capital commitments
and currently anticipates that additions to equipment and improvements
for the remainder of fiscal 1997 will be comparable to recent past
years. The Company believes that its cash and cash equivalents and
short-term investments on hand at June 30, 1996, together with the
cash flows from operations, if any, will be sufficient to meet its
working capital and capital expenditure requirements for the next
twelve months.
<PAGE> 17
PART II. OTHER INFORMATION
-------- ------------------
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits:
---------
The Exhibits listed on the accompanying Index to Exhibits
on page 20 are filed as part of this report.
(b) Reports on Form 8-K:
--------------------
The Registrant filed a Current Report on Form 8-K
dated May 17, 1996 reporting the completion of the
Registrant's acquisition of Clinitec International,
Inc. By amendment dated June 25, 1996, the
Registrant filed the following:
(a) The unaudited balance sheet of Clinitec
International, Inc. as of March 31, 1996
and the unaudited statements of operations
and cash flows for the three months ended
March 31, 1996 and 1995 together with the
related unaudited notes thereto.
(b) The unaudited pro forma consolidated balance
sheets of Quality Systems, Inc. as of
March 31, 1996 and the unaudited pro forma
consolidated statements of operations for
the year ended March 31, 1996 together with
the related unaudited notes thereto.
<PAGE> 17
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 authorized.
QUALITY SYSTEMS, INC.
<TABLE>
<S> <C>
Date August 7, 1996 By /s/ Sheldon Razin
--------------- ----------------------------------
Sheldon Razin
President and Chairman
of the Board of Directors;
Principal Executive Officer
Date August 7, 1996 By /s/ Robert G. McGraw
--------------- ----------------------------------
Robert G. McGraw
Chief Financial Officer;
Principal Accounting Officer
</TABLE>
<PAGE> 18
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
------- ----------
11.0 Earnings per share computation, is filed herewith 21
27.0 Financial Data Schedule, is filed herewith. 22
<PAGE> 19
EXHIBIT 11.0
------------
The net loss per share for the three months ended June 30, 1996 was
computed using the weighted average number of shares actually
outstanding during the period and any common share equivalents
assuming the exercise of outstanding stock options were excluded
because to have included such common share equivalents would have had
an anti-dilutive impact on the net loss per share calculation. Net
income per share for the three months ended June 30, 1995 was computed
based on the weighted average number of shares actually outstanding,
plus the shares that would be outstanding, using the treasury stock
method, assuming the exercise of all outstanding options which were
considered to be common stock equivalents. The difference between
primary and fully diluted net income per share was not significant for
the quarter ended June 30, 1995. The weighted average number of
common shares outstanding as of June 30, 1996 and 1995, were 5,806,712
and 4,730,540, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 22,803,000
<SECURITIES> 1,203,000
<RECEIVABLES> 5,830,000
<ALLOWANCES> 0
<INVENTORY> 672,000
<CURRENT-ASSETS> 30,627,000
<PP&E> 907,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,606,000
<CURRENT-LIABILITIES> 4,637,000
<BONDS> 0
0
0
<COMMON> 60,000
<OTHER-SE> 31,813,000
<TOTAL-LIABILITY-AND-EQUITY> 36,606,000
<SALES> 2,829,000
<TOTAL-REVENUES> 4,755,000
<CGS> 0
<TOTAL-COSTS> 2,324,000
<OTHER-EXPENSES> 10,195,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,409,000)
<INCOME-TAX> 358,000
<INCOME-CONTINUING> (7,767,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,767,000)
<EPS-PRIMARY> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
