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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996
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Commission file number 0-13801
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QUALITY SYSTEMS, INC.
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(Name of Small Business Issuer in Its Charter)
California 95-2888568
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17822 East 17th Street, Tustin, California 92680
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (714) 731-7171
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the Issuer: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure
will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. [ X ]
The Issuer's revenues for the year ended March 31, 1996 were
$16,732,000.
As of May 31, 1996, the aggregate market value of the Common
Stock held by non-affiliates was approximately $124.8 million.
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Exhibit Index on sequentially numbered Page 33
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On May 31, 1996, 5,963,337 shares of the Issuer's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Item 9 of Part III as well as all
of the information required by Items 10, 11, and 12 of Part III of the
Form 10-KSB are incorporated by reference from Registrant's Definitive
Proxy Statement for its 1996 annual meeting which is to be filed with
the Commission on or before July 29, 1996.
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PART I
Item 1. DESCRIPTION OF BUSINESS.
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GENERAL
Quality Systems, Inc. ("QSI" or the "Company") develops and markets
health care information systems that automate medical and dental group
practices, physician hospital organizations ("PHO's"), management
service organizations ("MSOs"), health maintenance organizations
("HMOs") and community health centers. In response to the growing
need for more comprehensive, cost-effective information solutions for
physician and dental practice management, the Company's systems
provide clients with the ability to redesign patient care and other
workflow processes, to improve productivity and reduce information
processing and administrative costs and to provide multi-site access
to patient information. The Company's proprietary software systems
include general patient information and summary medical records,
appointment scheduling, billing, insurance claims submission and
processing, managed care implementation and referral management,
treatment outcome studies, treatment planning, drug formularies, word
processing and accounting. In addition to providing fully integrated
information solutions to its clients, the Company provides
comprehensive hardware and software installation, maintenance and
support services, system training services and electronic claims
submission services. The Company is also introducing patient medical
records automation for medical and dental practices utilizing
proprietary software developed by Clinitec International Inc.
("Clinitec"), a developer of electronic medical records software
systems. In May 1996, Clinitec became a wholly-owned subsidiary of
the Company. As a result of the May 1996 acquisition of Clinitec, the
Company anticipates taking a net write off for purchased in-process
research and development of approximately $8.3 million during the June
30, 1996 quarter. (See "Item 1. Description of Business. Clinitec".)
The Company currently has an installed base of more than 475 operating
health care information systems serving PHOs, MSOs, HMOs and other
health care organizations, each of which consists of one to 120
physicians or dentists. It is estimated that the physician practice
management information systems market is currently $1.8 billion. The
Company believes that as health care providers are increasingly
required to reduce costs while maintaining the quality of health care,
the Company will be able to capitalize on its strategy of providing
fully integrated information systems and superior customer service.
QSI is a California corporation formed in 1974. The Company was
founded with an early focus on providing information systems and
services primarily for dental group practices. The Company's initial
"turnkey" systems were designed to improve productivity while reducing
information processing costs and personnel requirements. In the
mid-1980's, the Company capitalized on the opportunity presented by
the increasing pressure of cost containment on physicians and health
care organizations and further expanded its information processing
systems into the broader medical market. Today, the Company develops
and provides integrated UNIX-based* health care information systems
for both the medical and dental markets. These systems operate on a
* UNIX is a registered trademark of AT&T Corporation.
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stand-alone basis or in a networked environment and are expandable to
accommodate client needs.
Augmenting its practice management software, the Company added
Clinitec's electronic medical records software to its product line
in 1995 and completed its acquisition of Clinitec in May 1996.
Clinitec's principal product, NextGen*, permits scanning, annotation,
retrieval and analysis of medical records in all formats, from
documents to photographs and X-rays. NextGen has been developed using
a client/server platform, a graphical user interface for compatibility
with UNIX, Microsoft Windows**, Windows NT** and Windows 95**
operating systems, and a relational database for flexibility in screen
customization and logic flow. The Company is also in the process of
developing an alternative client/server version of its "back office"
products utilizing a graphical user interface with screens and
templates similar to those in the NextGen product to enable a more
seamless integration of the QSI and NextGen applications. With the
addition of NextGen, the Company is able to provide its clients with a
comprehensive information management solution. NextGen, in
conjunction with the Company's practice management software, was first
installed at a beta site in August 1995 and is currently being
installed in several additional sites. It is anticipated that release
of the combined systems will commence in the quarter ending June 30,
1996. (See "Item 1. Description of Business. - Clinitec".)
INDUSTRY BACKGROUND
To compete in the changing health care environment, physicians and
other outpatient care providers are increasingly joining and
affiliating with other physicians, managed care organizations,
hospitals and others enterprises to form larger health care
organizations such as PHOs, MSOs and HMOs. These organizations are
designed to take advantage of economies of scale associated with
managing health care services for large patient populations across
inpatient and outpatient settings, while achieving improved quality,
reduced costs and strengthened negotiating positions with managed care
entities. In the managed care environment, health care organizations
are increasingly entering into contracts which define the terms under
which care is administered. The expansion in the number of managed
care and third-party payor organizations, as well as additional
government regulation and changes in reimbursement models, has greatly
increased the complexity of pricing policies, billing procedures and
reimbursement policies impacting medical practices. In addition, to
operate effectively, health care organizations must efficiently manage
patient care and other workflow processes which may extend across
multiple care locations and business entities.
To compete under the constraints of managed care while maintaining
quality of services, health care organizations have placed increasing
demands on their information systems. Initially, these information
systems automated financial and administrative functions. As it
became necessary to manage patient flow processes, the need arose to
* NextGen is a registered trademark of Clinitec International, Inc.
** Microsoft Windows, Windows NT and Windows 95 are registered
trademarks of Microsoft Corporation.
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integrate all levels of "back-office" data with clinical information
such as patient test results and office visits. Particularly for
larger organizations and group practices, the Company believes
information systems must allow enterprise-wide exchange of patient
information incorporating administrative, financial and clinical
information from multiple entities, while focusing on the physician as
the primary care giver. In addition, large health care organizations
increasingly require information systems that can deliver
high-performance in environments with multiple concurrent computer
users.
Many existing health care information systems, including systems
designed for physicians and small group practices, were designed for
limited administrative tasks such as billing and scheduling and can
neither accommodate multiple computing environments nor operate
effectively across multiple locations and entities. As the health
care industry continues to evolve, physician groups and health care
organizations will increasingly require systems that compile
structured clinical information from multiple sources and enable
measurement of treatment outcomes and mangement of clinical processes.
Such systems must be integrated with financial and administrative
information systems in order to maintain patient flow while continuing
to reduce costs and improve quality of care. The Company believes
that systems which integrate patient clinical data with
administrative, financial and other practice management data are best
positioned to succeed in the current managed care environment.
As health care organizations transition to new platforms and newer
technologies, they will be migrating toward the implementation of
enterprise-wide, patient-centered computing systems embedded with
automated patient medical records. These organizations cannot afford
significant downtime or re-education, nor can they risk choosing a
system which has not proven its ability to handle high volume
processing with continuous dependability. The Company believes that
successful systems vendors in the market will have a sufficient
installed base and adequate resources to offer high quality, fully
integrated products and the value-added services needed to expand and
support clients throughout this evolution process.
Similarly, the dental industry has seen consolidation of dental
practices in recent times. This consolidation, as with the physician
marketplace, has created business organizations which require more
sophisticated computer information systems.
THE QSI SOLUTION
In response to the growing need for more comprehensive, cost-effective
health care information solutions for physician and dental practice
management, the Company's systems provide clients with the ability to
redesign patient care and other workflow processes and improve
productivity through multi-site and multi-entry access to patient
information. Utilizing proven third-party hardware solutions combined
with the Company's proprietary software configured to maximize the
efficiency of a health care organization's information processing
requirements, the Company's solutions enable a seamless integration of
a variety of administrative and patient information operations. With
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the addition of Clinitec's product line, the Company provides clients
with an integrated medical records management system as part of a
total information management solution. Leveraging over 20 year of
experience in the health care information services industry, the
Company believes that it continues to distinguish its solutions by
providing its clients with sophisticated, full-featured software
systems along with comprehensive systems implementation, maintenance
and support.
QSI's systems automate many aspects of group practice management,
including the retention of general patient information, appointment
scheduling, billing, insurance claims submission and processing,
managed care implementation and referral management, treatment outcome
studies, treatment planning, drug formularies, word processing and
accounting. The Company primarily uses the IBM RS6000* central
processing unit and IBM'S AIX** version of the UNIX operating system
as a platform for its application software, which enables the Company
to continue providing a wide range of flexible and functional systems
to accommodate clients from solo practitioner to large group
practices.
* RS6000 is a registered trademark of International Business Machines
Corporation.
** AIX is a registered trademark of International Business Machines
Corporation.
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PRODUCTS
The Company's health care information systems consist primarily of
proprietary software applications and third-party hardware and
software. The systems range in capacity from one to hundreds of
users, allowing the Company to address the needs of both small and
large clients. The software configuration of a typical system
includes a basic medical or dental application and additional software
applications. A typical system also consists of third party hardware
components, including a UNIX-based central processing unit, disk
drives, a magnetic tape unit, video display terminals, PCs, one or
more printers, and telecommunications equipment. The systems are
modular in design and may be expanded to grow with changing client
requirements.
The Company purchases all the hardware components of its systems as
well as the requisite operating system licenses from manufacturers or
distributors of those components. It assembles and tests the hardware
components and incorporates QSI's proprietary application software and
other third party software into completed systems. The Company
provides systems tailored to accommodate particular client
requirements. The Company continually evaluates the hardware
components of its systems with a view to utilizing hardware that is
functional, reliable and cost-effective.
The Company's systems include application and system software modules
that provide comprehensive solutions for physician and dental
practices. Clients typically purchase a base medical or dental
application and add on additional applications as desired. Add-on
applications include such modules as managed care, electronic medical
records, patient eligibility, electronic claims and patient statements
processing, various proprietary and third party accounting and word
processing packages. Systems have ranged in price from approximately
$10,000 to over $900,000 depending upon size of group practice, number
of system users and number of sites.
The Company continues to make enhancements to its hardware and
software packages to provide increased functionality and flexibility
to its clients. Recent enhancements include additional interfaces for
electronic claims submission and insurance payments, increased ability
to control managed care plans and fees, electronic patient
eligibility verification, applications for community health centers,
drug formulary tracking, enhanced patient scheduling, and software to
support paperless collections. The Company has continued to take
advantage of new releases in the IBM RS6000 family, as well as new
PC-based products utilizing the SCO* UNIX operating system. This
introduction of a PC-based UNIX system for physician and dental group
practices allowed the Company increased pricing flexibility and
enabled the Company's systems to be used in smaller practice settings.
In addition, the Company has added enhanced telecommunications,
full-featured color terminals and more versatile printer options.
* SCO is a registered trademark of Santa Cruz Operation, Inc.
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CLINITEC
In April 1995, the Company entered into a strategic relationship with
Clinitec, a developer of electronic medical records software systems.
In May 1995 as part of this relationship, the Company acquired a 25%
equity interest in Clinitec for $1.0 million. In May 1996, the
Company acquired the remaining 75% of Clinitec for approximately $4.9
million in cash plus 309,846 shares of QSI Common Stock. For purposes
of the acquisition, the shares were valued at approximately $6.9
million, or $22.25 per share, for a total purchase price of
approximately $11.8 million for this remaining 75% ownership interest.
QSI intends to maintain Clinitec as a separate subsidiary and sell
Clinitec software products in conjunction with QSI products, as well
as on a stand-alone basis. For accounting purposes, the acquisition
will be treated as a purchase transaction during the quarter ending
June 30, 1996. In connection with this accounting treatment, the
Company anticipates taking a net write off for purchased in-process
research and development of approximately $8.3 million during the June
30, 1996 quarter. The exact amount of the write off is subject to
change based upon the final determination of the purchase price
allocation.
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. In addition, there can be no assurance
that Clinitec's products will achieve broad market acceptance.
Clinitec's software product, NextGen, has been developed using a
graphical user interface client/server platform 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. NextGen operates in a
client/server environment, using a desktop, laptop or pen-based PC
configuration. Medical records data can include:
* User customized templates for data capture and automatic
document generation.
* Scanned or electronically acquired images, including X-rays
and photographs.
* Other records, documents and notes, including
electronically captured handwriting and annotations.
* Digital voice recordings embedded in documents.
In addition, specific templates designed into the system will permit
research and analysis of particular conditions and diagnoses,
including the interaction between various prescribed pharmaceuticals,
and will allow for extensive outcomes reporting.
Clinitec offers software applications that are complementary to those
offered by QSI. The key "back office" applications incorporated into
QSI's solutions such as practice management, eligibility, claims
processing and accounting can be augmented by the "front office"
applications of the NextGen software. Because the Company's products
are UNIX-based, the Company is able to add NextGen as part of an
integrated system. To address the client/server marketplace, the
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Company is in the process of developing an alternative version of its
products for the client/server environment. In addition to a
graphical user interface, these client/server versions will include
screens and templates similar to those in NextGen to enable a more
seamless integration of the QSI and NextGen applications. The Company
intends to leverage its existing client base for sales of NextGen.
SALES AND MARKETING
The Company sells and markets its products nationwide through a direct
sales force operating from sales offices in California, Florida,
Georgia, Massachusetts, New York and Texas. The Company's sales and
marketing employees identify and contact prospective clients by a
variety of means, including referrals from existing clients and
contacts at professional society meetings and seminars with persons
involved in group practice as well as trade journal advertising,
direct mail advertising, and telemarketing. These employees are
knowledgeable about medical and dental group practice management, as
well as computer applications. Typically, these employees make
presentations to potential clients by demonstrating the QSI system and
its capabilities on the prospective client's premises. In addition,
the Company performs remote demonstrations by utilizing a prospective
client's PC or by sending the prospective client a telecommunications
kit including a terminal.
The Company's sales cycle can vary significantly and typically ranges
from three to 12 months from initial contact to contract execution.
Systems are normally delivered to a customer within 30 to 60 days of
receipt of a system order, and therefore, the Company does not believe
data pertaining to backlog is meaningful. Standard payment terms
include a 25% down payment with the balance due when the hardware is
installed and the installed system is ready for training. As part of
the fees paid by its clients, the Company receives up-front licensing
fees, a monthly service fee based on client configuration and the
number of user ports and a nominal annual license renewal fee based
on the number of user ports.
Several clients have purchased the Company's system and, in turn, are
providing time-share services to local single and group practice
practitioners. Under the time-share agreements, the client provides
the use of its system for a fee to one or more practitioners.
Although the Company does not receive a fee directly from the
time-share client, implementation of time-share arrangements has
resulted in the purchase of additional system capacity by the client
offering the time-share services, as well as new system purchases made
by the time-share clients. The Company continues to concentrate its
sales and marketing efforts on medical and dental practices, dental
schools, physician clinics, MSOs, PHOs and community health centers.
MSOs and PHOs to which the Company has sold systems provide use of the
Company's software to those group and single practices associated with
the organization or hospital on either a time-sharing basis or by
directing the Company to contract with those practices for the sale of
stand-alone turnkey systems.
The Company has entered into marketing assistance agreements with
certain of its clients pursuant to which the clients allow the Company
to demonstrate to potential clients the use of systems on the existing
clients' premises. In addition, the Company has established certain
of its clients as dealers for its systems. Through this arrangement,
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the dealer markets and sells QSI systems to prospects in a local
territory. These prospects are generally smaller health care
facilities than those actively pursued by the Company. The Company's
PC-based products are well suited to this dealer marketing. In
addition, the dealer typically provides a variety of ongoing services
for its clients. Dealers are compensated based on system size and
profitability, and the services which they perform in lieu of the
Company.
The Company often assists prospective clients in identifying third
party sources for financing the purchase of QSI systems. The
financing usually is obtained by the client directly from
institutional lenders and typically takes the form of a loan from the
institution secured by the system to be purchased. Most of the
clients purchasing QSI systems have been assisted by the Company in
finding sources of financing for such purchases.
The Company has numerous clients and does not believe that the loss of
any single client would have a material adverse effect on the Company.
No client accounted for ten percent or more of net revenues during
fiscal years ended March 31, 1996, 1995 or 1994.
Clinitec sells and markets its products to individual and group
medical practices nationwide through a direct sales force operating
from its Pennsylvania corporate headquarters and sales offices in
California, Florida and Texas. Clinitec's sales and marketing
employees identify and contact prospective clients by a variety of
means, including referrals from existing clients, trade journal
advertising, contacts at professional society meetings and seminars,
and regional and national industry specialty trade shows. Typically,
these employees make presentations to potential clients by
demonstrating the Clinitec system and its capabilities on the
prospective client's premises. Clinitec's sales cycle can vary
significantly and typically ranges from three to 12 months from
initial contact to contract execution. Since inception, a system has
typically been delivered to a customer within 30 to 60 days following
receipt of a system order and, therefore, data pertaining to backlog
is not meaningful. As part of the fees paid by its clients, Clinitec
receives up-front licensing fees and a quarterly service fee based on
system configuration. Within the last year, Clinitec has entered into
several third party marketing agreements, including an April 1995
agreement with QSI, whereby Clinitec has granted non-exclusive
marketing rights to its software products for medical applications.
To date, revenues generated under these agreements have not been
material.
CUSTOMER SERVICE AND SUPPORT
The Company believes its success is attributable in part to its
exceptional customer service and support. The Company provides
support to its clients seven days a week, 24 hours a day. In
addition, the Company's policy is to respond to user defined
system-down emergencies with a response time of 15 minutes or less.
All Company systems have a dedicated computer port for dial-up remote
access, facilitating rapid response by QSI technicians to system
inquiries. Most inquiries can be resolved without the need to dispatch
Company technicians. These support services also provide the Company
with the opportunity to monitor changes in each client's information
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processing requirements and to recommend the purchase of system
hardware or software enhancements designed to satisfy these additional
requirements. The Company believes that its commitment to provide
extensive support has contributed significantly to the development of
its business.
The Company offers clients support services for all system components,
including hardware and software maintenance, for a fixed monthly fee.
In the last five years, more than 90% of the Company's clients have
elected to purchase the Company's maintenance and support services.
Hardware maintenance services are coordinated through the Company's
headquarters in California, with support from field service locations
in Northern and Southern California, New Jersey, North Carolina and
Wisconsin. The Company also subcontracts with IBM to perform specific
hardware maintenance tasks under QSI's direction. This arrangement
has provided the Company with economies of scale associated with IBM's
service infrastructure while still maintaining service standards.
The Company's continuing system software support staff operates from
the Company's offices in California and a location in Virginia. The
support staff is comprised of specialists who are knowledgeable in the
area of hardware and software technology as well as in the day-to-day
operations of a group practice. The Company's on-line access to all
client systems enables the support staff to provide immediate
assistance to clients. This assistance ranges from correcting minor
procedural problems in the client's system to performing complex data
base reconstructions or software updates. The Company also utilizes
an automated on-line support system which assists clients in resolving
minor problems and facilitates automated electronic retrieval of
problems along with symptoms following a client's call to the
Company's automated support system. Additionally, the on-line support
system maintains a complete call record at the clients' facility and
the Company.
IMPLEMENTATION AND TRAINING
The Company provides implementation and training services from its
headquarters in California as well as remote locations in Florida,
Kansas, Texas, and Washington. The Company believes that its system
delivery, implementation and support services are key elements of its
successful client relationships. When a client signs a contract for
the purchase of a system, a client manager, trained in physician
and/or dental group practice procedures, is assigned to ensure that
the client is fully informed of system options and that the proper
system configuration is installed. This information is determined
through discussions with the client and observation of the client's
practice. Once the set of software features is established, the
software configuration unique to a given client can be created in an
automated fashion.
Before activation of the client's system, Company personnel convert
the relevant client data onto the system. Typically, the Company
interfaces electronically to convert the client's data from another
computer system, allowing for a quick, cost-effective and accurate
conversion. The system is then subjected to extensive testing which
includes processing representative data using the client's system
configuration. In some situations, the data may have been previously
maintained by the client on ledger cards or other hard copy. In such
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situations, the Company typically uses its data entry staff to input
the required data.
One or more trainers experienced in group practice procedures are
assigned to conduct an intensive training program for the client's
employees. The program includes a combination of computer assisted
instruction ("CAI"), remote training techniques and training classes
conducted by QSI staff at the client's office(s). CAI consists of
workbooks, computer interaction and personal instruction. CAI is
also offered to clients, for an additional charge, after the initial
training program is completed for the purpose of training new and
additional employees. Remote training allows a trainer at the
Company's office to train one or more people at a client site via
telephone and computer connection, thus allowing an interactive and
office-specific mode of training without the expense and time required
for travel. The Company also provides ongoing training through
electronic classrooms where employees at different locations from the
same or different companies can simultaneously interact on-line with a
trainer. In addition, the Company's on-line "help" documentation
feature facilitates client training as well as ongoing support.
Clinitec provides implementation and training from its corporate
headquarters in Pennsylvania. Clinitec believes that systems
delivery, implementation and support services are key elements of
successful client relationships. When a client signs a contract for
the purchase of a system, Clinitec's customer service manager, in
conjunction with the client, creates and coordinates a detailed system
implementation and training plan. The customer service manager is
responsible for the internal coordination of Clinitec's implementation
team, training department and knowledge-base development group.
Clinitec also assigns to each client a training and implementation
specialist who is experienced with information flow within a medical
practice/organization. Training is provided at the client's site.
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 Company
believes its principal competitive advantages are the features and
capabilities of its products and services, its high level of customer
support and its 20 year experience in the industry. The industry is
highly fragmented and includes numerous competitors, none of which
the Company believes dominates the overall market for group practice
management systems. The Company has not encountered substantial
competition in the dental group practices market of six or more
dentists. The Company believes that numerous firms sell computerized
data processing systems to group dental practices consisting of five
or fewer dentists.
Among the Company's principal competitors for medical group practice
clients 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,
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and other software developers which may more directly enter the
markets in which the Company competes. There can be no assureance
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 market for electronic medical records systems is highly
competitive and subject to rapid changes in technology. The Company
expects that market competition will increase as new competitors enter
the marketplace. The industry is highly fragmented and includes
numerous competitors, none of which the Company believes dominates the
electronic medical records market. Many of the Company's competitors
have substantially greater name recognition and technical, marketing
and financial resources. Among the principal competitors for
Clinitec's software products are MedicaLogic, Inc., Datamedic Corp.
and Azron Incorporated. The Company believes its principal
competitive advantages are the features and flexibility of Clinitec's
NextGen products. There can be no assurance that future competition
or new product introductions will not have a material adverse effect
on the Company's business, financial condition and results of
operations. In addition, Clinitec's software products are new and
Clinitec has sold only a limited quantity of its principal products to
date. There can be no assurance that Clinitec's products will achieve
broad market acceptance.
PRODUCT ENHANCEMENT AND DEVELOPMENT
The computer software and hardware and medical practice management
industries are characterized by rapid technological change requiring
the Company to engage in continuing efforts to improve its systems.
During fiscal years 1996, 1995 and 1994 the Company expended
approximately $1.9 million, $1.5 million and $1.3 million,
respectively, on research and development activities. In addition,
many of the Company's product enhancements have resulted from software
development work performed under contracts with QSI clients. To the
extent that the Company fails to achieve technological advances
comparable to those made by others in the computer and health care
practice management industries, its products and services may become
obsolete.
GOVERNMENTAL 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. On
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the other hand, changes in the regulatory environment have increased
and may continue to increase the needs of health care organizations
for cost-effective data management and thereby enhance the
marketability of the Company's systems and related services. The
Company cannot predict what impact, if any, such proposals or health
care reforms might have on the Company's business, financial condition
and results of operations.
The Company's software may be subject to regulation by the U.S. Food
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.
EMPLOYEES
As of May 31, 1996, the Company employed 128 persons of which 118 were
full time employees. Systems analysts, programmers and qualified
sales and marketing personnel are in short supply and, consequently,
competition for such individuals is intense. The Company believes
that its future success depends in part upon recruiting and retaining
qualified marketing and technical personnel as well as other
employees. The Company considers its employee relations to be good.
RISK FACTORS
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-KSB 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
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<PAGE>
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
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.
-15-
<PAGE>
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
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
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<PAGE>
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
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 - A principal component of the Company's business strategy is
the acquisition of Clinitec (see "Item 1. Description of Business. -
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
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<PAGE>
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
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
-18-
<PAGE>
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.
Item 2. DESCRIPTION OF PROPERTIES.
--------------------------
The Company's principal administrative, data processing, marketing and
development operations are located in approximately 15,800 square feet
of leased space in Tustin, California under a lease which expires in
October 1996. In addition, the Company leases approximately 13,200
square feet of space in Santa Ana, California to house its assembly
and warehouse operations, and an aggregate of 1,875 square feet of
space in Florida, Georgia, New York, Texas and Washington to house
additional sales, training and service operations. These leases,
including options, have expiration dates ranging from month-to-month
to October 31, 1996 and provide for aggregate annual rental payments
of approximately $385,000. The Company believes that its facilities
are adequate for its current needs and that suitable additional or
substitute space is available, if needed.
Item 3. LEGAL PROCEEDINGS.
------------------
The Company is a party to various legal proceedings incidental to its
business, none of which are considered by the Company to be material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matter was submitted to a vote of security holders during the
fourth quarter of fiscal year 1996.
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<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
---------------------------------------------------------
<TABLE>
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "QSII". The following table sets forth for the
quarters indicated, the reported high and low closing sales prices as
reported by Nasdaq. The quotations reflect inter-dealer prices,
without retail markup, markdown, or commissions and may not
necessarily represent actual transactions.
<CAPTION>
Quarter Ended High Low
------------------ -------- --------
<S> <C> <C>
June 30, 1994 7.00 4.00
September 30, 1994 4.75 3.50
December 31, 1994 4.38 2.50
March 31, 1995 3.75 2.00
June 30, 1995 5.13 3.00
September 30, 1995 17.88 4.63
December 31, 1995 32.25 12.88
March 31, 1996 30.00 18.00
</TABLE>
At May 31, 1996 there were approximately 191 holders of record. The
Company estimates the number of beneficial holders of its Common Stock
to be in excess of 1,400.
Through May 31, 1996, the Company has not paid cash dividends on
shares of its Common Stock. The Company anticipates that all future
earnings, if any, will be retained for use in the Company's business
and it does not anticipate paying any cash dividends in the future.
Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion.
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<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
-----------------------------------------------------------
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.
During fiscal 1996, the Company's system revenues significantly
increased. The Company attributes this increase to the dynamic
changes currently occurring in the health care industry and to growing
acceptance of the Company's products and services. Health care
providers, faced with economic pressures to reduce costs and increase
productivity, are increasingly aligning with HMOs, 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
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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.
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. 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.
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.
With the completion in May 1996 of the Company's acquisition of
Clinitec International, Inc., the Company expects to take a net
writeoff for purchased in-process research and development of
approximately $8.3 million during the quarter ending June 30, 1996.
The exact amount of the writeoff will be subject to change pending
ultimate purchase allocations to be made by the Company.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the 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.
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<PAGE>
RESULTS OF OPERATIONS
<TABLE>
The following table sets forth for the periods indicated, the
percentage of net revenues represented by each item in the Company's
statements of income.
<CAPTION>
Years Ended March 31,
----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies 57.5% 47.1% 52.3%
Maintenance and other services 42.5 52.9 47.7
----- ----- -----
100.0 100.0 100.0
Cost of Products and Services 47.4 50.3 55.5
----- ----- -----
Gross Profit 52.6 49.7 44.5
Selling, General and Administrative
Expenses 23.3 29.3 26.0
Research and Development Costs 9.4 12.2 11.2
----- ----- -----
Income from Operations 19.9 8.2 7.3
Investment Income 3.2 3.6 3.4
Equity in Loss of Clinitec
International, Inc. (.3) - -
----- ----- -----
Income before Provision for Income
Taxes 22.8 11.8 10.7
Provision for Income Taxes 9.1 3.8 3.0
----- ----- -----
Net Income 13.7% 8.0% 7.7%
===== ===== =====
</TABLE>
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<PAGE>
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995.
Net income for the year ended March 31, 1996 increased 138.4% to $2.3
million from $1.0 million for the year ended March 31, 1995.
Similarly, net income per share on a fully diluted basis increased to
$0.48 from $0.21. A discussion of the components of the Company's
statements of income for the two years in the period ended March 31,
1996 follows.
Net Revenues. Net revenues for the year ended March 31, 1996
increased 38.9% to $16.7 million from $12.0 million for the year ended
March 31, 1995. This increase was due primarily to sales of computer
systems, upgrades (including software user licenses) and supplies
which in total grew 69.4% to $9.6 million from $5.7 million. This
growth resulted from an increase in the number of larger systems and
increased sales of upgrades. Net revenues from maintenance and other
services grew 11.6% to $7.1 million from $6.4 million as a result of a
growing client base for recurring services and increased time and
materials billings for additional services.
Cost of Products and Services. Cost of products and services for the
year ended March 31, 1996 increased 30.8% to $7.9 million from $6.1
million for the year ended March 31, 1995. This increase was due
primarily to the increases in systems sold and net revenues. As a
percentage of net revenues, costs of products and services decreased
to 47.4% from 50.3% due to an increase in the proportion of net
revenues with higher gross margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 31, 1996 increased
10.2% to $3.9 million from $3.5 million for the year ended March 31,
1995 as a result of increases in selling efforts and sales personnel.
However, since net revenues grew more rapidly between fiscal 1996 and
fiscal 1995 as compared to the growth in selling, general and
administrative expenses during the comparable period, selling, general
and administrative expenses as a percentage of net revenues declined
to 23.3% in fiscal 1996 as compared to 29.3% in fiscal 1995.
Research and Development Costs. Research and development costs for
the year ended March 31, 1996 increased 6.8% to $1.6 million from
$1.5 million for the year ended March 31, 1995. Total research and
development costs and capitalized software costs for the year ended
March 31, 1996 increased 33.5% to $1.9 million from $1.5 million for
the year ended March 31, 1995. The Company anticipates increased
expenditures in fiscal 1997 in capitalized software in connection with
developing an alternate version of certain of its products for the
client/server environment to take advantage of new more powerful
technologies and to allow for a more seamless integration of the
Company's and Clinitec's applications. With the completion of the
acquisition of Clinitec in May 1996, the Company also anticipates an
increase in research and development costs related to Clinitec's
ongoing product development.
Investment Income. Investment income for the year ended March 31,
1996 increased 24.2% to $533,000 from $429,000 for the year ended
March 31, 1995 primarily as a result of an increase in funds available
for investment during fiscal 1996 as compared to fiscal 1995. The
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<PAGE>
increase in available funds for investment was significantly augmented
during March 1996 with the receipt of $20.2 million in net proceeds
from the completion of the Company's secondary public offering.
Provision for Income Taxes. The provision for income taxes for the
year ended March 31, 1996 increased 237.3% to $1.5 million from
$453,000 for the year ended March 31, 1995. This increase in fiscal
1996 was due to increased earnings before the provision for income
taxes and an increase in the Company's effective tax rate. The
effective tax rates for fiscal 1996 and 1995 were 40.0% and 32.0%,
respectively. The effective rate for fiscal 1995 was lower than the
effective rate for fiscal 1996 due to utilization in fiscal 1995 of a
deferred tax valuation allowance related to net operating loss
carryforwards. All of the Company's net operating loss carryforwards
were utilized during fiscal 1995 and as such there were no similar tax
benefits available for use in fiscal 1996.
FOR THE YEARS ENDED MARCH 31, 1995 AND 1994.
Net income for the year ended March 31, 1995 increased 6.2% to $1.0
million from $0.9 million for the year ended March 31, 1994.
Similarly, net income per share on a fully diluted basis increased to
$0.21 from $0.20. A discussion of the components of the Company's
statements of income for the two years in the period ended March 31,
1995 follows.
Net Revenues. Net revenues were relatively unchanged for the year
ended March 31, 1995 increasing 2.5% to $12.0 million from $11.8
million for the year ended March 31, 1994. Revenues derived from
maintenance and other services increased 13.6% to $6.4 million from
$5.6 million as a result of the Company's larger installed base of
systems and higher prices for services. Revenues attributable to
sales of computer systems, upgrades and supplies decreased 7.6% to
$5.7 million from $6.1 million due to decreased systems sales during
fiscal 1995.
Cost of Products and Services. Cost of products and services for the
year ended March 31, 1995 decreased 7.2% to $6.1 million from $6.5
million for the year ended March 31, 1994. This decrease was due to
an increase in the proportion of revenues from lower cost items
comprising net revenues and also resulted in these costs, as a
percentage of net revenues, decreasing to 50.3% from 55.5%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 31, 1995 increased
15.9% to $3.5 million from $3.1 million for the year ended March 31,
1994 as result of increases in selling efforts and sales personnel,
thereby increasing these expenses, as a percentage of net revenues, to
29.3% from 26.0%.
Research and Development Costs. The amount of expenditures charged to
research and development costs for the year ended March 31, 1995
increased 11.3% to $1.5 million from $1.3 million for the year ended
March 31, 1994, and as a percentage of net revenues, to 12.2% from
11.2%. This increase was primarily attributable to development of
enhancements and additions to the Company's systems.
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<PAGE>
Investment Income. Investment income for the year ended March 31,
1995 increased 7.3% to $429,000 from $400,000 for the year ended March
31, 1994. This increase was due to an increase in funds available for
investment.
Provision for Income Taxes. The provision for income taxes for the
year ended March 31, 1995 increased 29.8% to $453,000 from $349,000
for the year ended March 31, 1994. This was due to increased earnings
before the income tax provision and an increase in effective tax
rates. The effective tax rates for the respective periods were 32.0%
and 27.8%. These lower than normal rates were due to utilization of a
deferred tax valuation allowance related to net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through cash generated from operations. Net cash provided by
operating activities was $2.7 million, $1.2 million and $1.2 million
for the the years ended March 31, 1996, 1995 and 1994, respectively.
Net cash provided from operating activities consists principally of
net income plus increases in accounts payable and income taxes payable
offset by an increase in accounts receivables. The increase in
accounts receivable results primarily from increased sales and the
timing of sales in fiscal 1996.
Net cash provided by (used in) investing activities was $(1.3)
million, $3.6 million and $(4.0) million for the years ended March 31,
1996, 1995 and 1994, respectively. Net cash provided by (used in)
investing activities consists principally of changes in short-term
investments as well as additions to equipment and improvements and
capitalized software. Net cash used in investing activities for the
year ended March 31, 1996 was also impacted by the Company's purchase
of a 25% ownership interest in Clinitec for $1.0 million during the
year.
Net cash provided by financing activities was $20.4 million,
$0.2 million and $0.4 million for the years anded March 31, 1996, 1995
and 1994, respectively. Net cash provided by financing activities for
the year ended March 31, 1996 consists of $20.2 million of net
proceeds from the Company's March 1996 secondary public offering of
one million shares of the Company's Common Stock and $0.2 million of
proceeds from the exercise of employee stock options during the year.
Net cash provided by financing activities for the years ended March
31, 1995 and 1994 consists of the proceeds from the exercise of
employee stock options.
At March 31, 1996, the Company had cash and cash equivalents of $27.9
million and short-term investments of $1.1 million. Short-term
investments include debt securities issued by foreign governments of
$314,000 and an investment in a fund which trades in special situation
securities of $500,000. The Company does not believe these
investments have significant principal risk; however, there can be no
assurance that the markets for these securities will not change,
causing a loss of principal.
-26-
<PAGE>
In May 1995, QSI acquired a 25% ownership interest in Clinitec for
$1.0 million in cash. In May 1996, the Company acquired the remaining
75% of Clinitec for $4.9 million in cash and 309,846 shares of QSI
Common Stock and merged Clinitec with and into a newly formed wholly-
owned subsidiary of the Company. For purposes of the May 1996
transaction, the shares were valued at $6.9 million or $22.25 per
share.
Except for the Company's purchase in May 1996 of the remaining 75%
ownership interest in Clinitec and QSI'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 and Clinitec's NextGen applications, the
Company has no significant capital commitments and currently
anticipates that additions to property, plant and equipment for fiscal
1997 will be comparable to recent past years. The Company believes
that its current cash balances and cash flow from operations, if any,
will be sufficient to meet its working capital and capital expenditure
requirements though fiscal 1997.
Item 7. FINANCIAL STATEMENTS
--------------------
The Financial Statements of the Company identified in the Index to
Financial Statements appearing under "Item 13. Exhibits and Reports on
Form 8-K" of this report are incorporated by reference to Item 13.
-27-
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
----------------------------------------------------------
None
-28-
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
-------------------------------------------------------------
EXECUTIVE OFFICERS OF REGISTRANT.
---------------------------------
<TABLE>
<CAPTION>
The executive officers of the Company as of March 31, 1996 were
as follows:
Name Age Position
---- --- --------
<S> <C> <C>
Sheldon Razin 58 Chairman of the Board, Chief
Executive Officer, President
and Director
Robert J. Beck 56 Executive Vice President
Robert G. McGraw 38 Vice President - Chief
Financial Officer
Greg Flynn 38 Vice President - Sales and
Marketing
Abe LaLande 45 Vice President - Hardware
Research and Development
Donn Neufeld 39 Vice President - Software
and Operations
Janet Razin 56 Vice President, Corporate
Secretary and Director
Irma G. Carmona 40 Corporate Controller
Executive officers of the Company are elected by, and serve at
the discretion of, the Board of Directors. Additional information
regarding the Company's executive officers is set forth below.
</TABLE>
-29-
<PAGE>
Sheldon Razin is the founder of the Company and has served as
Chairman of the Board of Directors and Chief Executive Officer since
the Company's inception. He also has served as the Company's
President since its inception except for the period from August 1990
to August 1991. Additionally, Mr. Razin served as Treasurer from the
Company's inception until October 1982. Prior to founding the
Company, he held various technical and managerial positions with
Rockwell International Corporation and was a founder of the Company's
predecessor, Quality Systems, a sole proprietorship engaged in the
development of software for commercial and space applications and in
management consulting work. Mr. Razin holds a B.S. degree in
Mathematics from the Massachusetts Institute of Technology. Mr. Razin
is the husband of Janet Razin.
Robert J. Beck joined the Company, and has served as its
Executive Vice President, since April 1992. In this capacity, he is
heavily involved in the Company's sales and marketing efforts. Mr.
Beck has been associated with turnkey healthcare computing
applications since 1975, holding a variety of increasingly responsible
management positions in several companies. Prior to joining the
Company, Mr. Beck served as Executive Vice President of Sandata, a
provider of DME and Home Health Care Turnkey Systems. Mr. Beck's
experience includes founding and running a corporation, The Hamilton
Computer Group, Inc., which was at one time a major competitor to the
Company. He holds a B.A. degree in Mathematics and Statistics from
Hunter College.
Robert G. McGraw joined the Company in February 1996 as Chief
Financial Officer. Prior to joining the Company, Mr. McGraw was the
Chief Financial Officer of CVD Financial Corporation, an asset-based
commercial lender, from March 1994 to February 1996. He was an
independent financial consultant from August 1989 to February 1991 and
from March 1992 to February 1994. From March 1991 to February 1992,
Mr. McGraw was Chief Financial Officer of MGV International, Inc., a
diversified middle market company with a personal computer
manufacturing plant and wholesale distribution operations. Mr. McGraw
is a Certified Public Accountant and holds an M.B.A. from UCLA and a
B.A. with highest honors in Business Economics from the University of
California, Santa Barbara.
Greg Flynn has served as the Company's Vice President Sales and
Marketing since January 1996 after serving as Vice President
Administration since June 1992. In these capacities, Mr. Flynn has
been responsible for numerous functions related to sales and the
ongoing management of the Company. Previously, Mr. Flynn served as
the Company's Vice President Corporate Communications. Since joining
the Company in January 1982, Mr. Flynn has held a variety of
increasingly responsible management positions within the organization.
Prior to joining the Company, Mr. Flynn was a scriptreader/script
consultant for a film production company. He holds a B.A. degree in
English from the University of California, Santa Barbara.
-30-
<PAGE>
Abe LaLande has served as the Company's Vice President Hardware
Research and Development since February 1989. From 1979 to 1982, he
served as the Company's senior field service engineer, and from 1982
to 1988, he served as Vice President Field Service and Production.
During fiscal 1989, Mr. LaLande left the Company for three months to
work for Toshiba America, Inc. Prior to joining the Company, Mr.
LaLande held various senior field service engineering positions with
Mini-Computer Systems (October 1978 to April 1979), Varian Associates
(February 1978 to October 1978) and General Automation (July 1977 to
February 1978), all of which are computer manufacturing companies. He
holds an A.A. degree in Electronic Engineering from Fullerton College
and an A.S. degree in Computer Science from Control Data Institute.
Donn Neufeld has served as the Company's Vice President-Software
and Operations since January 1996 and as Vice President - Operations
from June 1986 until January 1996. From April 1981 until June 1986,
Mr. Neufeld held the position of Manager of Customer Support. He
joined the Company in December 1980 as part of the System Generation
Department. Prior to joining the Company, Mr. Neufeld was a System
Analyst/Programmer at Loma Linda University Medical Center.
Janet Razin has served as a Director, Vice President and
Corporate Secretary since the Company's inception and served as the
Company's controller until November 1981. She served as Vice
President Chief Financial Officer from October 1982 until October
1984. Prior to joining the Company, she was a computer programmer for
Rockwell International Corporation. Mrs. Razin holds a B.A. degree
in Mathematics from Northeastern University. Mrs. Razin is the wife
of Sheldon Razin.
Irma G. Carmona has served as the Company's Corporate Controller
since June 1994. Since joining the Company in February 1980, Ms.
Carmona has held a variety of increasingly responsible financial
positions within the organization including Manager of Accounting from
June 1984 until June 1994. Prior to joining the Company, Ms. Carmona
was a staff accountant for Thomas Cook Bankers.
Except for information concerning the Company's executive
officers which is included above, the information required by Item 9
is incorporated by reference from the Company's definitive proxy
statement to be filed with the Commission on or before July 29, 1996
for the Company's 1996 annual shareholders' meeting.
-31-
<PAGE>
Item 10. EXECUTIVE COMPENSATION.
-----------------------
The information required by Item 10 is incorporated herein by
reference from the Company's definitive proxy statement scheduled to
be filed with the Commission on or before July 29, 1996 for the
Company's 1996 annual shareholders' meeting.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT.
-----------
The information required by Item 11 is incorporated herein by
reference from the Company's definitive proxy statement scheduled to
be filed with the Commission on or before July 29, 1996 for the
Company's 1996 annual shareholders' meeting.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
The information required by Item 12 is incorporated herein by
reference from the Company's definitive proxy statement scheduled to
be filed with the Commission on or before July 29, 1996 for the
Company's 1996 annual shareholders' meeting.
-32-
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
<TABLE>
<CAPTION>
(a) Index to Financial Statements Page
----------------------------- ----
<S> <C>
Independent Auditors' Report F-1
Balance Sheets at March 31, 1996 and 1995 F-2
Statements of Income for the Years Ended
March 31, 1996, 1995 and 1994 F-3
Statements of Shareholders' Equity for the
Years Ended March 31, 1996, 1995 and 1994 F-4
Statements of Cash Flows for the Years Ended
March 31 1996, 1995 and 1994 F-6
Notes to Financial Statements F-8
</TABLE>
(b) Exhibits.
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
------- ----------
3.1 Articles of Incorporation of the Company, as
amended, are hereby incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on
Form 10-K for the year ended March 31, 1984, File
No. 2-80056.
3.2 Bylaws of the Company, as amended, are hereby
incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1,
File No. 2-80056.
3.2.1 Certificate of Amendment of Bylaws of the Registrant
is hereby incorporated by reference to Exhibit 3.2.1
to the Registrant's Registration Statement on Form
S-1, File No. 333-00161.
10.2 1989 Incentive Stock Option Plan is hereby
incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8,
File No. 33-31949.
10.2.1 Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, File
No. 333-00161.
-33-
<PAGE>
INDEX TO EXHIBITS
(Continued) Sequential
Page
Exhibit No.
------- ----------
10.2.2 Form of Non-Qualified Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, File
No. 333-00161.
10.3 Form of Incentive Stock Option Agreement is
hereby incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form
S-1, File No. 2-80056.
10.4 1993 Deferred Compensation Plan, is hereby
incorporated by reference to Exhibit 10.5 to
the Registrant's Annual Report on Form 10-KSB
for the year ended March 31, 1994, File No.
0-13801.
10.5 Lease Agreement dated March 11, 1993 between the
Registrant and Craig Development Corporation, is
hereby incorporated by reference to Exhibit 10.35
to the Registrant's Annual Report on Form 10-K
for the year ended March 31, 1993 File No. 0-13801.
10.6 Lease agreement dated September 12, 1994 between the
Registrant and Koll/Realty Orangewood Business
Center General Partnership, is hereby
incorporated by reference to Exhibit 10.8 to the
Registrant's Annual Report on Form 10-KSB for
the year ended March 31, 1995, File No. 0-13801.
10.7 Series "A" Convertible Preferred Stock Purchase
Agreement, as amended, dated April 21, 1995 between
the Registrant and Clinitec International, Inc.,
is hereby incorporated by reference to Exhibit 10.11
to the Registrant's Annual Report on Form 10-KSB for
the year ended March 31, 1995, File No. 0-13801.
10.8 Form of Indemnification Agreement is hereby incorporated
by reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1, File No. 333-00161.
10.9 Marketing agreement, as amended, dated April 1, 1995
between the Registrant and Clinitec International,
Inc., is hereby incorporated by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-KSB
for the year ended March 31, 1995, File No. 0-13801.
10.10 Agreement and Plan of Merger, dated May 16, 1996, by and
among Quality Systems, Inc., CII Acquisition Corporation,
Clinitec International, Inc. and certain shareholders of
Clinitec International, Inc. and certain exhibits is
hereby incorporated by reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K, dated May 17, 1996
and filed May 30, 1996.
-34-
<PAGE>
INDEX TO EXHIBITS
(Continued) Sequential
Page
Exhibit No.
------- ----------
10.11 Employment agreement dated May 16, 1996 by and between
CII Acquisition Corporation and Patrick Cline is
hereby incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K/A dated
May 17, 1996 and filed June 21, 1996.
23.1 Independent Auditor's Consent - Deloitte & Touche LLP.,
is filed herewith. F-22
27.1 Financial Data Schedule, is filed herewith.
List of Compensation Plans:
10.2 1989 Incentive Stock Option Plan is hereby
incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8,
File No. 33-31949.
10.2.1 Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1,
File No. 333-00161.
10.2.2 Form of Non-Qualified Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1, File
No. 333-00161.
10.4.2 Profit Sharing and Retirement Plan, as amended,
is hereby incorporated by reference to Exhibit
10.4.2 to the Registrant's Annual Report on Form
10-KSB for the year ended March 31, 1994, File
No. 0-13801.
10.4.3 Profit Sharing and Retirement Plan, amendments
No. 2 and 3, as amended, is filed herewith. F-20
(c) Reports on form 8-K: None
-35-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
QUALITY SYSTEMS, INC.
<S> <C>
By: /s/SHELDON RAZIN Date: June 12, 1996
----------------------------- ---------------------------
SHELDON RAZIN
Chairman of the Board of
Directors and President
<CAPTION>
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/SHELDON RAZIN Chairman of the Board of
-------------------------- Directors and President June 12, 1996
SHELDON RAZIN (Principal Executive
Officer)
/s/JANET RAZIN
-------------------------- Vice President, June 12, 1996
JANET RAZIN Secretary and Director
/s/ROBERT MCGRAW
-------------------------- Vice President, June 12, 1996
ROBERT MCGRAW Chief Financial Officer
(Principal Financial
and Accounting Officer)
/s/JOHN BOWERS, M.D.
-------------------------- Director June 12, 1996
JOHN BOWERS, M.D.
/s/WILLIAM BOWERS
-------------------------- Director June 12, 1996
WILLIAM BOWERS
/s/GEORGE BRISTOL
-------------------------- Director June 12, 1996
GEORGE BRISTOL
/s/PATRICK CLINE
-------------------------- Director June 12, 1996
PATRICK CLINE
/s/GRAEME FREHNER
-------------------------- Director June 12, 1996
GRAEME FREHNER
/s/GORDON SETRAN
-------------------------- Director June 12, 1996
GORDON SETRAN
</TABLE>
-36-
<PAGE>
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors and Shareholders
Quality Systems, Inc.
We have audited the accompanying balance sheets of Quality Systems,
Inc. as of March 31, 1996 and 1995, and the related statements of
income, shareholders' equity and cash flows for each of the three
years in the period ended March 31, 1996. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of Quality Systems, Inc. as
of March 31, 1996 and 1995, and the results of its operations and its
cash flows for the three years in the period ended March 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
May 31, 1996
</AUDIT-REPORT>
F-1
<PAGE>
QUALITY SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION> March 31,
------------------------
ASSETS 1996 1995
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $27,872,000 $ 6,085,000
Short-term investments 1,072,000 1,237,000
Accounts receivable, less allowance
for doubtful accounts of $ 126,000
and $ 77,000, respectively 4,751,000 2,997,000
Inventories 853,000 783,000
Deferred tax asset - 199,000
Other current assets 135,000 74,000
----------- -----------
Total current assets 34,683,000 11,375,000
Equipment and Improvements, net 572,000 535,000
Capitalized Software Costs, net 599,000 502,000
Investment in Clinitec International, Inc. 976,000 -
Other Assets 442,000 256,000
----------- -----------
Total assets $37,272,000 $12,668,000
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable $ 1,706,000 $ 597,000
Deferred service revenue 1,031,000 952,000
Estimated costs to complete system
installations 402,000 217,000
Income taxes payable - 473,000
Other current liabilities 1,348,000 1,104,000
----------- -----------
Total current liabilities 4,487,000 3,343,000
Deferred Tax Liability 84,000 137,000
----------- -----------
Total liabilities 4,571,000 3,480,000
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value,
20,000,000 shares authorized, 5,653,491
and 4,535,866 shares issued and
outstanding, respectively 56,000 45,000
Additional paid-in capital 27,148,000 5,978,000
Unrealized loss on available-for-sale
securities (44,000) (83,000)
Retained earnings 5,541,000 3,248,000
----------- -----------
Total shareholders' equity 32,701,000 9,188,000
----------- -----------
Total liabilities and shareholders'
equity $37,272,000 $12,668,000
=========== ===========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
QUALITY SYSTEMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended March 31,
-----------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies $ 9,623,000 $ 5,681,000 $ 6,146,000
Maintenance and other services 7,109,000 6,368,000 5,606,000
----------- ----------- -----------
16,732,000 12,049,000 11,752,000
Cost of Products and Services 7,929,000 6,060,000 6,527,000
----------- ----------- -----------
Gross Profit 8,803,000 5,989,000 5,225,000
Selling, General and
Administrative Expenses 3,897,000 3,536,000 3,052,000
Research and Development Costs 1,567,000 1,467,000 1,318,000
---------- ---------- ----------
Income from Operations 3,339,000 986,000 855,000
Investment Income 533,000 429,000 400,000
Equity in Loss of Clinitec
International, Inc. (51,000) - -
---------- ---------- ----------
Income before Provision for
Income Taxes 3,821,000 1,415,000 1,255,000
Provision for Income Taxes 1,528,000 453,000 349,000
---------- ---------- ----------
Net Income $2,293,000 $ 962,000 $ 906,000
========== ========== ==========
Net Income per Share:
Primary $0.48 $0.21 $0.21
===== ===== =====
Fully diluted $0.48 $0.21 $0.20
===== ===== =====
</TABLE>
See notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
QUALITY SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized
Common Loss on
Shares Issued Additional Available-
------------------ Paid-in for-sale Retained
Number Amount Capital Securities Earnings
---------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at
April 1, 1993 4,186,616 $42,000 $5,100,000 $ - $1,380,000
Exercise of
stock options 258,500 2,000 400,000 - -
Tax benefit
resulting from
stock options - - 289,000 - -
Unrealized loss,
net of $60,000
tax benefit - - - (79,000) -
Net income - - - - 906,000
---------- ------- ---------- ----------- ----------
Balance at
March 31, 1994 4,445,116 44,000 5,789,000 (79,000) 2,286,000
Exercise of
stock options 90,750 1,000 150,000 - -
Tax benefit
resulting from
stock options - - 39,000 - -
Unrealized loss,
net of $3,000
tax benefit - - - (4,000) -
Net income - - - - 962,000
---------- ------- ---------- ----------- ----------
Balance at
March 31, 1995 4,535,866 45,000 5,978,000 (83,000) 3,248,000
See notes to financial statements.
F-4
<CAPTION>
QUALITY SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
Unrealized
Common Loss on
Shares Issued Additional Available-
------------------ Paid-in for-sale Retained
Number Amount Capital Securities Earnings
---------- ------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Sale of stock
in secondary
offering 1,000,000 10,000 20,244,000 - -
Exercise of
stock options 117,625 1,000 181,000 - -
Tax benefit
resulting from
stock options - - 745,000 - -
Unrealized gain,
net of $29,000
tax provision - - - 39,000 -
Net income - - - - 2,293,000
---------- ------ ----------- ---------- ----------
Balance at
March 31, 1996 5,653,491 $56,000 $27,148,000 $ (44,000) $5,541,000
========= ======= =========== ========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
QUALITY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
Years Ended March 31,
-----------------------------------
1996 1995 1994
----------- ---------- ------------
<S> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income $2,293,000 $ 962,000 $ 906,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 496,000 418,000 404,000
Realized (gains) losses from
sales of short-term
investments 10,000 (151,000) (194,000)
Unrealized (gains) losses on
trading securities (90,000) (82,000) 99,000
Equity in loss of Clinitec
International, Inc. 51,000 - -
Gain on sales of fixed assets (8,000) - -
Deferred income taxes 180,000 (62,000) -
Changes in:
Accounts receivable (1,754,000) (267,000) (284,000)
Inventories (70,000) 112,000 56,000
Other current assets 19,000 13,000 15,000
Accounts payable 1,109,000 (252,000) (153,000)
Deferred service revenue 79,000 76,000 32,000
Estimated costs to complete
system installations 185,000 (130,000) 115,000
Income taxes payable, and
taxes related to equity
accounts 163,000 515,000 263,000
Other current liabilities 25,000 66,000 (57,000)
---------- ---------- ----------
Net Cash Provided By Operating
Activities 2,688,000 1,218,000 1,202,000
---------- ---------- ----------
See notes to financial statements.
F-6
<CAPTION>
QUALITY SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (continued)
Years Ended March 31,
----------------------------------
1996 1995 1994
----------- ---------- ------------
<S> <C> <C> <C>
Cash Flows from Investing
Activities:
Proceeds from sales of
short-term investments 1,426,000 12,725,000 10,074,000
Purchases of short-term
investments (1,114,000) (8,758,000)(13,810,000)
Additions to equipment and
improvements, net (240,000) (162,000) (101,000)
Additions to capitalized
software costs (382,000) (191,000) (183,000)
Investment in Clinitec
International, Inc. (1,027,000) - -
Change in other assets - 9,000 17,000
------------ ---------- ------------
Net Cash Provided By (Used In)
Investing Activities (1,337,000) 3,623,000 (4,003,000)
------------ ---------- ------------
Cash Flows from Financing
Activities:
Proceeds from exercise of
stock options 182,000 151,000 402,000
Proceeds from issuance
of common stock 21,030,000 - -
Common stock issuance costs (776,000) - -
------------ ---------- ------------
Net Cash Provided By
Financing Activities 20,436,000 151,000 402,000
------------ ---------- ------------
Net Increase (Decrease) in Cash
and Cash Equivalents 21,787,000 4,992,000 (2,399,000)
Cash and Cash Equivalents,
beginning of year 6,085,000 1,093,000 3,492,000
------------ ---------- ------------
Cash and Cash Equivalents, end
of year $27,872,000 $6,085,000 $ 1,093,000
============ ========== ============
</TABLE>
Supplemental Information - During fiscal 1996, 1995 and 1994 the
Company made income tax payments of $1,146,000, $10,000 and $86,000,
respectively.
See notes to financial statements.
F-7
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 - DESCRIPTION OF BUSINESS
Quality Systems, Inc. ("QSI" or the "Company") develops and
markets proprietary information systems for medical and dental group
practices, physician hospital organizations, management service
organizations, health maintenance organizations and community health
centers. The Company's proprietary software systems include summary
medical records and general patient information, appointment
scheduling, billing, insurance claims submission and processing,
managed care implementation and referral management, treatment
outcome studies, treatment planning, drug formularies, word
processing and accounting. In addition to providing fully integrated
solutions to its client, the Company provides its clients with
comprehensive hardware and software maintenance and support services,
system training services and electronic claims submission services.
In May 1995, the Company acquired an ownership interest in a developer
of an electronic medical records product (see Note 11).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Licenses, sales of computer systems and
system upgrades are recognized at the time the basic software and
hardware is shipped and the estimated costs to complete the system are
not considered significant in accordance with Statement of Position
91-1, "Software Revenue Recognition". Estimated costs to complete are
normally insignificant and are charged to expense in the period in
which the sales are recognized. These costs typically include labor
and travel costs associated with training, installation and data
conversion. If estimated costs to complete are significant, revenue
is recognized on a percentage of completion basis.
Maintenance revenue is recognized ratably over the life of the
contract. Advance maintenance revenue billings are included in
deferred service revenue on the accompanying balance sheets. Sales of
supplies are recognized at the time of shipment.
Cash equivalents - The Company considers all highly liquid
interest earning deposits purchased with an original maturity of three
months or less to be cash equivalents.
Short-term investments - The Company classifies its short-term
investments into one of the following categories:
Held to maturity - Debt securities for which the Company has
the intent and the ability to hold to maturity.
Trading - Debt securities that do not meet the "intent-to-hold"
criterion and equity securities, both of which are bought and
held principally for the purpose of being sold in the near
term.
F-8
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Available-for-sale - Debt securities that do not meet the
"intent-to-hold" criterion and equity securities that are not
classified as trading securities.
Held to maturity securities are carried in the balance sheet at
cost (unless there is a decline in the value of the individual
securities that is not due to temporary declines), and realized gains
and losses are recorded in the income statement in the period that
they are earned or incurred. Trading securities are carried in the
balance sheet at fair market value and unrealized gains and losses are
recorded in the statement of income. Available-for-sale
securities are carried in the balance sheet at fair market value;
realized gains and losses are recorded in the statement of income when
they are earned or incurred, and unrealized gains and losses, net of
tax effect, are recognized as a component of shareholders' equity.
Realized gains and losses from investment transactions are
determined on a first-in, first-out basis.
Accounts Receivable - A majority of the Company's system sales
are financed by third-party sources, while the Company provides credit
for most maintenance contract sales. The Company performs ongoing
credit evaluations of its customers and maintains reserves for
potential credit losses, which have been within management's
expectations.
Inventories - Inventories are valued at lower of cost (first-in,
first-out) or market. Certain inventories are maintained for customer
support pursuant to service agreements and are amortized over a
five-year period using the straight-line method.
Equipment and Improvements - Equipment and improvements are
stated at cost less accumulated depreciation and amortization.
Depreciation and amortization of equipment and improvements are
provided over the estimated useful lives of the assets, or the related
lease terms if shorter, by the straight-line method. Useful lives
range from five to seven years.
Software Development Costs - 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 in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed". Such costs are amortized over
the lesser of five years or the economic life of the related product.
Beginning in fiscal 1996, the amortization period for new costs was
changed to three years, the impact of which was immaterial in fiscal
F-9
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
1996. The Company performs an annual review of the recoverability of
such capitalized software costs. At the time a determination has been
made that capitalized amounts are not recoverable based on the
estimated cash flows to be generated from the applicable software, any
remaining capitalized amounts would be written off.
Income Taxes - Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to differences
between the basis of assets and liabilities for financial and tax
reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either
be taxable or deductible when the assets and liabilities are recovered
or settled. Deferred taxes also are recognized for operating losses
that are available to offset future taxable income and tax credits
that are available to offset future income taxes. Valuation
allowances are established as a reduction of net deferred tax assets
when management cannot determine that the recoverability of such
assets is probable.
Earnings per Share - The difference between primary and fully
diluted earnings per share for each of the years ended March 31, 1996
and 1995 was not significant and earnings per share was calculated
based on the weighted average number of common shares and common share
equivalents outstanding of 4,788,000 and 4,606,000, respectively.
Primary and fully diluted earnings per share for the year ending March
31, 1994 are based on the weighted average number of common shares and
common share equivalents outstanding of 4,342,000 and 4,461,000,
respectively. Common stock equivalents consist primarily of stock
options and are calculated using the treasury stock method.
Stock-Based Compensation - In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No.123, "Accounting For Stock-Based Compensation" ("SFAS
No. 123"), which will be effective for the Company beginning April 1,
1996. SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does not
require) compensation cost to be measured based on the fair value of
the equity instrument awarded. Companies are permitted, however, to
continue to apply Accounting Principles Board Opinion No. 25 ("APB.
25"), which recognizes compensation cost based on the intrinsic value
of the equity instrument awarded. The Company will continue to apply
APB. 25 to its stock-based compensation awards to employees and will
disclose the required pro forma effect on net income and earnings per
share beginning in fiscal 1997.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results in future periods could differ from those estimates
made in the current year.
F-10
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Reclassifications - Certain amounts in the accompanying financial
statements have been reclassified to conform with the March 31, 1996
presentation.
NOTE 3 - CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
<TABLE>
<CAPTION>
At March 31, 1996 and 1995, the Company had cash equivalents of
$27,079,000 and $5,349,000, respectively, invested in a major national
brokerage firm's institutional fund that specializes in U.S.
government securities and commercial paper with high credit ratings.
Short-term investments consist of the following components:
March 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Trading securities $ 758,000 $ 927,000
Available-for-sale securities 314,000 310,000
---------- ----------
$1,072,000 $1,237,000
========== ==========
</TABLE>
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
March 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Aggregate market $ 314,000 $ 310,000
Gross unrealized holding losses $ 78,000 $ 146,000
Amortized cost basis for debt
securities issued by foreign
governments, denominated in U.S.
dollars. $ 392,000 $ 456,000
</TABLE>
F-11
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
Investment income for each of the three years ended March 31,
1996 consists of the following:
Years Ended March 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 433,000 $ 196,000 $ 305,000
Net gains (losses) on
short-term investments --
Realized (10,000) 151,000 194,000
Unrealized 90,000 82,000 (99,000)
Other 20,000 - -
---------- ---------- ----------
$ 533,000 $ 429,000 $ 400,000
========== ========== ==========
</TABLE>
F-12
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 4 - CAPITALIZED SOFTWARE COSTS
<TABLE>
<CAPTION>
Capitalized software costs at March 31, 1996 and 1995 were net of
accumulated amortization of $867,000 and $582,000, respectively.
Information related to net capitalized software costs is as
follows:
Years Ended March 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Beginning of year $ 502,000 $ 509,000 $ 491,000
Capitalized 382,000 191,000 183,000
Amortization (285,000) (198,000) (165,000)
--------- --------- ---------
End of year $ 599,000 $ 502,000 $ 509,000
========= ========= =========
</TABLE>
NOTE 5 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
March 31,
----------------------------
1996 1995
---------- ----------
<S> <C> <C>
INVENTORIES:
Computer systems and
components $ 509,000 $ 420,000
Replacement parts for
certain client systems, net
of accumulated amortization
of $1,015,000 and $1,026,000,
respectively 295,000 308,000
Miscellaneous parts and
supplies 49,000 55,000
---------- ----------
$ 853,000 $ 783,000
========== ==========
</TABLE>
F-13
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
EQUIPMENT AND IMPROVEMENTS:
March 31,
-----------------------------
1996 1995
------------- --------------
<S> <C> <C>
Computers and electronic
test equipment $1,393,000 $1,251,000
Furniture and fixtures 330,000 312,000
Vehicles 88,000 110,000
Leasehold improvements 117,000 117,000
---------- ----------
1,928,000 1,790,000
Accumulated depreciation
and amortization (1,356,000) (1,255,000)
---------- ----------
$ 572,000 $ 535,000
========== ==========
</TABLE>
OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
March 31,
-----------------------------
1996 1995
------------- --------------
<S> <C> <C>
Accrued payroll and related
expenses $ 498,000 $ 427,000
Deferred compensation 370,000 185,000
Deferred tax liability 34,000 -
Other accrued expenses 446,000 492,000
---------- ----------
$1,348,000 $1,104,000
========== ==========
</TABLE>
F-14
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 6 - INCOME TAXES
<TABLE>
<CAPTION>
The income tax provision consists of the following components:
Years Ended March 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Federal-
Current taxes $ 1,072,000 $ 414,000 $ 309,000
Deferred taxes 109,000 (36,000) -
----------- ----------- -----------
1,181,000 378,000 309,000
----------- ----------- -----------
State-
Current taxes 305,000 101,000 40,000
Deferred taxes 42,000 (26,000) -
----------- ----------- -----------
347,000 75,000 40,000
----------- ----------- -----------
$ 1,528,000 $ 453,000 $ 349,000
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
The income tax provision differs from an amount computed at
statutory rates as follows:
Years Ended March 31,
--------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Federal income tax provision
at statutory rate $ 1,299,000 $ 481,000 $ 426,000
Increases (decreases)
resulting from:
State income taxes 234,000 107,000 121,000
Change in valuation
allowance - (86,000) (204,000)
Other (5,000) (49,000) 6,000
----------- ----------- -----------
$ 1,528,000 $ 453,000 $ 349,000
=========== =========== ===========
The changes in valuation allowances in 1995 and 1994 are related
to benefits arising from federal and state net operating loss
carryforwards.
</TABLE>
F-15
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
The net deferred tax benefits in the accompanying balance sheets
include the following components:
March 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets -
Short-term investments $ - $ 71,000
Accounts receivable 55,000 33,000
Inventories 30,000 27,000
Other current assets 46,000 -
Accumulated depreciation 5,000 5,000
Investment, Clinitec
International, Inc. 22,000 -
Accrued vacation and sick leave 106,000 164,000
Accrued liability for deferred
compensation 169,000 100,000
State income taxes 51,000 18,000
--------- ---------
484,000 418,000
--------- ---------
Deferred tax liabilities -
Short-term investments (3,000) -
Inventories (17,000) (22,000)
Accumulated depreciation (21,000) (24,000)
Capitalized software (259,000) (217,000)
Deferred revenue (302,000) (93,000)
--------- ---------
(602,000) (356,000)
--------- ---------
$(118,000) $ 62,000
========= =========
</TABLE>
The deferred tax assets and liabilities have been shown net in
the accompanying balance sheets based on the long-term or short-term
nature of the items which give rise to the deferred amount.
NOTE 7 - EMPLOYEE BENEFIT PLANS
The Company has a profit sharing and retirement plan (the
"Retirement Plan") for the benefit of substantially all of its
employees. The Retirement Plan was amended during the fiscal year
ended March 31, 1994 to add 401(k) features. Participating employees
may defer up to 15% of compensation per year. The Company's annual
contribution is determined by the Company's Board of Directors and the
Retirement Plan may be amended or discontinued at the discretion of
the Board of Directors. Contributions of $20,000, $21,000 and $19,000
were made to the Retirement Plan for the fiscal years ended March 31,
1996, 1995 and 1994, respectively.
F-16
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
During the fiscal year ended March 31, 1994, the Company
initiated a deferred compensation plan (the "Deferral Plan") for the
benefit of officers and key employees. Participating employees may
defer all or a portion of their compensation for a Deferral Plan year.
In addition, the Company may, but is not required to, make
contributions into the Deferral Plan on behalf of participating
employees. Each participating employee's deferred compensation and
share of Company contributions has been invested in a life insurance
policy which has death benefit and mutual fund features. Investment
decisions are made by each participating employee from a family of
mutual funds. The Company is the owner and beneficiary of the life
insurance policies and has an obligation to pay the greater of the
death benefit or the net cash surrender value upon each employee's
death or termination. The net cash surrender value of the life
insurance policies and the related Company obligation for deferred
compensation was $370,000 and $185,000 at March 31, 1996 and 1995,
respectively, which have been included in the accompanying balance
sheets. The Company made contributions of $11,000, $10,000 and $8,000
to the Deferral Plan for the fiscal years ended March 31, 1996, 1995
and 1994, respectively.
NOTE 8 - EMPLOYEE STOCK OPTION PLANS
1981 Stock option Plan - Under a shareholder approved incentive
stock option plan (the "1981 Plan") for officers and employees,
365,384 shares of common stock were reserved for the issuance of
options to purchase shares of common stock at the fair market value at
the date of grant. On October 31, 1991, the 1981 incentive stock
option plan expired, and no additional shares could be granted under
the plan. As of March 31, 1995, all outstanding shares under this
plan had been excercised.
1989 Stock Option Plan - During fiscal 1990, the Company's
shareholders approved a stock option plan (the "1989 Plan") under
which 1,000,000 shares of common stock have been reserved for the
issuance of options. The 1989 Plan provides that salaried officers or
key employees, and non-employee directors of the Company or its
subsidiaries may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock at an exercise
price not less than 85% of their fair market value on the option grant
date.
F-17
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Upon an acquisition of the Company by merger or asset sale,
each outstanding option will be subject to accelerated vesting under
certain circumstances. The 1989 Plan will terminate on May 30, 1999,
unless sooner terminated by the Board. At March 31, 1996, options for
21,625 shares were exercisable and 596,500 shares were available for
future grant under the 1989 Plan.
<TABLE>
<CAPTION>
A summary of option transactions under the 1981 Plan and 1989
Plan for the three years ended March 31, 1996 is as follows:
Years Ended March 31,
----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Options -
Outstanding at beginning
of year 219,700 305,500 536,000
Granted 30,000 5,000 101,000
Exercised (117,600) (90,800) (258,500)
Cancelled (2,000) - (73,000)
------- ------- -------
Outstanding at end of year 130,100 219,700 305,500
======= ======= =======
Range of option exercise prices -
Granted $4.88-$26.50 $3.75 $1.50
Exercised $1.38-$ 3.75 $1.50-$1.69 $1.06-$1.69
Cancelled $26.50 $ - $1.06-$1.81
</TABLE>
F-18
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and offices under noncancelable
operating lease agreements which contain lease renewal options through
October 1996. The Company has rental commitments in fiscal
1997 of $211,000. Total rental expense for all operating leases was
$385,000, $387,000 and $412,000 for the years ended March 31, 1996,
1995 and 1994, respectively.
The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business. The Company
believes such matters are without merit, or involve such amounts that
unfavorable disposition would not have a material adverse effect on
the Company's financial statements.
NOTE 10 - RELATED PARTY TRANSACTION
During the year ended March 31, 1996, the Company sold a computer
system for $335,000 to an entity whose founder and chief executive
officer is also a QSI Director. In connection with this sale, the
Company also entered into an agreement to pay a license fee based upon
future revenues, if any, from certain software templates that may be
developed by the entity in the future.
NOTE 11 - SUBSEQUENT EVENT
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 strategic relationship, QSI acquired a 25%
ownership interest in Clinitec for $1.0 million in cash. On May 16,
1996, QSI and Clinitec executed an Agreement and Plan of Merger, which
was effected on May 17, 1996, whereby QSI acquired the remaining 75%
of Clinitec that it did not already own for $4.9 million in cash and
309,846 shares of QSI Common Stock. For purposes of the acquisition,
the shares were valued at $6.9 million, or $22.25 per share, for a
total purchase price of $11.8 million for this remaining 75% ownership
interest. On May 17, 1996, in accordance with the terms of the
transaction, Clinitec was merged with and into a newly formed,
wholly-owned subsidiary of the Company. For accounting purposes, the
acquisition will be treated as a purchase transaction during the
quarter ending June 30, 1996. In connection with this accounting
treatment, the Company anticipates taking a net write off for
purchased in-process research and development of approximately $8.3
million during the June 30, 1996 quarter. The exact amount of the
write off is subject to change based upon the final determination of
the purchase price allocation.
F-19
<PAGE>
EXHIBIT 10.4.3
--------------
SECOND AMENDMENT TO THE
QUALITY SYSTEMS, INC. RETIREMENT SAVINGS PLAN
The Quality Systems, Inc. Retirement Savings Plan is hereby
amended, effective April 1, 1995, in the following particulars:
1. Article I, Paragraph O. (definition of "Eligible
Employee") is amended by adding the following subparagraph 3.:
"3. A Key Employee as defined in Paragraph AG.
of this Article I. A Key Employee shall not be eligible
to make Salary Deferral Contributions, and shall not be
eligible to receive Employer Matching or Employer
Supplemental contributions."
2. Effective April 1, 1995, all Accounts of each
Participant in the Plan attributable to the former Quality Systems,
Inc. Profit Sharing Plan on April 1, 1995 are fully vested and
nonforfeitable. Article V, Paragraph A.2. is amended by adding the
following paragraph to read as follows:
"A Participant's Profit Sharing Plan Account(s)
attributable to the old Quality Systems, Inc. Profit
Sharing Plan shall be fully vested and nonforfeitable at all
times, and shall not be subject to divestment for cause."
3. Except as amended above, the Quality Systems, Inc.
Retirement Savings Plan is in full force and effect.
Date 5/18/95
-------
QUALITY SYSTEMS, INC.
By /s/ Janet M. Razin
ADMINISTRATIVE COMMITTEE
APPROVED AS TO FORM:
BARTON, KLUGMAN & OETTING
Attorneys for Quality Systems, Inc.
F-20
<PAGE>
EXHIBIT 10.4.3 (Continued)
--------------
THIRD AMENDMENT TO THE
QUALITY SYSTEMS, INC. RETIREMENT SAVINGS PLAN
The Quality Systems, Inc. Retirement Savings Plan is hereby
amended, effective February 12, 1996, in the following particulars:
1. The following sentence shall be added at the end of
Article IV.1 of the Plan to read as follows:
"No rollovers or transfers from other plans shall be
permitted after February 12, 1996."
2. The following sentence shall be added at the end of
Article VI.K of the Plan to read as follows:
"5. A Participant may also direct the Committee to pay
all or a portion of amounts allocated to the Participant's Rollover
Account directly to an Eligible Retirement Plan if the amounts have
been held in the Rollover Account for at least two years."
DATED: February 12, 1996
-----------------
QUALITY SYSTEMS, INC.
By /s/ Janet M. Razin
ADMINISTRATIVE COMMITTEE
APPROVED AS TO FORM:
BARTON, KLUGMAN & OETTING
Attorneys for Quality Systems, Inc.
F-21
<PAGE>
EXHIBIT 23.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statements Number 2-82773 and 33-31949 on Form S-8 of our report dated
May 31, 1996 appearing in this Annual Report on Form 10-KSB for
Quality Systems, Inc. for the year ended March 31, 1996.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Costa Mesa, California
June 21, 1996
F-22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 27,872,000 6,085,000
<SECURITIES> 1,072,000 1,237,000
<RECEIVABLES> 4,751,000 2,997,000
<ALLOWANCES> 126,000 77,000
<INVENTORY> 853,000 783,000
<CURRENT-ASSETS> 135,000 273,000
<PP&E> 1,928,000 1,790,000
<DEPRECIATION> (1,356,000) (1,255,000)
<TOTAL-ASSETS> 37,272,000 12,668,000
<CURRENT-LIABILITIES> 4,487,000 3,343,000
<BONDS> 0 0
0 0
0 0
<COMMON> 56,000 45,000
<OTHER-SE> 32,645,000 9,143,000
<TOTAL-LIABILITY-AND-EQUITY> 37,272,000 12,668,000
<SALES> 9,623,000 5,681,000
<TOTAL-REVENUES> 16,732,000 12,049,000
<CGS> 0 0
<TOTAL-COSTS> 7,929,000 6,060,000
<OTHER-EXPENSES> 5,464,000 5,003,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,821,000 1,415,000
<INCOME-TAX> 1,528,000 453,000
<INCOME-CONTINUING> 2,293,000 962,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,293,000 962,000
<EPS-PRIMARY> .48 .21
<EPS-DILUTED> .48 .21
</TABLE>
