<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-QSB
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
_________________
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission file number 0-13801
_______
QUALITY SYSTEMS, INC.
_________________________________________________________________
(Exact name of small business issuer as specified in its charter)
California 95-2888568
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
17822 East 17th Street, Tustin, California 92780
__________________________________________ __________
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (714) 731-7171
______________
NOT APPLICABLE
________________________________________________________________
(Former name, former address and former fiscal year, if changed,
since last year)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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. XX
Yes _____ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
5,997,462 shares of Common Stock, $.01 par value,
as of February 4, 1997
Transitional Small Business Disclosure Format (check one):
XX
Yes _____ No _____
Page 1 of 28
<PAGE> 2
PART I. CONSOLIDATED FINANCIAL INFORMATION
------- ----------------------------------
Item 1. Financial Statements
------- --------------------
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION> December 31, March 31,
1996 1996
----------- -----------
<S> <C> <C>
Current Assets: (Unaudited)
Cash and cash equivalents $21,997,000 $27,872,000
Short-term investments 882,000 1,072,000
Accounts receivable, net 6,140,000 4,751,000
Inventories 1,304,000 853,000
Deferred tax asset 214,000 -
Other current assets 416,000 135,000
----------- -----------
Total current assets 30,953,000 34,683,000
Equipment and Improvements, net 1,085,000 572,000
Capitalized Software Costs, net 843,000 599,000
Investment in Clinitec International, Inc. - 976,000
Excess of Cost Over Net Assets
of Acquired Business, net 2,886,000 -
Other Assets 1,407,000 442,000
----------- -----------
Total assets $37,174,000 $37,272,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,445,000 $ 1,706,000
Deferred service revenue 1,307,000 1,031,000
Estimated costs to complete
system installations 581,000 402,000
Other current liabilities 1,666,000 1,348,000
----------- -----------
Total current liabilities 4,999,000 4,487,000
Deferred Tax Liability 148,000 84,000
----------- -----------
Total liabilities 5,147,000 4,571,000
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $.01 par value,
20,000,000 shares authorized, 5,997,462
and 5,653,491 shares issued and
outstanding, respectively 60,000 56,000
Additional paid-in capital 34,121,000 27,148,000
Unrealized loss on
available-for-sale securities - (44,000)
Retained earnings (accumulated deficit) (2,154,000) 5,541,000
----------- -----------
Total shareholders' equity 32,027,000 32,701,000
----------- -----------
Total liabilities
and shareholders' equity $37,174,000 $37,272,000
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 3
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ----------------------
December 31, December 31,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer
systems, upgrades
and supplies $2,563,000 $2,514,000 $7,926,000 $7,162,000
Maintenance and
other services 2,114,000 1,819,000 6,080,000 5,159,000
---------- ---------- ---------- ----------
4,677,000 4,333,000 14,006,000 12,321,000
Cost of Products
and Services 2,431,000 2,080,000 7,064,000 5,865,000
---------- ---------- ---------- ----------
Gross Profit 2,246,000 2,253,000 6,942,000 6,456,000
Selling, General
and Administrative
Expenses 2,106,000 919,000 5,323,000 2,847,000
Research and
Development Costs 519,000 465,000 1,451,000 1,121,000
Purchased In-Process
Research and
Development - - 8,300,000 -
---------- ---------- ---------- ----------
Income (Loss) from
Operations (379,000) 869,000 (8,132,000) 2,488,000
Investment Income 316,000 135,000 1,015,000 340,000
Equity in Loss
of Clinitec
International, Inc. - (23,000) (31,000) (41,000)
---------- ---------- ---------- ----------
Income (Loss)
before Provision
for Income Taxes (63,000) 981,000 (7,148,000) 2,787,000
Provision for
Income Taxes 17,000 376,000 547,000 1,117,000
---------- ---------- ---------- ----------
Net Income (Loss) $ (80,000) $ 605,000 $(7,695,000) $1,670,000
========== ========== ========== ==========
Net Income (Loss)
per Share $(0.01) $0.13 $(1.30) $0.35
====== ===== ===== =====
Weighted average
number of shares
outstanding 5,979,000 4,728,000 5,917,000 4,724,000
========= ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE> 4
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION> Nine Months Ended
December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $(7,695,000) $ 1,670,000
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Purchased in-process
research and development 8,300,000 -
Depreciation and amortization 819,000 364,000
Gain on short-term
investments and fixed assets (83,000) (55,000)
Equity in loss of
Clinitec International, Inc. 31,000 41,000
Deferred income taxes 142,000 173,000
Changes in:
Accounts receivable (1,078,000) (1,368,000)
Inventories (435,000) 58,000
Other current assets (196,000) 13,000
Accounts payable (513,000) 346,000
Deferred service revenue 215,000 79,000
Estimated costs to complete
system installations 139,000 120,000
Income taxes payable and taxes
related to equity accounts 10,000 33,000
Other current liabilities 79,000 48,000
------------ ------------
Net Cash Provided by
(Used in) Operating Activities (265,000) 1,522,000
------------ ------------
Cash Flows from Investing Activities:
Proceeds from sales of
short-term investments 402,000 1,092,000
Purchases of short-term investments (51,000) (1,010,000)
Net additions to equipment
and improvements (462,000) (84,000)
Additions to capitalized
software costs (545,000) (281,000)
Purchase of ownership interests in
Clinitec International, Inc.
(excluding Common Stock issued
in the Acquisition) (4,946,000) (1,027,000)
Change in other assets (69,000) 9,000
------------ ------------
Net Cash Used in Investing Activities (5,671,000) (1,301,000)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of
stock options 61,000 159,000
Prepaid Common Stock Offering Costs - (68,000)
------------ ------------
Net Cash Provided by Financing Activities 61,000 91,000
------------ ------------
Net Increase (Decrease) in
Cash and Cash Equivalents (5,875,000) 312,000
Cash and Cash Equivalents,
beginning of period 27,872,000 6,085,000
------------ ------------
Cash and Cash Equivalents,
end of period $21,997,000 $ 6,397,000
============ ============
</TABLE>
Supplemental information - During the nine months ended December 31,
1996 and 1995 the Company made income tax payments of $430,000 and
$911,000, respectively.
Detail of business acquired in
purchase transaction:
<TABLE>
<CAPTION>
<S> <C>
In-Process Research and Development $ 8,300,000
Fair Value of Assets Acquired (net
of previous investment) 3,999,000
Liabilities Assumed (459,000)
Common Stock Issued in the Acquisition (6,894,000)
------------
Cash Paid for the Acquisition,
net of cash acquired $ 4,946,000
============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
------ ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements of Form 10-QSB and,
therefore, do not include all information and footnotes which would be
presented were such financial statements prepared in accordance with
generally accepted accounting principles, and should be read in
conjunction with the audited financial statements presented in the
Company's Annual Report for the fiscal year ended March 31, 1996. In
the opinion of management, the accompanying financial statements
reflect all adjustments which are necessary for a fair presentation of
the results of operations for the interim periods presented. The
results of operations for such interim periods are not necessarily
indicative of results of operations to be expected for the full year.
Certain amounts in the accompanying consolidated financial statements
have been reclassified to conform with the December 31, 1996
presentation.
NOTE 2 - ACQUISITION OF CLINITEC INTERNATIONAL, INC.
------ -------------------------------------------
In April 1995, the Company entered into a strategic relationship with
Clinitec International, Inc. ("Clinitec"), a developer of electronic
medical records software systems. In May 1995, in connection with
this relationship, the Company acquired a 25% percent ownership
interest in Clinitec for $1.0 million in cash. On May 17, 1996, the
Company acquired the remaining 75% of Clinitec for approximately $4.9
million in cash plus 309,846 shares of the Company's Common Stock and
is operating Clinitec as a wholly-owned subsidiary. For purposes of
the May 1996 acquisition, the Common Stock was valued at approximately
$6.9 million, or $22.25 per share. For accounting purposes, the
acquisition was treated as a purchase transaction. In connection with
this treatment, the Company incurred an $8.3 million charge for
purchased in-process research and development during the nine months
ended December 31, 1996.
NOTE 3 - INCOME TAXES
------ ------------
The provision for income taxes for the three months ended December 31,
1996 differs from the Company's combined Federal and state statutory
rates primarily due to non-deductible amortization of certain
intangible assets acquired in connection with the May 1996 Clinitec
purchase. The provision for income taxes for the nine months ended
December 31, 1996 differs from the Company's combined Federal and
state statutory rates primarily due to the non-deductible charge for
purchased in-process research and development incurred in connection
with the May 1996 Clinitec purchase and non-deductible amortization of
certain intangible assets acquired therein. The provisions for income
taxes for the three and nine months ended December 31, 1995
approximate the Company's combined Federal and state statutory rates.
<PAGE> 6
Item 2. Management's Discussion and Analysis of Financial Condition
------- -----------------------------------------------------------
and Results of Operations
-------------------------
RISK FACTORS
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-QSB, including
discussions of the Company's product development plans and business
strategies and market factors influencing the Company's results, are
forward-looking statements that involve certain risks and
uncertainties. Actual results may differ from those anticipated by
the Company as a result of various factors, both foreseen and
unforeseen, including, but not limited to, the Company's ability to
continue to develop new products and increase systems sales in a
market characterized by rapid technological evolution, consolidation,
and competition from larger, better capitalized competitors. Many
other economic, competitive, governmental and technological factors
could impact the Company's ability to achieve its goals and interested
persons are urged to review the risks described below and in the
discussion of the Company's liquidity and results of operations set
forth below, as well as in the Company's other public disclosures and
filings with the Securities and Exchange Commission.
DEPENDENCE ON PRINCIPAL PRODUCT AND NEW PRODUCT DEVELOPMENT - The
Company currently derives substantially all of its net revenues from
sales of its health care information systems and related services. The
Company believes that a primary factor in the market acceptance of its
systems has been its ability to meet the needs of users of health care
information systems. The Company's future financial performance will
depend in large part on the Company's ability to continue to meet the
increasingly sophisticated needs of its clients through the timely
development and successful introduction of new and enhanced versions
of its systems and other complementary products. The Company has
historically expended a significant amount of its net revenues on
product development and believes that significant continuing product
development efforts will be required to sustain the Company's growth.
There can be no assurance that the Company will be successful in its
product development efforts, that the market will continue to accept
the Company's existing or new products, or that products or product
enhancements will be developed in a timely manner, meet the
requirements of health care providers or achieve market acceptance.
If new products or product enhancements do not achieve market
acceptance, the Company's business, operating results and financial
condition could be adversely affected. At certain times in the past,
the Company has also experienced delays in purchases of its products
by clients anticipating the launch of new products by the Company.
There can be no assurance that material order deferrals in
anticipation of new product introductions will not occur.
COMPETITION - The market for health care information systems is
intensely competitive and the Company faces significant competition
from a number of different sources. The electronic medical records
market, in particular, is subject to rapid changes in technology and
the Company expects that competition in this portion of the market
will increase as new competitors enter the marketplace. In addition,
several of the Company's competitors have significantly greater
name recognition as well as substantially greater financial,
technical, product development and marketing resources than the
Company.
<PAGE> 7
The industry is highly fragmented and includes numerous competitors,
none of which the Company believes dominates the overall market for
either group practice management or electronic medical records
systems. Among the Company's principal competitors are health care
information systems companies such as IDX Corporation, Medic Computer
Systems, and Physician Computer Networks, Inc., and electronic medical
records vendors such as MedicaLogic, Inc., HealthPoint G.P., and
Datamedic Corp. 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 or new product
introductions 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. In addition, if the health
care industry continues to undergo further consolidation as it has
recently experienced, each sale of the Company's systems will assume
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 either newly formed groups and/or 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 will be materially adversely affected.
The Company is currently developing a new generation of its group
practice management 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.
<PAGE> 8
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 predictable with any
degree of certainty. Furthermore, the Company's systems can be
relatively large and expensive and individual systems sales can
represent a significant portion of the Company's revenues for a
quarter such that the loss of even one such sale can have a
significant adverse impact on the Company's quarterly profitability.
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/shipment and the installation cycle is typically two to four
months from contract execution/shipment 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.
<PAGE> 9
Due to all of the foregoing factors, it is possible that in some
future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially
adversely affected.
PROPRIETARY TECHNOLOGY - The Company is heavily dependent on the
maintenance and protection of its intellectual property and relies
largely on license agreements, confidentiality procedures and employee
nondisclosure agreements to protect its intellectual property. The
Company's software is not patented and existing copyright laws offer
only limited practical protection. There can be no assurance that the
legal protections and precautions taken by the Company will be
adequate to prevent misappropriation of the Company's technology or
that competitors will not independently develop technologies
equivalent or superior to the Company's. Further, the laws of some
foreign countries do not protect the Company's proprietary rights to
as great an extent as do the laws of the United States.
The Company does not believe that its operations or products infringe
on the intellectual property rights of others. However, there can be
no assurance that others will not assert infringement or trade secret
claims against the Company with respect to its current or future
products or that any such assertion will not require the Company to
enter into a license agreement or royalty arrangements with the party
asserting the claim. As competing health care information systems
increase in complexity and overall capabilities and the functionality
of these systems further overlaps, providers of such systems may
become increasingly subject to infringement claims. Responding to and
defending any such claims may distract the attention of Company
management and have a material adverse effect on the Company's
business, financial condition and results of operations. In addition,
claims may be brought against third parties from which the Company
purchases software, and such claims could adversely affect the
Company's ability to access third party software for its systems.
CLINITEC INTERNATIONAL, INC. - A principal component of the Company's
business strategy is the May 1996 acquisition of Clinitec
International, Inc. ("Clinitec"). The Company's future financial
results will depend in part on the Company's ability to achieve market
acceptance for Clinitec's products and successfully integrate
Clinitec's business with the Company's. 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.
<PAGE> 10
ABILITY TO MANAGE GROWTH - The Company has recently experienced a
period of growth and increased personnel which has placed, and will
continue to place, a significant strain on the Company's resources.
The Company anticipates expanding its overall software development,
marketing, sales, client management and training capacity. In the
event the Company is unable to identify, hire, train and retain
qualified individuals in such capacities within a reasonable time-
frame, such failure could have a material adverse effect on the
Company. In addition, the Company's ability to manage future
increases, if any, in the scope of its operations or personnel will
depend on significant expansion of its research and development,
marketing and sales, management and financial and administrative
capabilities. The failure of the Company's management to effectively
manage expansion in its business could have a material adverse effect
on the Company's business, results of operations and financial
condition.
PRODUCT LIABILITY - Certain of the Company's products provide
applications that relate to patient medical information. Any failure
by the Company's products to provide accurate and timely information
could result in claims against the Company. The Company maintains
insurance to protect against claims associated with the use of its
products, but there can be no assurance that its insurance coverage
would adequately cover any claim asserted against the Company. A
successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations.
Even unsuccessful claims could result in the Company's expenditure of
funds in litigation and management time and resources. There can be
no assurance that the Company will not be subject to product liability
claims, that such claims will not result in liability in excess of its
insurance coverage, that the Company's insurance will cover such
claims or that appropriate insurance will continue to be available to
the Company in the future at commercially reasonable rates. Such
claims could have a material adverse affect on the Company's business,
financial condition and results of operations.
UNCERTAINTY IN HEALTH CARE INDUSTRY; GOVERNMENT REGULATION - The
health care industry is subject to changing political, economic and
regulatory influences that may affect the procurement processes and
operation of health care facilities. During the past several years,
the health care industry has been subject to an increase in
governmental regulation of, among other things, reimbursement rates
and certain capital expenditures. Certain legislators have announced
that they intend to examine proposals to reform certain aspects of the
U.S. health care system including proposals which may increase
governmental involvement in health care, lower reimbursement rates and
otherwise change the operating environment for the Company's clients.
Health care providers may react to these proposals and the uncertainty
surrounding such proposals by curtailing or deferring investments,
including those for the Company's systems and related services. Cost-
containment measures instituted by health care providers as a result
of regulatory reform or otherwise could result in greater selectivity
in the allocation of capital funds. Such selectivity could have an
adverse effect on the Company's ability to sell its systems and
related services. The Company cannot predict what impact, if any,
such proposals or health care reforms might have on its business,
financial condition and results of operations.
The Company's software may be subject to regulation by the U.S. Food
and Drug Administration (the "FDA") as a medical device. Such
regulation could require the registration of the applicable
manufacturing facility and software/hardware products, application of
detailed recordkeeping and manufacturing standards, and FDA approval
or clearance prior to marketing. An approval or clearance could
create delays in marketing, and the FDA could require supplemental
filings or object to certain of these applications.
<PAGE> 11
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 stock options to key employees and
provide other forms of incentive compensation to attract and retain
such key personnel.
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.
In the last five years, the vast majority of the Company's clients
have elected to purchase the Company's maintenance and support
services. Revenues from systems maintenance are typically recognized
ratably over the life of the contract. In recent years, the Company's
maintenance revenues have been increasing and the Company anticipates
that these revenues will continue to increase if systems sales
increase. However, there can be no assurance that future purchasers
of the Company's systems will also purchase the Company's maintenance
services. Furthermore, if new systems sales do not materialize,
maintenance service revenues can be expected to decrease over time due
to failure to capture new maintenance revenues therefrom and to
attrition of existing maintenance revenues associated with systems
that become obsolete or are replaced by competitors' products.
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 revenues and systems upgrade revenues while at the same
time increasing the relative profitability in percentage terms of
these sales. For example, the costs of the hardware components used
in the Company's systems have consistently declined in the recent past
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 revenues generated from
such clients are lower than they otherwise would be. As a result of
these market changes, the Company has increasingly experienced a
growing number of new systems sales comprised of greater revenues as a
percentage of the total system sale from the software user licenses
and services components with reduced or no revenues from hardware
components and such systems sales generally yield higher margins than
those systems sales that also include significant hardware costs.
There can be no assurance that these trends will continue.
<PAGE> 12
With the recent 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. However, there can be no assurance that these trends
will continue and the Company's existing client base represents a
finite market that will not generate new sales indefinitely.
Ultimately, the Company's new growth depends on new client sales.
Health care providers, faced with economic pressures to reduce costs
and increase productivity, are increasingly aligning with health
maintenance organizations, hospitals and other health care
organizations as well as consolidating with other health care
providers into larger, more efficient business entities. This trend
results in an increase in the number of large and complex health care
organizations that are potential clients for the Company's
sophisticated systems. In addition, the potential growth of these
organizations after they become clients of the Company presents the
potential for the Company to increase sales of upgrades and additional
software user licenses. The Company's ability to address the complex
software requirements of such newly forming or growing business
entities, in particular in the area of managed care, is a key to
success in this changing health care delivery environment.
Furthermore, there can be no assurance that the Company will be
successful in its efforts to market its systems to a significant
number of these newly formed organizations and an inability to do so
can have a material adverse effect on the Company's business,
financial condition and results of operations.
The sales cycle for the Company's systems typically ranges from three
to 12 months from initial contact to contract execution/shipment. The
installation cycle is typically two to four months from contract
execution/shipment to completion of installation. 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. Furthermore, the Company's systems can be relatively large
and expensive, and individual systems sales can represent a
significant portion of the Company's revenues for a quarter such that
the loss of even one such sale can have a significant adverse impact
on the Company's quarterly profitability. 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. Thus, the
Company believes that interim period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
<PAGE> 13
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.
While the Company's current cash position supports research and
development expenditures even during periods with relatively low
revenues or gross profits, ultimately the Company's ability to
continue development of new products depends upon its ability to
generate new revenues. Because new revenues depend to a significant
degree upon new products, any interruption in either revenues or
research and development efforts could adversely affect the Company.
Development costs incurred in the research and development of new
software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any
additional development costs are capitalized and amortized over
periods ranging from three to five years.
In April 1995, the Company entered into a strategic relationship with
Clinitec, a developer of electronic medical records software systems.
In May 1995, in connection with this relationship, the Company
acquired a 25% percent ownership interest in Clinitec for $1.0 million
in cash. On May 17, 1996, the Company acquired the remaining 75% of
Clinitec for approximately $4.9 million in cash plus 309,846 shares of
QSI Common Stock and is operating Clinitec as a wholly-owned
subsidiary. For purposes of the May 1996 acquisition, the QSI Common
Stock was valued at approximately $6.9 million, or $22.25 per share.
For accounting purposes, the acquisition was treated as a purchase
transaction. In connection with this treatment, the Company incurred
an $8.3 million charge for purchased in-process research and
development during the quarter ended June 30, 1996.
Clinitec was formed in January 1994 to develop and market electronic
medical records software systems. The Clinitec software products are
complementary to the Company's existing medical and dental practice
management product solutions. Clinitec's software products have been
developed using a graphical user interface client/server platform
utilizing desktop, laptop or pen-based PC configurations for
compatibility with the UNIX, Microsoft Windows, Windows NT and Windows
95 operating systems together with a relational database enabling
flexibility in screen customization and logic flow.
Clinitec was not operating profitably prior to the acquisition and the
absorption of Clinitec's operating costs since the acquisition has
adversely affected the Company's profitability. The Company
anticipates that increased sales of Clinitec's products, together with
operational synergies, will ultimately contribute to greater
profitability. However, 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. If Clinitec's products are not successful,
the Clinitec operation will continue to impair the Company's
profitability.
<PAGE> 14
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements
and related notes thereto included elsewhere herein. Historical
results of operations, percentage margin fluctuations and any trends
that may be inferred from the discussion below are not necessarily
indicative of the operating results for any future period.
RESULTS OF OPERATIONS
---------------------
The following table sets forth for the periods indicated, the
percentage of net revenues represented by each item in the Company's
consolidated statements of operations. The consolidated statements of
operations include the operations of Clinitec from May 17, 1996, the
date of acquisition, through December 31, 1996.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
-------------- --------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies 54.8 % 58.0% 56.6 % 58.1%
Maintenance and other services 45.2 42.0 43.4 41.9
------- ------ ------- ------
100.0 100.0 100.0 100.0
Cost of Products and Services 52.0 48.0 50.4 47.6
------- ------ ------- ------
Gross Profit 48.0 52.0 49.6 52.4
Selling, General and
Administrative Expenses 45.0 21.2 38.0 23.1
Research and Development Costs 11.1 10.7 10.4 9.1
Purchased In-Process Research
and Development - - 59.3 -
------- ------ ------- ------
Income (Loss) from Operations (8.1) 20.1 (58.1) 20.2
Investment Income 6.8 3.1 7.3 2.8
Equity in Loss of
Clinitec International, Inc. - (0.5) (0.2) (0.3)
------- ------ ------- ------
Income (Loss) before
Provision for Income Taxes (1.3) 22.7 (51.0) 22.7
Provision for Income Taxes 0.4 8.7 3.9 9.1
------- ------ ------- ------
Net Income (Loss) (1.7)% 14.0% (54.9)% 13.6%
======= ====== ======= ======
</TABLE>
<PAGE> 15
For the Three Months Ended December 31, 1996 and 1995.
------------------------------------------------------
The Company's net loss for the three months ended December 31, 1996
was $(80,000), or $(0.01) per share on 5,979,000 weighted average
shares outstanding, as compared to net income of $605,000, or $0.13
per share on 4,728,000 weighted average shares outstanding, for the
three months ended December 31, 1995.
Net Revenues. Net revenues for the three months ended December 31,
1996 increased 7.9% to $4.7 million from $4.3 million for the three
months ended December 31, 1995. Sales of computer systems, upgrades
and supplies increased 1.9% to $2.6 million from $2.5 million after
the consolidation of Clinitec's net revenues in the 1996 period.
Without the inclusion of Clinitec's revenues, the Company's sales of
computer systems, upgrades and supplies declined 44.0% as compared to
the December 1995 period. Net revenues from maintenance and other
services during the three months ended December 31, 1996 grew 16.2% to
$2.1 million from $1.8 million for the three months ended December 31,
1995 resulting primarily from an increase in revenues from the
Company's larger client base for recurring maintenance and other
services together with the consolidation of Clinitec's revenues in the
1996 period.
Cost of Products and Services. Cost of products and services for the
three months ended December 31, 1996 increased 16.9% to $2.4 million
from $2.1 million for the three months ended December 31, 1995 while
costs of products and services as a percentage of net revenues
increased to 52.0% from 48.0% during the comparable periods. The
increase in costs of products and services in both amount and as a
percentage of net revenues during the December 31, 1996 quarter as
compared to the December 31, 1995 quarter results primarily from
increased customer service, support, and training personnel during the
December 31, 1996 quarter plus the addition of such costs for
Clinitec's personnel in the December 31, 1996 quarter. The increase
in the amount of costs of products and services also results from the
higher net revenues attained in the December 31, 1996 quarter.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 1996
increased 129.2% to $2.1 million from $919,000 for the three months
ended December 31, 1995 representing 45.0% and 21.2% of net revenues,
respectively. The increase in selling, general and administrative
expenses in both amount and as a percentage of net revenues is
primarily the result of the consolidation of Clinitec's selling,
general and administrative expenses for the quarter ended December 31,
1996 following the May 1996 acquisition of Clinitec and amortization
expense related to certain intangible assets acquired in connection
with the purchase as well as higher selling, general and
administrative expenses resulting from an increase in the Company's
selling efforts, including sales personnel, and administrative
infrastructure. The increase in selling, general and administrative
expenses as a percentage of net revenues between the comparable
periods also results from the differing cost structure of Clinitec as
compared to the Company's cost structure prior to the acquisition as
well as the Company's decrease in revenues before inclusion of the
Clinitec revenues.
<PAGE> 16
Research and Development Costs. Research and development costs for
the three months ended December 31, 1996 increased 11.6% to $519,000
from $465,000 for the three months ended December 31, 1995 due to the
consolidation of Clinitec's expenses in the December 31, 1996 quarter
following the May 1996 Clinitec acquisition. Research and development
costs as a percentage of net revenues for the quarters ended December
31, 1996 and 1995 remained relatively unchanged at 11.1% and 10.7%,
respectively.
Investment Income and Equity in Loss of Clinitec International, Inc.
Investment income for the three months ended December 31, 1996
increased 134.1% to $316,000 from $135,000 for the three months ended
December 31, 1995 primarily as a result of an increase in funds
available for investment during the quarter ended December 31, 1996
arising from the Company's $20.2 million secondary public offering
completed in March 1996. The Company acquired a 25% ownership
interest in Clinitec in May 1995 which the Company increased to 100%
in May 1996. During the period that the Company owned 25% of
Clinitec, its investment was accounted for under the equity method of
accounting whereby the Company recorded its proportionate share of
Clinitec's losses as equity in loss of Clinitec. Commencing in May
1996 when the Company acquired the remaining 75% of Clinitec, the
Company consolidated Clinitec's results with those of its own
operations. Accordingly, the equity in loss of Clinitec was $(23,000)
for the three months ended December 31, 1995 while there was no
comparable amount for the three months ended December 31, 1996 as
Clinitec's operations were consolidated with those of the Company's
during this latter period.
Provision for Income Taxes. The provision for income taxes for the
three months ended December 31, 1996 was $17,000 even though the
Company incurred a loss before provision for income taxes of $(63,000)
primarily due to non-deductible amortization of certain intangible
assets acquired in connection with the May 1996 Clinitec purchase.
The provision for income taxes for the three months ended December 31,
1995 was $376,000 yielding a combined Federal and state effective rate
of 38.3% which approximates the Company's combined statutory rates for
that period.
For the Nine Months Ended December 31, 1996 and 1995.
-----------------------------------------------------
After recognizing an $8.3 million charge for purchased in-process
research and development in connection with the Clinitec acquisition,
the Company incurred a net loss of $(7.7) million, or $(1.30) per
share on 5,917,000 weighted average shares outstanding, for the nine
months ended December 31, 1996 as compared to net income of $1.7
million, or $0.35 per share on 4,724,000 weighted average shares
outstanding, for the nine months ended December 31, 1995.
Net Revenues. Net revenues for the nine months ended December 31,
1996 increased 13.7% to $14.0 million from $12.3 million for the nine
months ended December 31, 1995. Sales of computer systems, upgrades
and supplies for the nine months ended December 31, 1996 increased
10.7% to $7.9 million from $7.2 million for the nine months ended
December 31, 1995 after the consolidation of Clinitec's net revenues
in the 1996 period. Without the inclusion of Clinitec's revenues, the
<PAGE> 17
Company's sales of computer systems, upgrades and supplies declined
28.5% as compared to the December 1995 period. Net revenues from
maintenance and other services during the nine months ended December
31, 1996 grew 17.9% to $6.1 million from $5.2 million for the nine
months ended December 31, 1995 resulting primarily from an increase in
revenues from the Company's larger client base for recurring
maintenance and other services together with the consolidation of
Clinitec's revenues in the 1996 period.
Cost of Products and Services. Cost of products and services for the
nine months ended December 31, 1996 increased 20.4% to $7.1 million
from $5.9 million for the nine months ended December 31, 1995 while
costs of products and services as a percentage of net revenues
increased to 50.4% from 47.6% during the comparable periods. The
increase in costs of products and services in both amount and as a
percentage of net revenues during the nine months ended December 31,
1996 as compared to the nine months ended December 31, 1995 results
primarily from increased customer service, support, and training
personnel during the December 31, 1996 period plus the addition of
such costs for Clinitec's personnel. The increase in the amount of
costs of products and services also results from the higher net
revenues attained in the December 31, 1996 period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended December 31, 1996
increased 87.0% to $5.3 million from $2.8 million for the nine months
ended December 31, 1995 representing 38.0% and 23.1% of revenues,
respectively. The increase in selling, general and administrative
expenses in both amount and as a percentage of net revenues is
primarily the result of the consolidation of Clinitec's selling,
general and administrative expenses during the portion of the nine
months ended December 31, 1996 following the May 1996 acquisition of
Clinitec and amortization expense related to certain intangible assets
acquired in connection with the purchase as well as higher selling,
general and administrative expenses resulting from an increase in the
Company's selling efforts, including sales personnel, and
administrative infrastructure. The increase in selling, general and
administrative expenses as a percentage of net revenues between the
comparable periods also results from the differing cost structure of
Clinitec as compared to the Company's cost structure prior to the
acquisition as well as the Company's decrease in revenues before the
inclusion of the Clinitec revenues.
Research and Development Costs. Research and development costs for
the nine months ended December 31, 1996 increased 29.4% to $1.5
million from $1.1 million for the nine months ended December 31, 1995
primarily due to the consolidation of Clinitec's research and
development costs during the portion of the nine months ended December
31, 1996 following the May 1996 purchase of Clinitec. Research and
development costs as a percentage of net revenues remained relatively
unchanged at 10.4% and 9.1%, respectively.
Purchased In-Process Research and Development. In connection with the
acquisition of Clinitec in May 1996, Clinitec's in-process research
and development for which technological feasibility had not been
established was valued at $8.3 million. In accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed,"
<PAGE> 18
software development costs must be expensed until technological
feasibility has been established. Accordingly, the value of the
purchased in-process research and development was expensed during the
nine months ended December 31, 1996. There were no comparable
transactions during the nine months ended December 31, 1995.
Investment Income and Equity in Loss of Clinitec International, Inc.
Investment income for the nine months ended December 31, 1996
increased 198.5% to $1.0 million from $340,000 for the nine months
ended December 31, 1995 primarily as a result of an increase in funds
available for investment during the nine months ended December 31,
1996 arising from the Company's $20.2 million secondary public
offering completed in March 1996. The Company acquired a 25%
ownership interest in Clinitec in May 1995 which the Company increased
to 100% in May 1996. During the period that the Company owned 25% of
Clinitec, its investment was accounted for under the equity method of
accounting whereby the Company recorded its proportionate share of
Clinitec's losses as equity in loss of Clinitec. Commencing in May
1996 when the Company acquired the remaining 75% of Clinitec, the
Company consolidated Clinitec's results with those of its own
operations. Accordingly, the equity in loss of Clinitec of $(41,000)
for the nine months ended December 31, 1995 reflects the Company's
proportionate share of Clinitec's net loss from the date the Company
acquired its 25% ownership interest in Clinitec in May 1995 through
September 30, 1995. Correspondingly, the equity in loss of Clinitec
of $(31,000) for the nine months ended December 31, 1996 reflects the
Company's proportionate share of Clinitec's net loss from April 1,
1996 until the Company began consolidating Clinitec's results in May
1996 when the Company acquired the remaining 75% ownership interest in
Clinitec.
Provision for Income Taxes. The provision for income taxes for the
nine months ended December 31, 1996 was $547,000 and differs from the
combined Federal and state statutory rates primarily due to the
non-deductible charge for purchased in-process research and
development as well as non-deductible amortization of certain
intangibles acquired therein. The provision for income taxes for the
nine months ended December 31, 1995 was $1.1 million yielding a
combined Federal and state effective rate of 40.1% which approximates
the Company's combined statutory rates for that period.
LIQUIDITY AND CAPITAL RESOURCES.
--------------------------------
Cash and cash equivalents decreased $(5.9) million for the nine months
ended December 31, 1996 principally as a result of the payment of the
$4.9 million cash portion of the purchase price for the remaining 75%
ownership interest in Clinitec in May 1996 as well as the Company's
net additions to equipment, improvements and capitalized software
totalling $1.0 million. Cash and cash equivalents increased $312,000
for the nine months ended December 31, 1995 principally as a result of
cash provided by operating activities of $1.5 million offset by the
Company's May 1995 $1.0 million initial cash investment to obtain a
25% ownership interest in Clinitec as well as the Company's additions
to capitalized software totalling $281,000.
<PAGE> 19
Net cash used by operating activities for the nine months ended
December 31, 1996 was $(265,000) consisting principally of net income
before the $8.3 million charge for purchased in-process research and
development in connection with the acquisition of Clinitec and
depreciation and amortization offset by an increase in accounts
receivable and a decrease in accounts payable. Net cash provided by
operating activities for the nine months ended December 31, 1995 was
$1.5 million consisting principally of net income before depreciation
and amortization together with increases in accounts payable and
various current liabilities offset by a decrease in accounts
receivable.
Net cash used in investing activities for the nine months ended
December 31, 1996 was $(5.7) million consisting principally of the
$4.9 million cash portion of the May 1996 purchase price of the
remaining 75% ownership interest in Clinitec including related legal
costs as well as the Company's net additions to equipment,
improvements and capitalized software totalling $1.0 million offset by
the net proceeds fom the sales of certain marketable securities. Net
cash used in investing activities for the nine months ended December
31, 1995 was $(1.3) million consisting principally of the Company's
$1.0 million cash investment to acquire 25% of Clinitec in May 1995
and its additions to capitalized software totalling $281,000 during
the period.
Net cash provided by financing activities were $61,000 and $91,000 for
the nine months ended December 31, 1996 and 1995, respectively,
consisting principally of the proceeds from the exercise of stock
options.
At December 31, 1996, the Company had cash and cash equivalents of
$22.0 million and short-term investments of $882,000. Short-term
investments consist principally of a $641,000 investment in a fund
which trades in special situation securities. The Company does not
believe these investments have significant risk; however, there can be
no assurance that the market for these securities will not change
which could result in a loss of principal.
Except for the Company's intention to expend funds on capitalized
software in connection with complementary products to its existing
product line, alternative versions of certain of its products for the
client/server environment to take advantage of more powerful
technologies and to enable a more seamless integration of the
Company's products, the Company has no other significant capital
commitments and currently anticipates that additions to equipment and
improvements for the remainder of fiscal 1997 will be comparable to
recent past years.
In March 1996, the Company raised $20.2 million to be used for general
corporate purposes, including the financing of product sales growth,
development of new products, working capital requirements, an increase
in its ownership of Clinitec, and the possible acquisitions of
complementary businesses and technologies. The Company continues to
evaluate potential investment opportunities, but currently has no
agreement or understanding with respect to any such acquisitions.
The Company believes that its cash and cash equivalents and short-term
investments on hand at December 31, 1996, together with the cash flows
from operations, if any, will be sufficient to meet its working
capital and capital expenditure requirements for the next year.
<PAGE> 20
PART II. OTHER INFORMATION
-------- -----------------
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits:
---------
The Exhibits listed on the accompanying Index to
Exhibits on page 23 are filed as part of this report.
(b) Reports on Form 8-K:
--------------------
The Registrant filed a Current Report on Form 8-K dated
November 22, 1996 and filed on December 4, 1996
reporting the adoption of a shareholder rights plan by
the Registrant. The Report included a Summary of the
Rights issued pursuant to the plan.
<PAGE> 21
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
QUALITY SYSTEMS, INC.
<TABLE>
<S> <C>
Date: February 12, 1997 By /s/ Sheldon Razin
----------------- ----------------------------------
Sheldon Razin
President and Chairman
of the Board of Directors;
Principal Executive Officer
Date: February 12, 1997 By /s/ Robert G. McGraw
----------------- ----------------------------------
Robert G. McGraw
Chief Financial Officer;
Principal Accounting Officer
</TABLE>
<PAGE> 22
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
------- ----------
3.2.2 Text of Sections 2 and 3 of Article II of the
Company's Bylaws reflecting amendments thereto
to incorporate certain advance notice require-
ments approved by the Board of Directors on
November 22, 1996. 24
11.0 Net income (loss) per share computation,
is filed herewith 28
27.0 Financial Data Schedule, is filed herewith. 29
<PAGE> 23
EXHIBIT 3.2.2
-------------
Section 2. ANNUAL MEETING
(a) The annual meeting of shareholders shall be
held each year on a date and at a time designated by the board of
directors. At each annual meeting, directors shall be elected
and any other proper business may be transacted.
(b) At an annual meeting of shareholders, only
such business shall be conducted, and only such proposals shall
be acted upon, as shall have been brought before the
annual meeting by or at the direction of a majority of the
directors or by any shareholder of the corporation who complies
with the notice procedures set forth in this Section 2(b). For a
proposal to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice
thereof in writing to the secretary of the corporation. To be
timely, a shareholder's notice must be delivered to, or mailed
and received at, the principal executive offices of the
corporation not less than sixty (60) days nor more than one
hundred twenty (120) days prior to the scheduled annual meeting,
regardless of any postponements, deferrals or adjournments of
that meeting to a later date; provided, however, that if less
than seventy (70) days notice or prior public disclosure of the
date of the scheduled annual meeting is given or made, notice by
the shareholder, to be timely, must be so delivered or received
not later than the close of business on the tenth day following
the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such
public disclosure was made. A shareholder's notice to the
secretary shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (i) a brief
description of the proposal desired to be brought before the
<PAGE> 24
annual meeting and the reasons for conducting such business at
the annual meeting, (ii) the name and address, as they appear on
the corporation's books, of the shareholder proposing such
business and any other shareholders known by such shareholder to
be supporting such proposal, (iii) the class and number of shares
of the corporation's stock which are beneficially owned by the
shareholder on the date of such shareholder notice and by any
other shareholders known by such shareholder to be supporting
such proposal on the date of such shareholder notice, and (iv)
any financial interest of the shareholder in such proposal. The
presiding officer of the annual meeting shall determine and
declare at the annual meeting whether the shareholder proposal
was made in accordance with the terms of this Section 2(b). If
the presiding officer determines that a shareholder proposal was
not made in accordance with the terms of this Section 2(b), he or
she shall so declare at the annual meeting and any such proposal
shall not be acted upon at the annual meeting. This provision
shall not prevent the consideration and approval or disapproval
at the annual meeting of reports of officers, directors and
committees of the board of directors, but, in connection with
such reports, no new business shall be acted upon at such annual
meeting unless stated, filed and received as herein provided.
(c) Only persons who are nominated in accordance
with the following procedures shall be eligible for election as
directors. Nominations of persons for election to the board of
directors of the corporation may be made at a meeting of
shareholders by or at the direction of the board of directors, by
any nominating committee or person appointed by the board of
directors or by any shareholder of the corporation entitled to
vote for the election of directors at the meeting who complies
with the notice procedures set forth in this Section 2(c). Such
nominations, other than those made by or at the direction of the
board of directors, shall be made pursuant to timely notice in
writing to the secretary of the corporation. To be timely, a
shareholder's notice must be delivered to, or mailed and received
at, the principal executive offices of the corporation not less
than sixty (60) days nor more than one hundred twenty (120) days
prior to the scheduled annual meeting, regardless of any
postponements, deferrals or adjournments of that meeting to a
later date; provided, however, that if less than seventy (70)
days notice or prior public disclosure of the date of the
scheduled annual meeting is given or made, notice by the
shareholder, to be timely, must be so delivered or received not
later than the close of business on the tenth day following the
earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such
public disclosure was made. A shareholder's notice to the
secretary shall set forth (i) as to each person whom the
shareholder proposes to nominate for election or re-election as a
director (A) the name, age, business address and residence
address of the person, (B) the principal occupation or employment
of the person, (C) the class and number of shares of capital
stock of the corporation which are beneficially owned by the
person, and (D) any other information relating to the person that
is required to be disclosed in solicitations for proxies for
election of directors pursuant to applicable rules and
regulations of the Securities and Exchange Commission promulgated
under the Securities Exchange Act of 1934, as amended; and (ii)
as to the shareholder giving the notice (A) the name and address,
as they appear on the corporation's books, of the shareholder,
and (B) the class and number of shares of the corporation's stock
which are beneficially owned by the shareholder on the date of
such shareholder notice. The corporation may require any
proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the
eligibility of such proposed nominee to serve as director of the
corporation. The presiding officer of the annual meeting shall
determine and declare at the annual meeting whether the
nomination was made in accordance with the terms of this Section
2(c). If the presiding officer determines that a nomination was
not made in accordance with the terms of this Section 2(c), he or
she shall so declare at the annual meeting and any such defective
nomination shall be disregarded.
(d) Nothing herein is intended or shall be
construed to limit requirements imposed by applicable laws or
regulations upon shareholder proposals, opposition thereto by the
corporation, or inclusion thereof in the corporation's proxy
materials.
<PAGE> 25
Section 3. SPECIAL MEETING
(a) A special meeting of the shareholders may be
called at any time by the board of directors, or by the chairman
of the board, or by the president, or by one or more shareholders
holding shares in the aggregate entitled to cast not less than ten
percent (10%) of the votes at that meeting.
(b) For a special meeting of shareholders to be
properly called by any person or persons other than the board of
directors, the request must be in writing, specifying the date
and time of such meeting and the information set forth in Section
3(c) hereof, and must be delivered to, or mailed and received by,
the chairman of the board, the president or the secretary of the
corporation not less than thirty-five (35) nor more than sixty
(60) days prior to the date requested for such meeting. The
officer receiving the request shall cause notice to be promptly
given to the shareholders entitled to vote, in accordance with
the provisions of Sections 4 and 5 of this Article II, that a
meeting will be held at the time requested by the person or
persons calling the meeting. If the notice is not given within
twenty (20) days after receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 3 shall be construed
as limiting, fixing or affecting the time when a meeting of
shareholders called by action of the board of directors may be
held.
(c) Any request for a special meeting submitted
pursuant to Section 3(b) hereof shall set forth as to each matter
the shareholder proposes to bring before the special meeting (i)
a brief description of the proposal desired to be brought before
the special meeting and the reasons for conducting such business
at the special meeting, (ii) the name and address, as they appear
on the corporation's books, of the shareholder proposing such
business and any other shareholders known by such shareholder to
be supporting such proposal, (iii) the class and number of shares
of the corporation's stock which are beneficially owned by the
shareholder on the date of such shareholder request and by any
other shareholders known by such shareholder to be supporting
such proposal on the date of such shareholder request, and (iv)
any financial interest of the shareholder in such proposal. In
addition to whatever other limitations are imposed by applicable
law, no person may be nominated for election to the board of
directors of the corporation by any of the person or persons
making a request for a special meeting pursuant to Section 3(b)
hereof unless the request sets forth as to each person whom the
requesting person or persons propose to nominate for election as
a director, (A) the name, age, business address and residence
address of the person, (B) the principal occupation or employment
of the person, (C) the class and number of shares of capital
stock of the corporation which are beneficially owned by the
person, and (D) any other information relating to the person that
is required to be disclosed in solicitations for proxies for
election of directors pursuant to applicable rules and
regulations of the Securities and Exchange Commission promulgated
under the Securities Exchange Act of 1934, as amended.
<PAGE> 26
(d) Nothing herein is intended or shall be
construed to limit requirements imposed by applicable laws or
regulations upon shareholder proposals, opposition thereto by the
corporation, or inclusion thereof in the corporation's proxy
materials.
<PAGE> 27
EXHIBIT 11.0
------------
The net losses per share for the three and nine months ended December
31, 1996 were computed using the weighted average number of shares
actually outstanding during the respective periods and any common
share equivalents assuming the exercise of outstanding stock options
were excluded because to have included such common share equivalents
would have had an anti-dilutive impact on the net loss per share
calculations.
Net income per share for the three and nine months ended December 31,
1995 were computed based on the weighted average number of shares
actually outstanding during the respective periods plus the shares
that would be outstanding, using the treasury stock method, assuming
the exercise of outstanding options for each period. The difference
between primary and fully diluted net income per share for each of
these periods was not significant.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 21,997,000
<SECURITIES> 882,000
<RECEIVABLES> 6,140,000
<ALLOWANCES> 0
<INVENTORY> 1,304,000
<CURRENT-ASSETS> 416,000
<PP&E> 1,085,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,174,000
<CURRENT-LIABILITIES> 4,999,000
<BONDS> 0
0
0
<COMMON> 60,000
<OTHER-SE> 31,967,000
<TOTAL-LIABILITY-AND-EQUITY> 37,174,000
<SALES> 7,926,000
<TOTAL-REVENUES> 14,006,000
<CGS> 0
<TOTAL-COSTS> 7,064,000
<OTHER-EXPENSES> 15,074,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,148,000)
<INCOME-TAX> 547,000
<INCOME-CONTINUING> (7,695,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,695,000)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> (1.30)
</TABLE>
