<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
________________________
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 registrant 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)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
Yes XX No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
5,973,112 shares of Common Stock, $.01 par value,
as of November 7, 1997
<PAGE> 2
PART I. CONSOLIDATED FINANCIAL INFORMATION
------- ----------------------------------
Item 1. Financial Statements
------- --------------------
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1997 1997
----------- --------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $15,850 $21,852
Short-term investments 938 883
Accounts receivable, net 8,238 6,574
Inventories 1,521 1,071
Other current assets 752 628
------- -------
Total current assets 27,299 31,008
Equipment and Improvements, net 1,760 1,391
Capitalized Software Costs, net 1,640 1,041
Excess of Cost Over Net Assets
Of Acquired Business, net 2,710 2,868
Deferred Tax Asset 1,440 -
Other Assets, net 2,201 1,558
------- -------
Total assets $37,050 $37,866
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,688 $ 1,345
Deferred service revenue 1,766 1,493
Estimated costs to complete
system installations 861 565
Other current liabilities 3,009 1,992
------- -------
Total current liabilities 7,324 5,395
Deferred Tax Liability - 201
------- -------
Total liabilities 7,324 5,596
------- -------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.01 par value, 20,000
shares authorized, 5,976 and 5,997
shares issued and outstanding, respectively 60 60
Additional paid-in capital 33,986 34,144
Accumulated deficit (4,320) (1,934)
------- -------
Total shareholders' equity 29,726 32,270
------- -------
Total liabilities and shareholders' equity $37,050 $37,866
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 3
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
September 30, September 30,
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies $ 4,848 $ 2,534 $ 9,558 $ 5,363
Maintenance and other services 2,644 2,040 5,107 3,966
-------- -------- ------- -------
7,492 4,574 14,665 9,329
Cost of Products and Services 3,010 2,309 6,577 4,633
-------- -------- ------- -------
Gross Profit 4,482 2,265 8,088 4,696
Selling, General and
Administrative Expenses 3,317 1,779 5,854 3,217
Research and Development Costs 723 475 1,551 932
Purchased In-Process
Research and Development - - 4,720 8,300
-------- -------- ------- -------
Income (Loss) from Operations 442 11 (4,037) (7,753)
Investment and Other Income 219 313 495 668
-------- -------- ------- -------
Income (Loss) before Provision for
(Benefit from) Income Taxes 661 324 (3,542) (7,085)
Provision for (Benefit from)
Income Taxes 312 172 (1,156) 530
-------- -------- ------- -------
Net Income (Loss) $ 349 $ 152 $(2,386) $(7,615)
======== ======== ======= =======
Net Income (Loss) per Share $0.06 $0.03 $(0.40) $(1.29)
===== ===== ====== ======
Weighted Average Number of
Shares Outstanding 6,033 5,965 5,988 5,886
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(2,386) $(7,615)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Purchased in-process
research and development 4,720 8,300
Depreciation and amortization 846 494
Gains on short-term investments (55) (51)
Equity in loss of Clinitec
International, Inc. - 31
Deferred income taxes (1,572) 26
Changes, net of amounts acquired, in:
Accounts receivable (1,467) (804)
Inventories (450) (162)
Other current assets (161) (184)
Other assets (134) -
Accounts payable 289 (351)
Deferred service revenue 112 127
Estimated costs to complete
system installations 296 73
Income taxes payable and taxes
related to equity accounts 101 221
Other current liabilities 464 (17)
------------ -------------
Net Cash Provided by
Operating Activities 603 88
------------ -------------
Cash Flows from Investing Activities:
Proceeds from sales of
short-term investments - 402
Purchases of short-term investments - (57)
Net additions to equipment
and improvements (523) (275)
Additions to capitalized
software costs (885) (253)
Purchase of Additional Ownership
Interest in Clinitec
International, Inc. - (4,946)
Purchase of Net Assets of MicroMed
Healthcare Information Systems, Inc. (5,259) -
Change in other assets 230 (57)
------------ -------------
Net Cash Used in Investing Activities (6,437) (5,186)
------------ -------------
Cash Flows from Financing Activities: $ $
Purchases of Common Stock (182) -
Proceeds from Exercise of
Stock Options 14 3
------------ -------------
Net Cash Provided by (Used in)
Financing Activities (168) 3
------------ -------------
Net Decrease in Cash and Cash Equivalents (6,002) (5,095)
Cash and Cash Equivalents,
beginning of period 21,852 27,872
------------ -------------
Cash and Cash Equivalents, end of period $ 15,850 $ 22,777
============ =============
</TABLE>
Supplemental Information - During the six months ended September 30, 1997
and 1996, the Company made income tax payments, net of refunds received, of
$321 and $312, respectively.
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Detail of businesses acquired in
purchase transactions:
Purchased In-Process
Research and Development $ 4,720 $ 8,300
Fair Value of Assets Acquired (net of
previous investment, if any) 1,216 4,023
Liabilities Assumed (677) (483)
Common Stock Issued in the Acquisition - (6,894)
------------- --------------
Cash Paid for the Acquisitions,
net of cash acquired $ 5,259 $ 4,946
============= ==============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------ ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements of Form 10-Q 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, 1997. 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 September 30, 1997 presentation.
NOTE 2 - ACQUISITION OF MICROMED HEALTHCARE INFORMATION SYSTEMS, INC.
- ------ ------------------------------------------------------------
On May 15, 1997, the Company acquired substantially all of the assets of
MicroMed Healthcare Information Systems, Inc. ("MicroMed"), a developer and
marketer of proprietary information systems utilizing a graphical user
interface client/server platform for medical group practices. The purchase
price consists of an initial cash payment of $4.8 million paid at the
closing of the transaction and an additional payment of up to $6.0 million
due no later than June 29, 1998. The additional payment will be determined
using a formula based primarily upon Revenues and Pre-Tax Operating Income
of the MicroMed Business, each as defined in the related Asset Purchase
Agreement, for the twelve months ending March 31, 1998. Up to 15% of the
additional payment, if any, is payable in the Company's Common Stock at the
sole election of the Company with the balance of any such payment payable
in cash. As of the closing date of the transaction, MicroMed also had an
operating loan payable to the Company in the amount of $550,000. For
accounting purposes, the loan balance is considered part of the purchase
price in addition to the $4.8 million payment made at the closing. The
acquisition was treated as a purchase for financial reporting purposes. In
connection with this treatment, the Company allocated $4.7 million of the
purchase price paid at the closing of the transaction to purchased in-
process research and development which was charged against operations
during the quarter ending June 30, 1997.
<PAGE> 6
NOTE 3 - STOCK REPURCHASE PLAN
- ------ ---------------------
In February 1997, the Company's Board of Directors authorized the
repurchase on the open market of up to 10% of the Company's outstanding
Common Stock at various times through February 1998, subject to compliance
with applicable laws and regulations. The timing and amount of any
repurchase is at the discretion of the Company's management. The Company's
management could, in the exercise of its judgment, repurchase fewer shares
than authorized. During the six months ended September 30, 1997, the
Company repurchased 27,600 shares at a cost of $182,000. Since the
inception of the repurchase program through November 7, 1997, 30,600 shares
have been repurchased at a cost of $205,000.
NOTE 4 - INCOME TAXES
- ------ ------------
The provisions for income taxes for the three months ending September 30,
1997 and 1996 differ from the combined statutory rate primarily due to the
impact of non-deductible amortization of certain intangible assets acquired
in the May 1996 acquisition of Clinitec International, Inc. ("Clinitec").
The provision for income taxes for the six months ended September 30, 1997
differs from the combined statutory rate primarily due to the effect of
varying state tax rates together with the impact of non-deductible
amortization of certain intangible assets acquired in the May 1996
acquisition of Clinitec. The MicroMed acquisition was structured as a
taxable transaction while the Clinitec acquisition was tax-free at the
acquisition date. Consequently, the provision for income taxes for the six
months ended September 30, 1996 differs from the combined statutory rate
primarily due to the non-deductible amortization of certain intangible
assets and the non-deductible $8.3 million charge for purchased in-process
research and development each of which were incurred in connection with the
May 1996 acquisition of Clinitec.
NOTE 5 - RECENTLY ISSUED ACCOUNTING STANDARDS
- ------ ------------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings per Share
(EPS), ("SFAS No. 128"), which is effective for financial statements for
interim and annual periods ending after December 15, 1997. SFAS No. 128
requires the Company to report Basic EPS, as defined therein, which
excludes all common share equivalents from the earnings per share
computation, and Diluted EPS, as defined therein, which is calculated
similar to the Company's primary earnings per share computation. The
Company has determined that the adoption of this statement would not have
had a material impact on the earnings per share calculations for the
periods presented in the accompanying consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
("SFAS No. 130"). This statement establishes standards for the reporting
of comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements.
<PAGE> 7
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to be
included in comprehensive income, which are excluded from net income,
include foreign currency translation adjustments and unrealized gain/loss
on available-for-sale securities. The disclosures prescribed by SFAS No.
130 are effective for interim periods and fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, ("SFAS No. 131"). This statement
establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosure about products and services, geographic
areas and major customers. The Company has not yet determined the impact,
if any, of adopting this new standard. The disclosures prescribed by SFAS
No. 131 are effective for interim periods and fiscal years beginning after
December 15, 1997.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations
-------------------------
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q, 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, as well as in the Company's other
public disclosures and filings with the Securities and Exchange Commission.
RISK FACTORS
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> 9
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. Furthermore, the
Company also competes indirectly and to varying degrees with other major
health care related 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. 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 the Company's
existing clients whose systems become obsolete or are replaced by
competitor's products.
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. New product
development depends upon significant research and development expenditures
which depend ultimately upon sales growth. Any material weakness in
revenues or research funding could impair the Company's ability to respond
to technological advances in the marketplace and to remain competitive. 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.
<PAGE> 10
In response to increasing market demand, the Company is currently
developing new generations of certain of its group practice management
software products that will be designed for the client/server and
Internet/intranet environments. 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 and Internet/intranet environments. Any
such failure or delay could adversely affect the Company's competitive
position or could make the Company's current UNIX-BASED practice management
product line 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 minimal 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. Clients often defer systems purchases until the Company's
quarter end, so quarterly results generally cannot be predicted and
frequently are not known until the quarter has concluded. 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.
* UNIX is a registered trademark of AT&T Corporation.
** Microsoft Windows, Windows NT and Windows 95 are registered
trademarks of Microsoft Corporation.
<PAGE> 11
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.
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 to 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 fully integrating Clinitec's 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 thus relatively 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> 12
MICROMED HEALTHCARE INFORMATION SYSTEMS, INC. - A principal component of
the Company's business strategy is the May 1997 acquisition of MicroMed
Healthcare Information Systems, Inc. ("MicroMed"). The Company's future
financial results will depend in part on the Company's ability to achieve
market acceptance for MicroMed's products and to successfully integrate
MicroMed'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 MicroMed. Furthermore, there can be no assurance that the
Company will be successful in fully integrating MicroMed's products with
those of the Company or that the acquisition of MicroMed will not have an
adverse effect upon the Company's operating results. In addition, MicroMed
was formed in February 1993 to develop and market medical practice
management software systems. MicroMed's proprietary software products are
thus new and MicroMed has sold only a limited quantity of these products to
date. There can be no assurance that MicroMed's products will achieve
broad market acceptance.
ABILITY TO MANAGE GROWTH - The Company has recently experienced a period of
growth and increased personnel which has placed, and will continue to
place, a significant strain on the Company's resources. The Company
anticipates expanding its overall software development, marketing, sales,
client management and training capacity. In the event the Company is
unable to identify, hire, train and retain qualified individuals in such
capacities within a reasonable time frame, such failure could have a
material adverse effect on the Company. In addition, the Company's ability
to manage future increases, if any, in the scope of its operations or
personnel will depend on significant expansion of its research and
development, marketing and sales, management and administrative, and
financial 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.
<PAGE> 13
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 ("FDA") as a medical device. Such regulation could
require the registration of the applicable manufacturing facility and
software/hardware products, application of detailed recordkeeping and
manufacturing standards, and FDA approval or clearance prior to marketing.
An approval or clearance could create delays in marketing, and the FDA
could require supplemental filings or object to certain of these
applications.
DEPENDENCE UPON KEY PERSONNEL - The Company's future performance also
depends in significant part upon the continued service of its key technical
and senior management personnel, many of whom have been with the Company
for a significant period of time. Because the Company has a relatively
small number of employees when compared to other leading companies in the
same industry, its dependence on maintaining its employees is particularly
significant. The Company is also dependent on its ability to attract and
retain high quality personnel, particularly highly skilled software
engineers for applications development. The industry is characterized by a
high level of employee mobility and aggressive recruiting of skilled
personnel. There can be no assurance that the Company's current employees
will continue to work for the Company. Loss of services of key employees
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company does not maintain key man
life insurance on any of its employees. The Company may need to grant
additional stock options to key employees and to provide other forms of
incentive compensation to attract and retain such key personnel.
GENERAL
Quality Systems, Inc. ("QSI") and its wholly-owned subsidiaries, Clinitec
and MicroMed, (all three collectively the "Company") develop and market
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
<PAGE> 14
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 plan implementation and referral
management, treatment outcome studies, treatment planning, drug
formularies, patient electronic medical records, 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 insurance claims submission services.
The Company currently has an installed base of more than 500 operating
health care information systems serving PHOs, MSOs, HMOs, group practices,
specialty practices, community health centers, dental schools and other
health care organizations, each of which consists of one to 120 physicians
or dentists. 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 and was founded with an
early focus on providing information systems and services primarily for
dental group practices. QSI's initial "turnkey" systems were designed to
improve productivity while reducing information processing costs and
personnel requirements. In the mid-1980's, QSI 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, QSI
develops and provides integrated UNIX-based health care information systems
for both the medical and dental markets. These systems operate on a stand-
alone basis or in a networked environment and are expandable to accommodate
client needs.
Augmenting its practice management software, QSI 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, reporting and logic flow. With the addition of
NextGen, the Company is able to provide its clients with a comprehensive
information management solution. NextGen, in conjunction with QSI's
practice management software, was first installed at a beta site in August
1995 and is currently being installed in additional sites. The Company is
also in the process of designing an alternative client/server version of
its practice management products utilizing a graphical user interface with
the intent of enabling a more seamless integration of the QSI and NextGen
applications.
* NextGen is a registered trademark of Clinitec International, Inc.
<PAGE> 15
Further augmenting its product line, the Company purchased substantially
all of the assets of MicroMed in May 1997. MicroMed develops proprietary
medical practice management systems that utilize a client/server platform,
a graphical user interface for compatibility with Windows 95 and Windows NT
operating systems, and a relational database that is ANSI SQL compliant in
contrast with the Company's existing UNIX-based practice management systems
which are primarily character based. MicroMed was formed in 1993 and, as
of October 1997, MicroMed had seven installed customer sites which include
a medical center with more than 70 doctors, 20 locations and nearly 100
simultaneous users.
<PAGE> 16
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
Clinitec's acquisition, and the operations of MicroMed from May 15, 1997,
the date of MicroMed's acquisition.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
September 30, September 30,
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies 64.7% 55.4% 65.2% 57.5%
Maintenance and other services 35.3 44.6 34.8 42.5
------ ------ ------ ------
100.0 100.0 100.0 100.0
Cost of Products and Services 40.2 50.5 44.8 49.7
------ ------ ------ ------
Gross Profit 59.8 49.5 55.2 50.3
Selling, General and
Administrative Expenses 44.3 38.9 39.9 34.4
Research and Development Costs 9.6 10.4 10.6 10.0
Purchased In-Process
Research and Development - - 32.2 89.0
------ ------ ------ ------
Income (Loss) from Operations 5.9 0.2 (27.5) (83.1)
Investment and Other Income 2.9 6.9 3.3 7.2
------ ------ ------ ------
Income (Loss) before Provision for
(Benefit from) Income Taxes 8.8 7.1 (24.2) (75.9)
Provision for (Benefit from)
Income Taxes 4.2 3.8 (7.9) 5.7
------ ------ ------ ------
Net Income (Loss) 4.6% 3.3% (16.3)% (81.6)%
====== ====== ====== ======
</TABLE>
<PAGE> 17
For the Three-Month Periods Ended September 30, 1997 and 1996.
The Company's net income for the three months ended September 30, 1997 was
$349,000, or $0.06 per share on 6,033,000 weighted average shares
outstanding, as compared to net income of $152,000, or $0.03 per share on
5,965,000 weighted average shares outstanding, for the three months ended
September 30, 1996.
Net Revenues. Net revenues for the three months ended September 30, 1997
increased 63.8% to $7.5 million from $4.6 million for the three months
ended September 30, 1996. Sales of computer systems, upgrades and supplies
increased 91.3% to $4.9 million from $2.5 million while net revenues from
maintenance and other services grew 29.6% to $2.6 million from $2.0 million
during the comparable periods. The increase in net revenues from sales of
computer systems, upgrades and supplies was principally due to an increase
in such revenues for Clinitec and the contribution of such revenues from
MicroMed which was acquired in May 1997. The increase in maintenance and
other services net revenue resulted principally from an increase in such
revenues for QSI which has a larger client base than the more recently
formed Clinitec and MicroMed organizations. The Company's quarterly
results fluctuate and there can be no assurance that similar revenue
increases or revenue levels will be achieved in future quarters.
Cost of Products and Services. Cost of products and services for the three
months ended September 30, 1997 increased 30.4% to $3.0 million from $2.3
million for the three months ended September 30, 1996 while cost of
products and services as a percentage of net revenues decreased to 40.2%
from 50.5% during the comparable periods. The increase in cost of products
and services in amount during the September 30, 1997 quarter as compared to
the September 30, 1996 quarter results from a combination of the effects
of: the increase in net revenues; increased product development, customer
service, support, and training personnel reflecting the Company's recent
growth in annual sales volumes; and, the impact of the acquisition of
MicroMed. The decrease in the cost of products and services as a
percentage of net revenues results primarily from a combination of the
overall increase in net revenues during the September 1997 quarter as
compared to the September 1996 quarter and a large increase in the dollar
amount of systems sales which did not include any significant amount of
hardware content. Systems sales without significant hardware components
generally yield higher margins than those systems sales that also include
significant hardware components. The mixture of sales with and without
significant hardware components fluctuates from quarter to quarter and
there can be no assurance that the mixture of such sales attained in the
quarter ended September 30, 1997 will be achieved in future quarters.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1997
increased 86.5% to $3.3 million from $1.8 million for the three months
ended September 30, 1996 primarily as a result of: the inclusion of
MicroMed's selling, general and administrative expenses for the September
1997 quarter following the May 1997 acquisition of the MicroMed business;
an increase in the September 1997 quarter commission expense arising from
the increased sales volume; and, an increase in QSI's and Clinitec's
selling efforts, sales personnel and administrative infrastructure.
<PAGE> 18
In addition, primarily as a result of the effects of the less mature
Clinitec and MicroMed infrastructures and the increase in commissions
expense, selling, general and administrative expenses as a percentage of
net revenues increased to 44.3% from 38.9% for the respective periods.
Research and Development Costs. Research and development costs for the
three months ended September 30, 1997 increased 52.2% to $723,000 from
$475,000 for the three months ended September 30, 1996. The increase is
principally the result of the inclusion of MicroMed's research and
development costs for the September 1997 quarter following the May 1997
purchase of the MicroMed business and an increase in Clinitec research and
development efforts. Research and development costs as a percentage of net
revenues decreased to 9.6% as compared to 10.4% for the respective periods
primarily as a result of the effect of increased revenues offset in part by
the inclusion of MicroMed's operations for the September 1997 quarter.
Investment and Other Income. Investment and other income for the three
months ended September 30, 1997 decreased 30.0% to $219,000 from $313,000
for the three months ended September 30, 1996 primarily as a result of a
decrease in average funds available for investment during the quarter ended
September 30, 1997. The decrease in available funds is primarily the
result of the payment made to acquire the MicroMed business in May 1997
together with amounts used to fund the growth of Clinitec over the last
twelve months and more recently the growth of MicroMed.
Provision for Income Taxes. The provision for income taxes for the three
months ended September 30, 1997 was $312,000 as compared to $172,000 for
the three months ended September 30, 1996. The provisions for income taxes
for the three months ended September 30, 1997 and 1996 differ from the
combined statutory rate primarily due to the impact of non-deductible
amortization of certain intangible assets acquired in the May 1996 Clinitec
acquisition.
For the Six-Month Periods Ended September 30, 1997 and 1996.
After recognizing a $4.7 million charge for purchased in-process research
and development in connection with the acquisition of the MicroMed
business, the Company incurred a net loss of $(2.4) million, or $(0.40) per
share on 5,988,000 weighted average shares outstanding, for the six months
ended September 30, 1997. In comparison, 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 $(7.6)
million, or $(1.29) per share on 5,886,000 weighted average shares
outstanding, for the six months ended September 30, 1996.
Net Revenues. Net revenues for the six months ended September 30, 1997
increased 57.2% to $14.7 million from $9.3 million for the six months ended
September 30, 1996. Sales of computer systems, upgrades and supplies
increased 78.2% to $9.6 million from $5.4 million while net revenues from
maintenance and other services grew 28.8% to $5.1 million from $4.0 million
during the comparable periods. The increase in net revenues from sales of
computer systems, upgrades and supplies was due to an increase in such
revenues for both QSI and Clinitec together with the contribution of such
revenues from MicroMed which was acquired in May 1997. The increase in
maintenance and other services net revenue resulted principally from an
increase in such revenues for QSI which has a larger client base
<PAGE> 19
than the more recently formed Clinitec and MicroMed organizations. The
Company's periodic results fluctuate and there can be no assurance that
similar revenue increases or revenue levels will be achieved in future
periods.
Cost of Products and Services. Cost of products and services for the six
months ended September 30, 1997 increased 42.0% to $6.6 million from $4.6
million for the six months ended September 30, 1996 while cost of products
and services as a percentage of net revenues decreased to 44.8% from 49.7%
during the comparable periods. The increase in cost of products and
services in amount during the September 30, 1997 period as compared to the
September 30, 1996 period results from a combination of the effects of: the
increase in net revenues; increased product development, customer service,
support, and training personnel during the September 30, 1997 period
reflecting the Company's recent growth in annual sales volumes; and, the
impact of the acquisition of MicroMed. The decrease in the cost of
products and services as a percentage of net revenues for the period ended
September 30, 1997 as compared to the period ended September 30, 1996
results primarily from a combination of the overall increase in net
revenues during the September 1997 period as compared to the September 1996
period and a large increase in the dollar amount of systems sales which did
not include any significant amount of hardware content. Systems sales
without significant hardware components generally yield higher margins than
those systems sales that also include significant hardware components. The
mixture of sales with and without significant hardware components
fluctuates from quarter to quarter and there can be no assurance that the
mixture of such sales attained in the period ended September 30, 1997 will
be achieved in future periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended September 30, 1997
increased 82.0% to $5.9 million from $3.2 million for the six months ended
September 30, 1996 primarily as a result of: the consolidation of
MicroMed's selling, general and administrative expenses during the portion
of the period ended September 30, 1997 following the May 1997 acquisition
of the MicroMed business; the inclusion of such Clinitec expenses for the
entire six-month period ended September 30, 1997 as compared to the
inclusion of such Clinitec expenses for only that portion of the
corresponding period ended September 30, 1996 following the May 1996
Clinitec acquisition; an increase in the September 1997 period commission
expense arising from the increased sales volume; and, an increase in QSI's
and Clinitec's selling efforts, sales personnel and administrative
infrastructure. In addition, primarily as a result of the less mature
Clinitec and MicroMed infrastructures and the increase in commission
expense, selling, general and administrative expenses as a percentage of
net revenues increased to 39.9% from 34.4% for the respective periods.
Research and Development Costs. Research and development costs for the six
months ended September 30, 1997 increased 66.4% to $1.6 million from
$932,000 for the six months ended September 30, 1996. The increase is the
result of increased research and development efforts by QSI and Clinitec as
well as consolidation of MicroMed's research and development costs during
the portion of the period ended September 30, 1997 following the May 1997
purchase of the MicroMed business. Research and development costs as a
percentage of net revenues increased to 10.6% as compared to 10.0% for the
respective periods as a result of the inclusion of MicroMed's operations.
Without including MicroMed's operations, the percentage would have
<PAGE> 20
decreased somewhat due to the impact of increased revenues offset in part
by increased QSI and Clinitec research and development efforts.
Purchased In-Process Research and Development. In connection with the
acquisition of MicroMed in May 1997, MicroMed's in-process research and
development for which technological feasibility had not been established
was valued in excess of $4.7 million. After allocating the purchase price
paid to identifiable tangible and certain intangible assets, the remaining
$4.7 million unallocated portion of the purchase price was allocated to
MicroMed's in-process research and development. In accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
software development costs must be expensed until technological feasibility
has been established. Accordingly, the $4.7 million value allocated to
MicroMed's purchased in-process research and development was expensed
during the six month period ended September 30, 1997. Correspondingly,
Clinitec was acquired in May 1996, and its in-process research and
development for which technological feasibility had not been established as
of the acquisition date was valued at $8.3 million which value was
accordingly charged to operations during the six month period ended
September 30, 1996.
Investment and Other Income. Investment and other income for the six
months ended September 30, 1997 decreased 25.9% to $495,000 from $668,000
for the six months ended September 30, 1996 primarily as a result of a
decrease in average funds available for investment during the period ended
September 30, 1997. The decrease in available funds is primarily the
result of the timing and amounts of the cash payments made to acquire
Clinitec and MicroMed in May 1996 and May 1997, respectively, together with
amounts used to fund the growth of Clinitec over the last twelve months and
more recently the growth of MicroMed.
Provision for (Benefit from) Income Taxes. The benefit from income taxes
for the six months ended September 30, 1997 was $(1.2) million as compared
to a provision of $530,000 for the six months ended September 30, 1996.
The benefit from income taxes for the six months ended September 30, 1997
differs from the combined statutory rate primarily due to the effect of
varying state tax rates together with the impact of non-deductible
amortization of certain intangible assets acquired in the May 1996
acquisition of Clinitec. The MicroMed acquisition was structured as a
taxable transaction while the Clinitec acquisition was tax-free at the
acquisition date. Consequently, the provision for income taxes for the six
months ended September 30, 1996 differs from the combined statutory rate
primarily due to the non-deductible amortization of certain intangible
assets and the non-deductible $8.3 million charge for purchased in-process
research and development each of which was incurred in connection with the
May 1996 acquisition of Clinitec.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents decreased $6.0 million for the six months ended
September 30, 1997 primarily as a result of the purchase of the MicroMed
business. Correspondingly, cash and cash equivalents decreased $5.1
million for the six months ended September 30, 1996 principally as a result
of the payment of the cash portion of the purchase price for the remaining
75% ownership interest in Clinitec in May 1996.
<PAGE> 21
Net cash provided by operating activities for the six months ended
September 30, 1997 was $603,000 consisting primarily of the Company's
$(2.4) million net loss adjusted for the principal non-cash operating
expenses of depreciation, amortization and the $4.7 million charge for the
MicroMed purchased in-process research and development and the related tax
benefit, offset by an increase in accounts receivable. The increase in
accounts receivable during the period ended September 30, 1997 resulted
primarily from increased sales as compared to the six months ended March
31, 1997 and the timing of such sales during the respective periods. Net
cash provided by operating activities for the six months ended September
30, 1996 was $88,000 consisting primarily of the Company's $(7.6) million
net loss adjusted for the principal non-cash operating expenses of
depreciation, amortization and the $8.3 million charge for the Clinitec
purchased in-process research and development, offset by an increase in
accounts receivable and a decrease in accounts payable.
Net cash used in investing activities for the six months ended September
30, 1997 was $6.4 million consisting principally of $5.3 million, including
a $550,000 operating loan made by QSI to MicroMed prior to the acquisition
date, used to purchase the MicroMed business, plus additions to equipment
and improvements and capitalized software. Net cash used in investing
activities for the six months ended September 30, 1996 was $5.2 million
consisting principally of the payment of the $4.9 million cash portion of
the May 1996 purchase price for the remaining 75% ownership interest in
Clinitec, related legal costs of the acquisition, and additions to
equipment and improvements and capitalized software offset in part with
proceeds from the sales of short-term investments.
Net cash used in financing activities for the six months ended September
30, 1997 was $168,000 consisting of the purchase of 27,600 shares of the
Company's Common Stock offset in part by proceeds from the exercise of
stock options. Net cash provided by financing activities was negligible
for the six months ended September 30, 1996.
In February 1997, the Company's Board of Directors authorized the
repurchase on the open market of up to 10% of the Company's outstanding
Common Stock at various times through February 1998, subject to compliance
with applicable laws and regulations. The timing and amount of any
repurchase is at the discretion of the Company's management. The Company's
management could, in the exercise of its judgment, repurchase fewer shares
than authorized. During the six months ended September 30, 1997, the
Company repurchased 27,600 shares at a cost of $182,000. Since the
inception of the repurchase program through November 7, 1997, 30,600 shares
have been repurchased at a cost of $205,000.
At September 30, 1997, the Company had cash and cash equivalents of $15.9
million and short-term investments of $938,000. Short-term investments
include a $675,000 investment in a fund which trades in special situation
securities. There can be no assurance that the markets for these
securities will not change, causing a loss of principal.
In March 1996, QSI 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
interest in Clinitec (which was completed in May 1996), and the possible
acquisitions of complementary businesses and technologies. The Company
continues to evaluate potential investment opportunities and in May 1997
acquired substantially all of the assets of MicroMed for an initial cash
<PAGE> 22
payment of $4.8 million in addition to a previously advanced $550,000
operating loan plus a potential future additional payment based upon
operating results of the MicroMed business for the twelve months ending
March 31, 1998. The additional payment, if any, ranges up to $6.0 million,
up to 15% of which is payable at the option of QSI in Common Stock, and is
due on or before June 29, 1998. Pursuant to an independent valuation of
the assets acquired, it is anticipated that a significant portion of any
future additional payment will be charged to operations as additional
purchased in-process research and development during the quarter ending
March 31, 1998.
Except for the acquisition of MicroMed and the Company's intention to
expend funds on capitalized software in connection with complementary
products to its existing product line and 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.
The Company believes that its cash and cash equivalents and short-term
investments on hand at September 30, 1997, 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> 23
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 25 are filed as part of this report.
(b) Reports on Form 8-K:
--------------------
None.
<PAGE> 24
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>
<CAPTION>
<S> <C>
Date November 12, 1997 By /s/ Sheldon Razin
----------------- ----------------------------------
Sheldon Razin
President and Chairman
of the Board of Directors;
Principal Executive Officer
Date November 12, 1997 By /s/ Robert G. McGraw
----------------- ----------------------------------
Robert G. McGraw
Chief Financial Officer;
Principal Accounting Officer
</TABLE>
<PAGE> 25
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
------- ----------
11.0 Earnings per share computation, is filed herewith 26
27.0 Financial Data Schedule, is filed herewith. 27
<PAGE> 26
EXHIBIT 11.0
------------
The net income per share for the three months ended September 30, 1997 and
1996 was computed using the weighted average number of shares outstanding
during the periods of 6,033,000 and 5,965,000, respectively, which amounts
included common share equivalents from stock options. The difference
between primary and fully diluted net income per share for each of the
three-month periods was not significant.
The net loss per share for the six months ended September 30, 1997 and 1996
was computed using the weighted average number of shares actually
outstanding during the periods of 5,988,000 and 5,886,000, respectively,
and any common share equivalents were excluded because their impact would
have been anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 15,850,000
<SECURITIES> 938,000
<RECEIVABLES> 8,238,000
<ALLOWANCES> 0
<INVENTORY> 1,521,000
<CURRENT-ASSETS> 27,299,000
<PP&E> 1,760,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,050,000
<CURRENT-LIABILITIES> 7,324,000
<BONDS> 0
0
0
<COMMON> 60,000
<OTHER-SE> 29,666,000
<TOTAL-LIABILITY-AND-EQUITY> 37,050,000
<SALES> 9,558,000
<TOTAL-REVENUES> 14,665,000
<CGS> 0
<TOTAL-COSTS> 6,577,000
<OTHER-EXPENSES> 12,125,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,542,000)
<INCOME-TAX> (1,156,000)
<INCOME-CONTINUING> (2,386,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,386,000)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
