<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 December 31, 1999
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, Suite 210
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.
6,197,891 shares of Common Stock, $.01 par value, as of January 28, 2000
<PAGE> 2
PART I. CONSOLIDATED FINANCIAL INFORMATION.
------- -----------------------------------
Item 1. Financial Statements.
- ------- ---------------------
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
December 31, March 31,
1999 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 16,180 $ 14,196
Short-term investments 235 245
Accounts receivable, net 12,590 12,488
Inventories 1,141 772
Other current assets 1,049 1,019
------------- -------------
Total current assets 31,195 28,720
Equipment and Improvements, net 1,646 1,783
Capitalized Software Costs, net 1,962 2,144
Deferred Tax Asset 3,081 3,254
Excess of Cost Over Net Assets
of Acquired Business, net 2,197 2,452
Other Assets 1,721 1,865
------------- -------------
Total assets $ 41,802 $ 40,218
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,124 $ 1,813
Deferred service revenue 5,130 4,484
Other current liabilities 3,980 4,257
------------- -------------
Total liabilities 10,234 10,554
------------- -------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.01 par value, 20,000 shares
authorized, 6,206 and 6,214 shares issued
and outstanding, respectively 62 62
Additional paid-in capital 35,517 35,568
Accumulated deficit (4,011) (5,966)
------------- -------------
Total shareholders' equity 31,568 29,664
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Total liabilities and
shareholders' equity $ 41,802 $ 40,218
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 3
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ ------------------
December 31, December 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies $ 4,435 $ 5,000 $ 15,184 $ 13,338
Maintenance and other services 4,373 3,827 12,435 10,645
-------- -------- -------- --------
8,808 8,827 27,619 23,983
Cost of Products and Services 4,023 4,037 12,547 11,510
-------- -------- -------- --------
Gross Profit 4,785 4,790 15,072 12,473
Selling, General and
Administrative Expenses 3,166 3,390 9,344 10,072
Research and Development Costs 962 842 2,819 2,630
-------- -------- -------- --------
Income (Loss) from Operations 657 558 2,909 (229)
Investment Income 183 109 531 260
-------- -------- -------- --------
Income before
Provision for Income Taxes 840 667 3,440 31
Provision for Income Taxes 365 298 1,485 202
-------- -------- -------- --------
Net Income (Loss) and
Comprehensive Income (Loss) $ 475 $ 369 $ 1,955 $ (171)
======== ======== ======== ========
Net Income (Loss) per Share,
basic & diluted $ 0.08 $ 0.06 $ 0.31 $ (0.03)
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 1,955 $ (171)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,990 1,870
Loss on short-term investments 31 242
Deferred income taxes 173 (253)
Changes in:
Accounts receivable (102) (117)
Inventories (369) 453
Other current assets (30) (139)
Other assets (76) (101)
Accounts payable (689) 39
Deferred service revenue 646 1,247
Income taxes payable and taxes
related to equity accounts (769) (277)
Other current liabilities 492 (540)
------------ ------------
Net Cash Provided by Operating Activities 3,252 2,253
------------ ------------
Cash Flows from Investing Activities:
Net additions to
equipment and improvements (298) (368)
Additions to capitalized software costs (852) (953)
Purchase of net assets of MicroMed
Healthcare Information Systems, Inc. - (3,840)
Purchase of short-term investment (50) (75)
Proceeds from sale of
short-term investment 29 515
Change in other assets (46) 18
------------ ------------
Net Cash Used in Investing Activities (1,217) (4,703)
------------ ------------
Cash Flows from Financing Activities:
Purchases of Common Stock (57) (150)
Proceeds from exercise of stock options 6 50
------------ ------------
Net Cash Used in Financing Activities (51) (100)
------------ ------------
Net Increase (Decrease) in
Cash and Cash Equivalents 1,984 (2,550)
Cash and Cash Equivalents,
beginning of period 14,196 16,107
------------ ------------
Cash and Cash Equivalents, end of period $ 16,180 $ 13,557
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
(in thousands)
Supplemental Information - During the nine months ended December 31, 1999
and 1998, the Company made income tax payments, net of refunds received,
of $2,099 and $719, respectively.
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Detail of businesses acquired in
purchase transaction:
Purchased In-Process
Research and Development $ - $ -
Fair Value of Assets Acquired - -
Liabilities Assumed - -
Common Stock Issued in the Acquisition - (1,836)
Retirement of Acquisition Obligation - 5,676
------------ ------------
Cash Paid for the Acquisition,
net of cash acquired $ - $ 3,840
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
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, 1999. 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.
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 consisted of an initial cash payment of $4.8 million paid at the
closing of the transaction and an additional payment, based upon certain
operating results of MicroMed for the twelve-month period ended March 31,
1998, of $5.7 million due no later than June 29, 1998. The additional
payment, paid on June 29, 1998, consisted of $3.8 million in cash and
245,454 shares of the Company's Common Stock valued at $1.8 million, or
$7.48 per share. The shares of Common Stock could not be sold or otherwise
transferred in any manner until June 1999.
NOTE 3 - STOCK REPURCHASE
- ------ ----------------
In February 1997, the Company's Board of Directors authorized the
repurchase on the open market of up to 10% of the shares of the Company's
outstanding Common Stock at various times through February 1998, subject
to compliance with applicable laws and regulations. On February 9, 1998,
the Company's Board of Directors extended this authorization through
February 9, 1999 and on February 9, 1999 further extended this
authorization through February 28, 2000. 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 three and nine months ended December 31, 1999,
the Company repurchased 9,400 shares at a cost of $57,000. Since the
inception of the repurchase authorization through January 28, 2000, 109,900
shares have been repurchased at a cost of $630,000.
<PAGE> 7
NOTE 4 - INCOME TAXES
- ------ ------------
The provision for income taxes for the three and nine months ended December
31, 1999 and 1998 differ from the expected combined statutory rates
primarily due to the impact of non-deductible amortization of certain
intangible assets acquired in the May 1996 acquisition of Clinitec
International, Inc. and the effect of varying state income tax rates.
NOTE 5 - NET INCOME (LOSS) PER SHARE
- ------ ---------------------------
The following table reconciles the weighted average shares outstanding for
basic and diluted net income (loss) per share for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss) $ 475 $ 369 $ 1,955 $ (171)
-------- -------- -------- --------
Basic net income (loss) per share:
Weighted average number of
common shares outstanding 6,208 6,242 6,213 6,162
-------- -------- -------- --------
Basic net income (loss) per share $ 0.08 $ 0.06 $ 0.31 $ (0.03)
======== ======== ======== ========
Diluted net income
(loss) per share:
Weighted average number of
common shares outstanding 6,208 6,242 6,213 6,162
Weighted average number of
common shares equivalents-
Weighted average
options outstanding 10 1 10 -
-------- -------- -------- --------
Weighted average number of common
and common equivalent shares 6,218 6,243 6,223 6,162
-------- -------- -------- --------
Diluted net income
(loss) per share $ 0.08 $ 0.06 $ 0.31 $ (0.03)
======== ======== ======== ========
</TABLE>
The net loss per share, basic and diluted, for the nine months ended
December 31, 1998 was computed using the weighted average number of
shares actually outstanding during the period and any common share
equivalents were excluded because their impact would have been anti-
dilutive.
<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.
COMPANY OVERVIEW.
Quality Systems, Inc. ("QSI") and its wholly-owned subsidiaries, Clinitec
International, Inc. ("Clinitec") and MicroMed Healthcare Information
Systems, Inc. ("MicroMed"), (collectively, the "Company") develop and
market healthcare information systems that automate medical and dental
group practices, physician hospital organizations ("PHOs"), management
service organizations ("MSOs"), community health centers and dental
schools. In response to the growing need for more comprehensive, cost-
effective information solutions for physician and dental practices, the
Company's systems provide its clients with the ability to redesign patient
care and other workflow processes, improve productivity, reduce information
processing and administrative costs, and provide multi-site access to
patient information. The Company's proprietary software systems include
general patient information, electronic medical records, appointment
scheduling, billing, insurance claims submission and processing, managed
care plan implementation and referral management, treatment outcome
studies, treatment planning, drug formularies, dental charting, and letter
generation. In addition to providing fully integrated software information
solutions to its clients, the Company offers comprehensive hardware and
software installation services, maintenance and support services, system
training services, and electronic insurance claims submission services.
The Company currently has an installed base of more than 600 healthcare
information systems serving PHOs, MSOs, group practices, specialty
practices, dental schools and other healthcare organizations, each of which
consists of from one to 250 physicians or dentists. The Company believes
that as healthcare providers are increasingly required to reduce costs
while maintaining the quality of healthcare, the Company will be able to
capitalize on its strategy of providing fully integrated information
systems and superior client 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
<PAGE> 9
physicians and healthcare organizations and further expanded its
information processing systems into the broader medical market. Today, QSI
primarily develops and provides integrated character-based healthcare
information systems utilizing a UNIX* operating system for both the medical
and dental markets ("Legacy Product"). These expandable systems operate on
a stand-alone basis or in a networked environment.
Augmenting its medical practice management software system, QSI added
Clinitec's electronic medical records software, NextGen** EMR, to its
product line in 1995 and completed its acquisition of Clinitec in May 1996.
NextGen EMR allows healthcare providers to create and maintain medical
records using a series of user-definable clinical "templates." Data is
generally captured using a light pen or a mouse, and entries are then
turned into sentences and/or paragraphs to create documentation. NextGen
EMR also supports the scanning and annotation of paper documents,
photographs and X-rays, and contains many other advanced features. NextGen
EMR is marketed both in conjunction with the Company's practice management
software offerings as well as on a stand-alone basis where NextGen EMR may
interface with other practice management systems. With the addition of
NextGen EMR, the Company believes that it currently provides a
comprehensive information management solution for the medical marketplace.
During fiscal 1998, the Company released a new product, the Clinical
Product Suite ("CPS"), a comprehensive dental solution designed
specifically for the large dental group practice environment. CPS
integrates the dental Legacy Product with a computer-based clinical
information system that incorporates a wide range of clinical tools,
including electronic charting of dental procedures, treatment plans and
existing conditions; periodontal charting, via light-pen, voice-activation,
or keyboard entry, for full periodontal examinations and PSR scoring;
digital imaging of X-ray and intra-oral camera images; computer-based
patient education modules; full access to patient information, treatment
plans, and insurance plans; and document and image scanning for digital
storage and linkage to the electronic patient record. CPS incorporates a
Windows-based client-server technology consisting of one or more file
servers together with any combination of one or more desktop, laptop, or
pen-based PC workstations. The file server(s) used in connection with CPS
utilize a Windows NT*** operating system. Based on the server configuration
chosen, CPS is scalable from one to hundreds of workstations.
Further augmenting its medical practice management system product line, the
Company purchased MicroMed in May 1997. MicroMed develops and markets
proprietary medical practice management systems. MicroMed's practice
management system, NextGen EPM, has been developed with a client-server
architecture; a GUI design utilizing either Windows 95***, Windows 98*** or
Windows NT operating system platforms; and, a platform independent
relational database that is ANSI SQL-compliant. NextGen EPM is designed to
provide a flexible, enterprise-wide solution employing a master patient
index.
* UNIX is a registered trademark of AT&T Corporation.
** NextGen is a registered trademark of Clinitec International, Inc.
*** Microsoft Windows, Windows NT, Windows 95 and Windows 98 are
registered trademarks of Microsoft Corporation.
<PAGE> 10
RISK FACTORS.
COMPETITION.
The market for healthcare 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.
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 clinical systems. Furthermore, the Company also
competes indirectly and to varying degrees with other major healthcare
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, results of operations and financial condition. Competitive
pressures and other factors, such as new product introductions by the
Company or its competitors, may result in price or market share erosion
that could have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, the Company believes that once a healthcare provider has
chosen a particular healthcare 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. Furthermore, if the healthcare
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, results of operations and financial
condition. The Company's inability to make initial sales of its systems to
either newly formed groups and/or healthcare providers that are replacing
or substantially modifying their healthcare information systems could have
a material adverse effect on the Company's business, results of operations
and financial condition. If new systems sales do not materialize,
maintenance service revenues can be expected to decrease over time due to
the effect of failure to capture new maintenance revenues therefrom in
combination with attrition of existing maintenance revenues associated with
the Company's current clients whose systems become obsolete or are replaced
by competitors' products.
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
<PAGE> 11
its competitors; the availability and cost of system components; 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 healthcare 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.
Through March 31, 1998, the Company recognized revenue in accordance with
the provisions of the American Institute of Certified Public Accountants
("AICPA") Statement of Position No. 91-1, "Software Revenue Recognition"
("SOP 91-1"). The AICPA adopted Statement of Position No. 97-2, "Software
Revenue Recognition" ("SOP 97-2"), that supersedes SOP 91-1 and became
effective for the Company on April 1, 1998. There can be no assurance that
application and subsequent interpretations of this pronouncement by the
Company, its independent auditors or the Securities and Exchange Commission
will not further modify the Company's revenue recognition policies, or that
such modifications would not have a material adverse effect on the
operating results reported in any particular quarter. There can be no
assurance that the Company will not be required to adopt changes in its
licensing or services practices to conform to SOP 97-2, or that such
changes, if adopted, would not result in delays or cancellations of
potential sales of the Company's products.
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.
<PAGE> 12
ACQUISITIONS.
During the past several years, the Company has made two significant
acquisitions of relatively new companies, each of which has products
utilizing newer technology than the Company's Legacy Product and each
company having a limited sales history. Acquisitions involve a number of
special risks, including possible adverse effects on the Company's
operating results, diversion of management's attention, failure to retain
key acquired personnel, amortization of acquired intangible assets, and
risks associated with unanticipated events or liabilities, some or all of
which could have a material adverse effect on the Company's business,
results of operations and financial condition. Customer dissatisfaction or
performance problems at a single acquired business can also have an adverse
effect on the reputation of the Company.
DEPENDENCE ON PRINCIPAL PRODUCT AND NEW PRODUCT DEVELOPMENT.
The Company currently derives substantially all of its net revenues from
sales of its healthcare 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 healthcare
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,
successful introduction and implementation 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 and implemented in a timely manner, meet the
requirements of healthcare providers, or achieve market acceptance. If new
products or product enhancements do not achieve market acceptance, the
Company's business, results of operations and financial condition could be
materially 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.
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 remain competitive. If the Company is unable, for technological or
<PAGE> 13
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.
In response to increasing market demand, the Company is currently
developing new generations of certain of its software products 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, Windows 95 and Windows 98, 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 products obsolete.
YEAR 2000 ISSUES.
The Company is aware of issues associated with the programming code in
existing computer systems with regard to the millennium change. In
particular, software applications that use only two digits to identify a
year in the date field may fail or create errors in the year 2000 ("Year
2000 Issues").Year 2000 Issues create risk for the Company from unforeseen
problems in computer systems that the Company sells to customers on a
nationwide basis which are used, among other things, to process their
financial transactions and schedule patients ("Company Products"), as well
as systems that the Company uses internally to provide certain services to
its customers and to process its own financial transactions ("Internal Use
Systems"). The potential costs and uncertainties associated with Year 2000
Issues depend upon a number of factors, including the Company's proprietary
and third party developed software, hardware (hardware and third party
developed software will hereinafter be referred to collectively as "Third
Party Products") and the nature of the industry in which the Company
operates.
The nature of the Company's business and its relationships with its
customers make it difficult to assess the magnitude of the Company's
potential exposure as a result of Year 2000 Issues. Company Products and
Third Party Products sold by the Company may fail to operate properly or as
expected due to Year 2000 Issues. Such failures could result in system
failures or miscalculations causing disruptions of customers' operations,
including among other things, an inability to process transactions, send
invoices, conduct communications, treat patients or engage in similar
normal business activities. In addition, Company Products and Third Party
Products are often used in conjunction with other vendors' products and
services and the Company must rely on these other vendors to complete the
material remediation efforts necessary with regards to Year 2000 Issues in
connection with such products and services. Should such vendors be unable
to complete such remediation efforts in a timely manner, the use of such
products and services on the same system as Company Products and Third
Party Products may result in system failures. As a result of one or more of
the above potential system failures, certain of the Company's customers may
assert breach of warranty or other claims against the Company relating to
Year 2000 functionality. The assertion of such claims may have a material
adverse impact upon the Company's business, results of operations and
financial condition. Furthermore, the efforts and resources devoted to Year
<PAGE> 14
2000 Issues of current and potential customers of the Company could result
in the deferral, delay or cancellation by customers of current
installations of and plans to purchase systems from the Company. Internal
Use Systems, including both information systems and non-information
systems, may not operate properly or as expected due to Year 2000 Issues.
Year 2000 Issues could result in system failures or miscalculations causing
disruption of the Company's operations, including among other things, an
inability to process its own and certain of its customers' financial
transactions, send invoices, conduct communications, or engage in similar
normal business activities. The failure of one or more Internal Use Systems
as a result of Year 2000 Issues may have a material adverse impact upon the
Company's business, results of operations and financial condition.
LITIGATION.
On April 22, 1997, a purported class action was filed in California
Superior Court on behalf of all persons who purchased the Company's Common
Stock between June 26, 1995 and July 3, 1996. The complaint alleges that
the Company and certain of its officers and directors, as well as other
defendants not affiliated with the Company, violated sections of the
California Corporations Code by issuing positive statements about the
Company that allegedly were knowingly false, in part, in order to assist
the Company and certain of its officers and directors in selling Common
Stock at an inflated price in the Company's March 5, 1996 public offering
and at other points during the period specified. On May 14, 1997, a second
purported class action was filed in the same court essentially repeating
the allegations of the April 22, 1997 suit. On July 1, 1997, a third
purported class action was filed in the United States District Court
repeating essentially the same factual allegations as the April 22, 1997
suit and purports to state claims under the Federal securities laws. The
Company and its named officers and directors deny all allegations of
wrongdoing made against them in these suits, consider the allegations
groundless and without merit, and intend to vigorously defend against these
actions.
On March 23, 1999, a purported class action and derivative complaint was
filed in the Superior Court of the State of California for the County of
Orange, on behalf of all non-director shareholders, and derivatively on
behalf of the Company, alleging that certain directors of the Company
breached their fiduciary duties by allegedly entrenching themselves in
their positions of control, failing to ensure that third-party offers
involving the Company were fully and fairly considered, and/or failing to
conduct a reasonable inquiry to assure the maximization of shareholder
value. The complaint seeks declaratory and injunctive relief, an accounting
of monetary damages allegedly suffered by plaintiff and the purported
class, and attorneys' fees. The named directors deny all allegations of
wrongdoing made against them in this suit, consider the allegations
groundless and without merit, and intend to vigorously defend against the
action.
The pending Federal and state securities actions and the derivative action
are in the early states of procedure. Consequently, at this time it is not
reasonably possible to estimate the damage, or the range of damages, if
any, that the Company might incur in connection with such actions. However,
the uncertainty associated with substantial unresolved litigation may be
expected to have an adverse impact on the Company's business. In
particular, such litigation could impair the Company's relationships with
existing customers and its ability to obtain new customers. Defending such
<PAGE> 15
litigation will likely result in a diversion of management's time and
attention away from business operations, which could have a material
adverse effect on the Company's business, results of operations and
financial condition. Such litigation may also have the effect of
discouraging potential acquirors from bidding for the Company or reducing
the consideration such acquirors would otherwise be willing to pay in
connection with an acquisition.
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 and are often not enforced as
vigorously as those in 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 arrangement with the party asserting the claim. As
competing healthcare 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, results of operations and financial condition. 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.
ABILITY TO MANAGE GROWTH.
The Company has experienced periods of growth and increased personnel,
which has placed, and may continue to place, a significant strain on the
Company's resources. The Company also 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
timeframe, 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.
<PAGE> 16
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.
The Company does not maintain key man life insurance on any of its
employees. 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. Furthermore, 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.
PRODUCT LIABILITY.
Certain of the Company's products provide applications that relate to
patient clinical 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, results of operations and financial condition. 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, results of
operations and financial condition.
UNCERTAINTY IN HEALTHCARE INDUSTRY; GOVERNMENT REGULATION.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement processes and
operation of healthcare facilities. During the past several years, the
healthcare industry has been subject to an increase in governmental
regulation of, among other things, reimbursement rates and certain capital
expenditures. In the past, various legislators have announced that they
intend to examine proposals to reform certain aspects of the U.S.
healthcare system including proposals which may increase governmental
involvement in healthcare, lower reimbursement rates and otherwise change
the operating environment for the Company's clients. Healthcare 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
<PAGE> 17
healthcare 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 healthcare reforms might have on its business,
results of operations and financial condition.
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 record-keeping 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, the result of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
<PAGE> 18
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.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
December 31, December 31,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies 50.4% 56.6% 55.0% 55.6%
Maintenance and other services 49.6 43.4 45.0 44.4
------ ------ ------ ------
100.0 100.0 100.0 100.0
Cost of Products and Services 45.7 45.7 45.4 48.0
------ ------ ------ ------
Gross Profit 54.3 54.3 54.6 52.0
Selling, General and
Administrative Expenses 35.9 38.4 33.9 42.0
Research and Development Costs 10.9 9.5 10.2 11.0
------ ------ ------ ------
Income (Loss) from Operations 7.5 6.4 10.5 (1.0)
Investment Income 2.0 1.2 1.9 1.1
------ ------ ------ ------
Income before
Provision for Income Taxes 9.5 7.6 12.4 0.1
Provision for Income Taxes 4.1 3.4 5.4 0.8
------ ------ ------ ------
Net Income (Loss) 5.4% 4.2% 7.0% (0.7)%
====== ====== ====== ======
</TABLE>
<PAGE> 19
FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998.
- -------------------------------------------------------------
The Company's net income for the three months ended December 31, 1999 was
$475,000, or $0.08 per share on a basic and diluted basis, as compared to
net income of $369,000, or $0.06 per share on a basic and diluted basis,
for the three months ended December 31, 1998.
Net Revenues. Net revenues were unchanged at $8.8 million for the three
months ended December 31, 1999 and 1998. Sales of computer systems,
upgrades and supplies decreased 11.3% to $4.4 million from $5.0 million
while net revenues from maintenance and other services grew 14.3% to $4.4
million from $3.8 million during the comparable periods. The decrease in
net revenues from sales of computer systems, upgrades and supplies was
principally the result of a decrease in the sales of the Legacy Product.
The increase in maintenance and other services net revenue resulted
principally from an increase in revenues from the Company's increased
client base from which to generate maintenance and other services revenue
together with an increase in revenues generated from the Company's
electronic data interchange services.
Cost of Products and Services. Cost of products and services for the three
months ended December 31, 1999 was unchanged at $4.0 million as compared to
the three months ended December 31, 1998 and the cost of products and
services as a percentage of net revenues was also unchanged at 45.7% for
the respective periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 1999
decreased 6.6% to $3.2 million as compared to $3.4 million for the three
months ended December 31, 1998. Selling, general and administrative
expenses as a percentage of net revenues decreased to 35.9% from 38.4% as a
result of the reduced expenses. The decrease in the amount of such expenses
resulted primarily from the cost savings effected with the merger beginning
in October 1998 of the NextGen EPM and NextGen EMR sales forces and the
related marketing efforts.
Research and Development Costs. Research and development costs for the
three months ended December 31, 1999 increased 14.3% to $962,000 as
compared to $842,000 for the three months ended December 31, 1998. Research
and development costs as a percentage of net revenues increased to 10.9%
as compared to 9.5% for the respective periods as a result of the effect of
the increased research and development expenses.
Investment Income. Investment income for the three months ended December
31, 1999 was $183,000 while investment income for the December 31, 1998
period was $109,000. The December 1998 quarter included recognition of
a $39,000 unrealized loss in connection with an investment in a fund which
traded in special situation securities. The investment was fully liquidated
by March 31, 1999. There was no similar loss in the December 1999 quarter.
The balance of the increase in the December 1999 quarter as compared to the
December 1998 quarter was principally due to greater available cash
balances for investment during the 1999 quarter.
Provision for Income Taxes. The provision for income taxes for the three
months ended December 31, 1999 was $365,000 as compared to $298,000
for the three months ended December 31, 1998. The provisions for income
taxes for the three months ended December 31, 1999 and 1998 differ from
<PAGE> 20
the combined statutory rates primarily due to the impact of non-deductible
amortization of certain intangible assets acquired in the May 1996 Clinitec
acquisition and the effect of varying state income tax rates.
FOR THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1999 AND 1998.
- ------------------------------------------------------------
The Company's net income for the nine months ended December 31, 1999 was
$2.0 million, or $0.31 per share on a basic and diluted basis, as compared
to a net loss of ($171,000), or ($0.03) per share on a basic and diluted
basis, for the nine months ended December 31, 1998.
Net Revenues. Net revenues for the nine months ended December 31, 1999
increased 15.2% to $27.6 million from $24.0 million for the nine months
ended December 31, 1998. Sales of computer systems, upgrades and supplies
increased 13.8% to $15.2 million from $13.3 million, while net revenues
from maintenance and other services grew 16.8% to $12.4 million from $10.6
million during the comparable periods. The increase in net revenues from
sales of computer systems, upgrades and supplies was principally the result
of increases in the sales of the CPS product and NextGen EPM and NextGen
EMR systems offset in part by a decrease in sales of the Legacy Product.
The increase in maintenance and other services net revenue resulted
principally from an increase in revenues from the Company's increased
client base from which to generate maintenance and other services revenue
together with an increase in revenues generated from the Company's
electronic data interchange services.
Cost of Products and Services. Cost of products and services for the nine
months ended December 31, 1999 increased 9.0% to $12.5 million from $11.5
million for the nine months ended December 31, 1998 while cost of products
and services as a percentage of net revenues decreased to 45.4% from 48.0%
during the comparable periods. The increase in the cost of products and
services results from the impact of increased sales in the December 31,
1999 period together with a change in the relative mix of hardware content
of such sales. The cost of products and services as a percentage of net
revenues decreased as a result of the impact of increased sales in the
December 31, 1999 period together with a change in the relative mix of
hardware content of such sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended December 31, 1999
decreased 7.2% to $9.3 million as compared to $10.1 million for the nine
months ended December 31, 1998. Selling, general and administrative
expenses as a percentage of net revenues decreased to 33.9% from 42.0%. The
decrease in the amount of such expenses resulted primarily from the cost
savings effected with the merger beginning in October 1998 of the NextGen
EPM and NextGen EMR sales forces and the related marketing efforts. The
decrease of such expenses as a percentage of net revenues resulted from the
increase in net revenues between the comparable periods together with the
aforementioned cost savings.
Research and Development Costs. Research and development costs for the nine
months ended December 31, 1999 increased 7.2% to $2.8 million from $2.6
million for the nine months ended December 31, 1998. Research and
development costs as a percentage of net revenues decreased to 10.2% as
compared to 11.0% for the respective periods primarily as a result of the
effect of the increase in net revenues for the December 1999 period.
<PAGE> 21
Investment Income. Investment income for the nine months ended December 31,
1999 and 1998 was $531,000 and $260,000, respectively. The increase
resulted principally from the recognition of a $242,000 unrealized loss
during the 1998 period in connection with an investment in a fund which
traded in special situation securities. The investment was fully liquidated
by March 31, 1999. There was no similar unrealized loss in the 1999 period.
Provision for Income Taxes. The provision for income taxes for the nine
months ended December 31, 1999 and 1998 was $1.5 million and $202,000,
respectively. The provision for income taxes for the nine months ended
December 31, 1999 and 1998 differ from the combined statutory rates
primarily due to the impact of non-deductible amortization of certain
intangible assets acquired in the May 1996 Clinitec acquisition and the
effect of varying state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents increased $2.0 million for the nine months ended
December 31, 1999 primarily as a result of cash provided by operating
activities. Cash and cash equivalents decreased $2.6 million for the nine
months ended December 31, 1998 primarily as a result of the payment of the
final cash portion of the purchase price for the MicroMed business.
Net cash provided by operating activities for the nine months ended
December 31, 1999 was $3.3 million consisting primarily of the Company's
$2.0 million in net income adjusted for the principal non-cash operating
expenses of depreciation and amortization plus an increase in deferred
service revenue offset in part by decreases in accounts payable and income
tax related accounts. Net cash provided by operating activities for the
nine months ended December 31, 1998 was $2.3 million consisting primarily
of the Company's ($171,000) net loss adjusted for the principal non-cash
operating expenses of depreciation and amortization plus an increase in
deferred service revenue offset in part by an increase in income tax
related accounts.
Net cash used in investing activities for the nine months ended December
31, 1999 was $1.2 million consisting principally of additions to equipment
and improvements and capitalized software. Net cash used in investing
activities for the nine months ended December 31, 1998 was $4.7 million
consisting principally of the $3.8 million cash portion of the final
payment for the MicroMed business, plus additions to equipment and
improvements and capitalized software offset in part by proceeds from the
sale of certain short-term investments.
Net cash used in financing activities for the nine months ended December
31, 1999 was $51,000 consisting of the purchase of 9,400 shares of the
Company's Common Stock offset in part by proceeds from the exercise of
stock options. Net cash used in financing activities for the nine months
ended December 31, 1998 was $100,000 consisting of the purchase of 30,000
shares of the Company's Common Stock offset in part by proceeds from the
exercise of stock options.
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. On February 9, 1998, the Company's
Board of Directors extended this authorization through February 9, 1999 and
on February 9, 1999 further extended this authorization through February
<PAGE> 22
28, 2000. 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 nine
months ended December 31, 1999, the Company repurchased 9,400 shares at a
cost of $57,000. Since the inception of the repurchase authorization
through January 28, 2000, 109,900 shares have been repurchased at a cost of
$630,000.
At December 31, 1999, the Company had cash and cash equivalents
of $16.2 million and short-term investments of $235,000. Except for the
Company's intention to expend funds for the development of 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 and currently anticipates that additions to equipment and
improvements for fiscal 2000 will be comparable to fiscal 1999. The Company
believes that its cash and cash equivalents and short-term investments on
hand at December 31, 1999, together with cash flows from operations, if
any, will be sufficient to meet its working capital and capital expenditure
requirements for the next year.
<PAGE> 23
YEAR 2000 COMPLIANCE.
INTRODUCTION.
The Company is aware of issues associated with the programming code in
existing computer systems with regard to the millennium change. In
particular, software applications that use only two digits to identify a
year in the date field may fail or create errors in the year 2000 ("Year
2000 Issues"). Year 2000 Issues create risk for the Company from unforeseen
problems in computer systems that the Company sells to customers on a
nationwide basis which are used, among other things, to process their
financial transactions and schedule patients ("Company Products"), as well
as systems that the Company uses internally to provide certain services to
its customers and to process its own financial transactions ("Internal Use
Systems"). The potential costs and uncertainties associated with Year 2000
Issues will depend upon a number of factors, including the Company's
proprietary and third party developed software, hardware (hardware and
third party developed software will hereinafter be referred to collectively
as "Third Party Products") and the nature of the industry in which the
Company operates.
Company Products and Third Party Products sold by the Company may fail to
operate properly or as expected due to Year 2000 Issues. Such failures
could result in system failures or miscalculations causing disruptions of
customers' operations, including among other things, an inability to
process transactions, send invoices, conduct communications, schedule and
treat patients or engage in similar normal business activities. Further,
products and services used by the Company's customers, but not supplied by
the Company, could fail to operate properly or as expected due to Year 2000
Issues. Customers' efforts to plan for such events could result in the
deferral, delay or cancellation by customers of current installations of
and plans to purchase systems from the Company. Similarly, Internal Use
Systems, including both information systems and non-information systems,
may not operate properly or as expected due to Year 2000 Issues. Year 2000
Issues could result in system failures or miscalculations causing
disruption of the Company's operations, including among other things, an
inability to process its own and certain of its customers financial
transactions, send invoices, conduct communications, or engage in similar
normal business activities.
STATE OF READINESS.
The Company has undertaken various initiatives intended to address Year
2000 Issues. The Company has identified individuals and/or working groups
to (1) develop and implement the Company's definition of Year 2000
readiness; (2) assess Company Products, Third Party Products and Internal
Use Systems for possible Year 2000 Issues; (3) monitor development, testing
and remediation efforts with respect to Company Products, Third Party
Products and Internal Use Systems; (4) monitor and coordinate the Company's
deployment plans and results with respect to Year 2000 releases of Company
Products, Third Party Products and Internal Use Systems; and, (5) develop
contingency plans with respect to Company Products, Third Party Products
and Internal Use Systems. Although the Company's efforts to address Year
2000 Issues do not fall precisely into sequential phases, generally these
efforts are comprised of an assessment phase, a development phase (only
with respect to Company Products and certain proprietary Internal Use
Systems), a deployment or remediation phase, and a contingency planning
phase.
<PAGE> 24
Company Products. NextGen EPM, NextGen EMR and CPS are designed to be
Year 2000 compliant and contain no known Year 2000 Issues when configured
and used in accordance with the related documentation, and provided that
the underlying operating system of the host machine and any other software
used with or in the host machine are also Year 2000 compliant. However,
there can be no assurance that such products do not contain undetected
errors or defects associated with Year 2000 Issues.
The Company's Legacy Product has required significant development and
remediation efforts in connection with Year 2000 Issues with many of these
efforts commencing in 1997. The Company completed its development efforts
in connection with Year 2000 Issues associated with the Legacy product and
certain associated ancillary products during calendar 1999. Also during
calendar 1999, the Company completed deployment of Version 9 of its Legacy
Product which version has been designed to be Year 2000 compliant. The
Company continues to test and monitor performance of Version 9 and
ancillary products in customer environments and expects to deliver and
deploy maintenance releases in the ordinary course of business.
Based on the Company's assessment to date, the Company believes continuing
efforts will be required to assist customers in deploying and testing
Version 9 in many of the customers' unique environments. The Company also
expects an increase in service and support effort during the early months
of the year 2000.
Third Party Products Sold by the Company. The Company works closely with
vendors of significant Third Party Products sold by the Company. In
addition, Company Products have been tested with certain Third Party
Products. Based upon its current assessments, the Company believes that it
has received adequate assurances that significant Third Party Product
vendors have successfully addressed their significant identified Year 2000
Issues on a timely basis. Due to uncertainties associated with Third Party
Product vendors, the Company is unable to predict whether a material
adverse effect on the Company's business, results of operations and
financial condition may result from Year 2000 Issues related to Third Party
Products despite the Company's current assessment to the contrary.
Internal Use Systems. Based upon the Company's assessment efforts to date,
the Company believes that its critical Internal Use Systems are Year 2000
compliant.
Certain of the Internal Use Systems are proprietary and were developed by
the Company. Company personnel have used similar techniques to identify
Year 2000 Issues with its Company Products and proprietary Internal Use
Systems. The critical proprietary Internal Use Systems have either been
modified by Company personnel or replaced with third party developed
systems which the Company believes will not fail as a result of Year 2000
Issues. The Company has communicated with developers and/or vendors of
certain of its third party developed Internal Use Systems to determine the
extent to which those products and services are Year 2000 compliant. Based
upon its current assessments, the Company believes that it has received
adequate assurances that critical third party developed Internal Use
Systems are Year 2000 compliant.
Contingency Plans. The Company has engaged in contingency planning to
address company-wide personnel, resource, technical and communication
matters in connection with foreseeable scenarios that may develop from Year
2000 Issues despite the Company's remediation efforts. The Company expects
that its development, remediation, testing, deployment and contingency
<PAGE> 25
planning efforts with respect to Company Products, Third Party Products and
Internal Use Systems will continue beyond December 31, 1999. The Company's
contingency planning includes possible (1) failure by the Company and its
vendors to complete efforts to avoid or minimize the impact of Year 2000
Issues on a timely basis; (2) failure of customers to be ready for, or
cooperate with, the deployment of Year 2000 compliant Company Products on a
timely basis; and, (3) delay, deferral or cancellation by customers of
current installations and prospective purchase decisions with respect to
Company Products. A reasonably likely "worst case" scenario has not been
identified, but it is anticipated that such scenario would include the
failure of significant communications and computing infrastructures by the
Company, its customers and its suppliers together with failures of
infrastructures encompassing utilities, transportation, banking and
government.
COSTS.
The total cost to address the Company's Year 2000 Issues were not material
to the Company's financial condition. The Company does not separately track
all of its internal personnel costs incurred in connection with identifying
and resolving Year 2000 Issues. Excluding internal costs, total
expenditures to address Year 2000 Issues were less than $100,000. All of
these expenditures have been funded from operations.
<PAGE> 26
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 28 are
filed as part of this report.
(b) Reports on Form 8-K:
--------------------
None.
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUALITY SYSTEMS, INC.
<TABLE>
<S> <C>
Date: February 10, 2000 By /s/ Sheldon Razin
----------------------------------
Sheldon Razin
President and Chairman
of the Board of Directors;
Principal Executive Officer
Date: February 10, 2000 By /s/ Robert G. McGraw
----------------------------------
Robert G. McGraw
Chief Financial Officer;
Principal Accounting Officer
</TABLE>
<PAGE> 28
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
------- ----------
27.0 Financial Data Schedule, is filed herewith. 29
<PAGE> 29
EXHIBIT 27.0
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 16,180,000
<SECURITIES> 235,000
<RECEIVABLES> 12,590,000
<ALLOWANCES> 0
<INVENTORY> 1,141,000
<CURRENT-ASSETS> 31,195,000
<PP&E> 1,646,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,802,000
<CURRENT-LIABILITIES> 10,234,000
<BONDS> 0
0
0
<COMMON> 62,000
<OTHER-SE> 31,506,000
<TOTAL-LIABILITY-AND-EQUITY> 41,802,000
<SALES> 15,184,000
<TOTAL-REVENUES> 27,619,000
<CGS> 0
<TOTAL-COSTS> 12,547,000
<OTHER-EXPENSES> 12,163,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,440,000
<INCOME-TAX> 1,485,000
<INCOME-CONTINUING> 1,955,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,955,000
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.31
</TABLE>
