-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UZ2oUGVnZtU+c+dNiCc99BMG1LhRtlxl+CfkmbPF09JbV7RBFhmRSrkzl8ECdQui WZfhtQwVHn3Wp+DkYqXK/w== 0000708818-98-000001.txt : 19980211 0000708818-98-000001.hdr.sgml : 19980211 ACCESSION NUMBER: 0000708818-98-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980210 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALITY SYSTEMS INC CENTRAL INDEX KEY: 0000708818 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 952888568 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12537 FILM NUMBER: 98526662 BUSINESS ADDRESS: STREET 1: 17822 E 17TH ST STE 210 CITY: TUSTIN STATE: CA ZIP: 92680 BUSINESS PHONE: 7147317171 MAIL ADDRESS: STREET 1: 178222 E 17TH STREET SUITE 210 CITY: TUSTIN STATE: CA ZIP: 92680 10-Q 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, 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. 5,963,612 shares of Common Stock, $.01 par value, as of January 30, 1998 PART I. CONSOLIDATED FINANCIAL INFORMATION ------- ---------------------------------- Item 1. Financial Statements ------- -------------------- QUALITY SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, March 31, ASSETS 1997 1997 ----------- -------- (unaudited) Current Assets: Cash and cash equivalents $15,330 $21,852 Short-term investments 982 883 Accounts receivable, net 8,291 6,574 Inventories 1,124 1,071 Other current assets 785 628 ------- ------- Total current assets 26,512 31,008 Equipment and Improvements, net 1,717 1,391 Capitalized Software Costs, net 1,918 1,041 Excess of Cost Over Net Assets Of Acquired Business, net 2,631 2,868 Deferred Tax Asset 1,379 - Other Assets, net 2,116 1,558 ------- ------- Total assets $36,273 $37,866 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,173 $ 1,345 Deferred service revenue 1,853 1,493 Estimated costs to complete system installations 609 565 Other current liabilities 2,769 1,992 ------- ------- Total current liabilities 6,404 5,395 Deferred Tax Liability - 201 ------- ------- Total liabilities 6,404 5,596 ------- ------- Commitments and Contingencies Shareholders' Equity: Common stock, $0.01 par value, 20,000,000 shares authorized, 5,963,612 and 5,997,462 shares issued and outstanding, respectively 60 60 Additional paid-in capital 33,897 34,144 Accumulated deficit (4,088) (1,934) ------- ------- Total shareholders' equity 29,869 32,270 ------- ------- Total liabilities and shareholders' equity $36,273 $37,866 ======= =======
See notes to consolidated financial statements. QUALITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share amounts)
Three Months Ended Nine Months Ended ------------------ ----------------- December 31, December 31, 1997 1996 1997 1996 -------- -------- ------- -------- Net Revenues: Sales of computer systems, upgrades and supplies $ 4,796 $ 2,563 $14,354 $ 7,926 Maintenance and other services 2,741 2,114 7,848 6,080 -------- -------- ------- ------- 7,537 4,677 22,202 14,006 Cost of Products and Services 3,524 2,431 10,101 7,064 -------- -------- ------- ------- Gross Profit 4,013 2,246 12,101 6,942 Selling, General and Administrative Expenses 3,119 2,106 8,973 5,323 Research and Development Costs 698 519 2,249 1,451 Purchased In-Process Research and Development - - 4,720 8,300 -------- -------- ------- ------- Income (Loss) from Operations 196 (379) (3,841) (8,132) Investment and Other Income 278 316 773 984 -------- -------- ------- ------- Income (Loss) before Provision for (Benefit from) Income Taxes 474 (63) (3,068) (7,148) Provision for (Benefit from) Income Taxes 242 17 (914) 547 -------- -------- ------- ------- Net Income (Loss) $ 232 $ (80) $(2,154) $(7,695) ======== ======== ======= ======= Net Income (Loss) per Share, basic and diluted $0.04 $(0.01) $(0.36) $(1.30) ===== ====== ====== ====== Weighted Average Number of Shares Outstanding 6,026 5,979 5,982 5,917 ======= ======= ======= =======
See notes to consolidated financial statements. QUALITY SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended December 31, ----------------------------- 1997 1996 ------------ ------------- [S] [C] [C] Cash Flows from Operating Activities: Net loss $(2,154) $(7,695) 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 1,346 819 Gains on short-term investments (99) (83) Equity in loss of Clinitec International, Inc. - 31 Deferred income taxes (1,384) 142 Changes, net of amounts acquired, in: Accounts receivable (1,520) (1,078) Inventories (53) (435) Other current assets (321) (196) Other assets (145) - Accounts payable (226) (513) Deferred service revenue 199 215 Estimated costs to complete system installations 44 139 Income taxes payable and taxes related to equity accounts (6) 10 Other current liabilities 331 79 ------------ ------------- Net Cash Provided by (Used in) Operating Activities 732 (265) ------------ ------------- Cash Flows from Investing Activities: Proceeds from sales of short-term investments - 402 Purchases of short-term investments - (51) Net additions to equipment and improvements (614) (462) Additions to capitalized software costs (1,361) (545) 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 237 (69) ------------ ------------- Net Cash Used in Investing Activities (6,997) (5,671) ------------ ------------- Cash Flows from Financing Activities: Purchases of Common Stock $ (271) $ - Proceeds from Exercise of Stock Options 14 61 ------------ ------------- Net Cash Provided by (Used in) Financing Activities (257) 61 ------------ ------------- Net Decrease in Cash and Cash Equivalents (6,522) (5,875) Cash and Cash Equivalents, beginning of period 21,852 27,872 ------------ ------------- Cash and Cash Equivalents, end of period $ 15,330 $ 21,997 ============ ============= [/TABLE] Supplemental Information - During the nine months ended December 31, 1997 and 1996, the Company made income tax payments, net of refunds received, of $482 and $430, respectively.
Nine Months Ended December 31, ------------------------------ 1997 1996 ------------- -------------- 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 3,999 Liabilities Assumed (677) (459) Common Stock Issued in the Acquisition - (6,894) ------------- -------------- Cash Paid for the Acquisition, net of cash acquired $ 5,259 $ 4,946 ============= ==============
See notes to consolidated financial statements. 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 December 31, 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 ended June 30, 1997. 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 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 nine months ended December 31, 1997, the Company repurchased 40,100 shares at a cost of $271,000. NOTE 4 - INCOME TAXES - ------ ------------ The provisions for income taxes for the three months ended December 31, 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 nine months ended December 31, 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 nine months ended December 31, 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 - ------ ------------------------------------ As of December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings per Share (EPS), ("SFAS No. 128"). 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 previous primary earnings per share computation. Earnings per share amounts for all periods presented have been restated to conform with the requirements of SFAS No. 128. 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. 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 Company has not yet determined the impact, if any, of adopting this new standard. 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. 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. 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 due to attrition of existing maintenance revenues associated with the Company's existing clients whose systems become obsolete or are replaced by competitors' 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. The Company is currently evaluating the impact of Year 2000 issues upon its software used internally as well as that which is licensed to its customers and, pending the conclusion of its evaluation, the impact of such Year 2000 issues upon the Company and its financial performance is uncertain. 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. 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. 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. 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 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 * NextGen is a registered trademark of Clinitec International, Inc. 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. 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. 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.
Three Months Nine Months Ended Ended December 31, December 31, ---------------- ---------------- 1997 1996 1997 1996 ------ ------ ------ ------ Net Revenues: Sales of computer systems, upgrades and supplies 63.6% 54.8% 64.7% 56.6% Maintenance and other services 36.4 45.2 35.3 43.4 ------ ------ ------ ------ 100.0 100.0 100.0 100.0 Cost of Products and Services 46.8 52.0 45.5 50.4 ------ ------ ------ ------ Gross Profit 53.2 48.0 54.5 49.6 Selling, General and Administrative Expenses 41.4 45.0 40.4 38.0 Research and Development Costs 9.2 11.1 10.1 10.4 Purchased In-Process Research and Development - - 21.3 59.3 ------ ------ ------ ------ Income (Loss) from Operations 2.6 (8.1) (17.3) (58.1) Investment and Other Income 3.7 6.8 3.5 7.1 ------ ------ ------ ------ Income (Loss) before Provision for (Benefit from) Income Taxes 6.3 (1.3) (13.8) (51.0) Provision for (Benefit from) Income Taxes 3.2 0.4 (4.1) 3.9 ------ ------ ------ ------ Net Income (Loss) 3.1% (1.7)% (9.7)% (54.9)% ====== ====== ====== ======
For the Three-Month Periods Ended December 31, 1997 and 1996. The Company's net income for the three months ended December 31, 1997 was $232,000, or $0.04 per share on 6,026,000 weighted average shares outstanding, as compared to a net loss of $(80,000), or $(0.01) per share on 5,979,000 weighted average shares outstanding, for the three months ended December 31, 1996. Net Revenues. Net revenues for the three months ended December 31, 1997 increased 61.2% to $7.5 million from $4.7 million for the three months ended December 31, 1996. Sales of computer systems, upgrades and supplies increased 87.1% to $4.8 million from $2.6 million while net revenues from maintenance and other services grew 29.7% to $2.7 million from $2.1 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 QSI and 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 December 31, 1997 increased 45.0% to $3.5 million from $2.4 million for the three months ended December 31, 1996 while cost of products and services as a percentage of net revenues decreased to 46.8% from 52.0% during the comparable periods. The increase in cost of products and services in amount during the December 31, 1997 quarter as compared to the December 31, 1996 quarter resulted 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 resulted primarily from a combination of the overall increase in net revenues during the December 1997 quarter as compared to the December 1996 quarter and an increase in the dollar amount of systems sales, including sales from recently acquired MicroMed, 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 December 31, 1997 will be achieved in future quarters. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended December 31, 1997 increased 48.1% to $3.1 million from $2.1 million for the three months ended December 31, 1996 primarily as a result of: the inclusion of MicroMed's selling, general and administrative expenses for the December 1997 quarter following the May 1997 acquisition of the MicroMed business and an increase in Clinitec's selling efforts, sales personnel and administrative infrastructure. In addition, primarily as a result of increased sales by QSI and Clinitec offset in part by the effects of the less mature MicroMed infrastructure, selling, general and administrative expenses as a percentage of net revenues decreased to 41.4% from 45.0% for the respective periods. Research and Development Costs. Research and development costs for the three months ended December 31, 1997 increased 34.5% to $698,000 from $519,000 for the three months ended December 31, 1996. The increase was principally the result of the inclusion of MicroMed's research and development costs for the December 1997 quarter following the May 1997 purchase of the MicroMed business and an increase in Clinitec's research and development efforts. Research and development costs as a percentage of net revenues decreased to 9.2% as compared to 11.1% 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 December 1997 quarter. Investment and Other Income. Investment and other income for the three months ended December 31, 1997 decreased 12.0% to $278,000 from $316,000 for the three months ended December 31, 1996 primarily as a result of a decrease in average funds available for investment during the quarter ended December 31, 1997. The decrease in available funds was 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 and MicroMed. Provision for Income Taxes. The provision for income taxes for the three months ended December 31, 1997 was $242,000 as compared to $17,000 for the three months ended December 31, 1996. The provisions for income taxes for the three months ended December 31, 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 Nine-Month Periods Ended December 31, 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 $(2.2) million, or $(0.36) per share on 5,982,000 weighted average shares outstanding, for the nine months ended December 31, 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 $(7.7) million, or $(1.30) per share on 5,917,000 weighted average shares outstanding, for the nine months ended December 31, 1996. Net Revenues. Net revenues for the nine months ended December 31, 1997 increased 58.5% to $22.2 million from $14.0 million for the nine months ended December 31, 1996. Sales of computer systems, upgrades and supplies increased 81.1% to $14.4 million from $7.9 million while net revenues from maintenance and other services grew 29.1% to $7.8 million from $6.1 million during the comparable periods. The increase in net revenues from sales of computer systems, upgrades and supplies was due to a large increase in such revenues for Clinitec together with an increase in such revenues for QSI 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 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 nine months ended December 31, 1997 increased 43.0% to $10.1 million from $7.1 million for the nine months ended December 31, 1996 while cost of products and services as a percentage of net revenues decreased to 45.5% from 50.4% during the comparable periods. The increase in cost of products and services in amount during the December 31, 1997 period as compared to the December 31, 1996 period resulted from a combination of the effects of: the increase in net revenues; increased product development, customer service, support, and training personnel during the December 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 December 31, 1997 as compared to the period ended December 31, 1996 resulted primarily from a combination of the overall increase in net revenues during the December 1997 period as compared to the December 1996 period and a large increase in the dollar amount of systems sales, including revenues from recently acquired MicroMed, 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 December 31, 1997 will be achieved in future periods. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the nine months ended December 31, 1997 increased 68.6% to $9.0 million from $5.3 million for the nine months ended December 31, 1996 primarily as a result of: the consolidation of MicroMed's selling, general and administrative expenses during the portion of the period ended December 31, 1997 following the May 1997 acquisition of the MicroMed business; the inclusion of such Clinitec expenses for the entire nine-month period ended December 31, 1997 as compared to the inclusion of such Clinitec expenses for only that portion of the corresponding period ended December 31, 1996 following the May 1996 Clinitec acquisition; an increase in the December 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 40.4% from 38.0% for the respective periods. Research and Development Costs. Research and development costs for the nine months ended December 31, 1997 increased 55.0% to $2.2 million from $1.5 million for the nine months ended December 31, 1996. The increase was 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 December 31, 1997 following the May 1997 purchase of the MicroMed business. Research and development costs as a percentage of net revenues decreased to 10.1% 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. 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 nine-month period ended December 31, 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 nine-month period ended December 31, 1996. Investment and Other Income. Investment and other income for the nine months ended December 31, 1997 decreased 21.4% to $773,000 from $984,000 for the nine months ended December 31, 1996 primarily as a result of a decrease in average funds available for investment during the period ended December 31, 1997. The decrease in available funds was 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 and MicroMed. Provision for (Benefit from) Income Taxes. The benefit from income taxes for the nine months ended December 31, 1997 was $(914,000) as compared to a provision of $547,000 for the nine months ended December 31, 1996. The benefit from income taxes for the nine months ended December 31, 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 nine months ended December 31, 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 $6.5 million for the nine months ended December 31, 1997 primarily as a result of the purchase of the MicroMed business. Correspondingly, cash and cash equivalents decreased $5.9 million for the nine months ended December 31, 1996 principally as a result of the payment of the cash portion of the purchase price for the remaining 75% ownership interest in Clinitec in May 1996. Net cash provided by operating activities for the nine months ended December 31, 1997 was $732,000 consisting primarily of the Company's $(2.2) 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 December 31, 1997 resulted primarily from increased sales. Net cash used in operating activities for the nine months ended December 31, 1996 was $265,000 consisting primarily of the Company's $(7.7) 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 nine months ended December 31, 1997 was $7.0 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 nine months ended December 31, 1996 was $5.7 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 nine months ended December 31, 1997 was $257,000 consisting of the purchase of 40,100 shares of the Company's Common Stock offset in part by proceeds from the exercise of stock options. Net cash provided by financing activities consisted of $61,000 in proceeds from the exercise of stock options for the nine months ended December 31, 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 nine months ended December 31, 1997, the Company repurchased 40,100 shares at a cost of $271,000. Since the inception of the repurchase program through January 30, 1998, 40,100 shares have been repurchased at a cost of $271,000. At December 31, 1997, the Company had cash and cash equivalents of $15.3 million and short-term investments of $982,000. Short-term investments include a $739,000 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 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 December 31, 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. 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. 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.
Date February 9, 1998 By /s/ Sheldon Razin ----------------- ---------------------------------- Sheldon Razin President and Chairman of the Board of Directors; Principal Executive Officer Date February 9, 1998 By /s/ Robert G. McGraw ----------------- ---------------------------------- Robert G. McGraw Chief Financial Officer; Principal Accounting Officer
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 EXHIBIT 11.0 ------------ Basic and diluted net income per share amounts for the three months ended December 31, 1997 were computed using the weighted average number of shares outstanding during the period of 5,971,000 and 6,026,000, respectively. The net loss per share amounts for the three months ended December 31, 1996 and the nine months ended December 31, 1997 and 1996 were computed using the weighted average number of shares actually outstanding during the periods of 5,979,000, 5,982,000 and 5,917,000, respectively, and any common share equivalents were excluded because their impact would have been anti- dilutive. EX-27 2
5 9-MOS MAR-31-1998 DEC-31-1997 15,330,000 982,000 8,291,000 0 1,124,000 26,512,000 1,717,000 0 36,273,000 6,404,000 0 0 0 60,000 29,809,000 36,273,000 14,354,000 22,202,000 0 10,101,000 15,942,000 0 0 (3,068,000) (914,000) (2,154,000) 0 0 0 (2,154,000) (0.36) (0.36)
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