<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, 1998
________________________
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.
6,213,666 shares of Common Stock, $.01 par value,
as of January 29,1999
<PAGE 2>
PART I. CONSOLIDATED FINANCIAL INFORMATION.
------- -----------------------------------
Item 1. Financial Statements.
- ------- ---------------------
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
ASSETS 1998 1998
------------ ---------
Current Assets: (Unaudited)
Cash and cash equivalents $13,557 $16,107
Short-term investments 291 973
Accounts receivable, net 10,063 9,946
Inventories 875 1,328
Other current assets 1,021 574
-------- --------
Total current assets 25,807 28,928
Equipment and Improvements, net 1,724 1,790
Capitalized Software Costs, net 2,213 2,183
Deferred Tax Asset 3,050 3,105
Excess of Cost Over Net
Assets of Acquired Business, net 2,540 2,793
Other Assets, net 1,940 2,117
-------- --------
Total assets $37,274 $40,916
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,366 $ 1,327
Acquisition obligation - 5,676
Deferred service revenue 3,491 2,244
Estimated costs to complete
system installations 341 592
Other current liabilities 3,070 3,636
-------- --------
Total current liabilities 8,268 13,475
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.01 par value, 20,000
shares authorized, 6,236 and 5,988
shares issued and outstanding, respectively 62 60
Additional paid-in capital 35,665 33,931
Accumulated deficit (6,721) (6,550)
-------- --------
Total shareholders' equity 29,006 27,441
-------- --------
Total liabilities and shareholders' equity $37,274 $40,916
======== ========
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)
Three Months Ended Nine Months Ended
------------------ ------------------
December 31, December 31,
1998 1997 1998 1997
-------- -------- -------- --------
[S] [C] [C] [C] [C]
Net Revenues:
Sales of computer systems,
upgrades and supplies $ 5,000 $ 4,796 $ 13,338 $14,354
Maintenance and other services 3,827 2,741 10,645 7,848
-------- -------- -------- --------
8,827 7,537 23,983 22,202
Cost of Products and Services 4,037 3,524 11,510 10,101
-------- -------- -------- --------
Gross Profit 4,790 4,013 12,473 12,101
Selling, General and
Administrative Expenses 3,390 3,119 10,072 8,973
Research and Development Costs 842 698 2,630 2,249
Purchased In-Process
Research and Development - - - 4,720
-------- -------- -------- --------
Income (Loss) from Operations 558 196 (229) (3,841)
Investment Income 109 278 260 773
-------- -------- -------- --------
Income (Loss) before Provision
for (Benefit from) Income Taxes 667 474 31 (3,068)
Provision for
(Benefit from) Income Taxes 298 242 202 (914)
-------- -------- -------- --------
Net Income (Loss)
and Comprehensive Income (Loss) $ 369 $ 232 $ (171) $(2,154)
======== ======== ======== ========
Net Income (Loss) per Share,
basic & diluted $ 0.06 $ 0.04 $ (0.03) $(0.36)
======== ======== ======== ========
[/TABLE]
See notes to consolidated financial statements.
<PAGE 4>
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended December 31,
------------------------------
1998 1997
------------ ------------
[S] [C] [C]
Cash Flows from Operating Activities:
Net loss $ (171) $(2,154)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Purchased in-process
research and development - 4,720
Depreciation and amortization 1,870 1,346
Loss (Gain) on short-term investments 242 (99)
Deferred income taxes (253) (1,384)
Changes, net of amounts acquired, in:
Accounts receivable (117) (1,520)
Inventories 453 (53)
Other current assets (139) (321)
Other assets (101) (145)
Accounts payable 39 (226)
Deferred service revenue 1,247 199
Estimated costs to complete
system installations (251) 44
Income taxes payable and taxes
related to equity accounts (277) (6)
Other current liabilities (289) 331
------- --------
Net Cash Provided by
Operating Activities 2,253 732
------- -------
Cash Flows from Investing Activities:
Net additions to
equipment and improvements (368) (614)
Additions to capitalized software costs (953) (1,361)
Purchase of net assets of MicroMed
Healthcare Information Systems, Inc. (3,840) (5,259)
Purchases of short-term investments (75) -
Proceeds from sales of
short-term investments 515 -
Change in other assets 18 237
------- -------
Net Cash Used in Investing Activities (4,703) (6,997)
------- -------
See notes to consolidated financial statements.
<PAGE 5>
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
[CAPTION]
Nine Months Ended December 31,
------------------------------
1998 1997
------------ -------------
[S] [C] [C]
Cash Flows from Financing Activities:
Purchases of Common Stock $ (150) $ (271)
Proceeds from
exercise of stock options 50 14
-------- --------
Net Cash Used in
Financing Activities (100) (257)
-------- --------
Net Decrease in Cash and Cash Equivalents (2,550) (6,522)
Cash and Cash Equivalents,
beginning of period 16,107 21,852
-------- --------
Cash and Cash Equivalents, end of period $ 13,557 $ 15,330
======== ========
[/TABLE]
Supplemental Information - During the nine months ended December 31, 1998
and 1997, the Company made income tax payments, net of refunds received, of
$719 and $482, respectively.
Nine Months Ended December 31,
------------------------------
1998 1997
------------ -------------
Detail of businesses acquired in
purchase transactions:
Purchased In-Process
Research and Development $ - $ 4,720
Fair Value of Assets Acquired - 1,216
Liabilities Assumed - (677)
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 $ 5,259
======== ========
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, 1998. 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 may 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. 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
months ended December 31, 1998, the Company repurchased 7,800 shares at a
cost of $34,000. Since the inception of the repurchase authorization
through January 29, 1999, 92,500 shares have been repurchased at a cost of
$518,000.
<PAGE 7>
NOTE 4 - INCOME TAXES
- ------ ------------
The provisions for (benefits from) income taxes for the three and nine
months ended December 31, 1998 and 1997 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 per share for the periods indicated.
Three Months Ended December 31,
-------------------------------
1998 1997
------- -------
(in thousands except
per share amounts)
Net income $ 369 $ 232
------ ------
Basic net income per common share:
Weighted average of
common shares outstanding 6,242 5,971
------ ------
Basic net income per common share $ 0.06 $ 0.04
====== ======
Diluted net income per share:
Weighted average of
common shares outstanding 6,242 5,971
Weighted average of
common shares equivalents--
Weighted average options outstanding 1 55
------ ------
Weighted average number of common
and common equivalent shares 6,243 6,026
------ ------
Diluted net income per common share: $ 0.06 $ 0.04
====== ======
The net loss per share, basic and diluted, for each of the nine months
ended December 31, 1998 and 1997 was computed using the weighted average
number of shares actually outstanding during the periods of 6,162,000 and
5,982,000, respectively, and any common share equivalents were excluded
because their impact would have been anti-dilutive.
<PAGE 8>
NOTE 6 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
- ------ -----------------------------------------
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
("SOP 97-2"), which was later amended in part by SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Revenue Recognition"
("SOP 98-4"). As of April 1, 1998, the Company has adopted SOP 97-2, as
amended by SOP 98-4. SOP 97-2 provides guidance on applying generally
accepted accounting principles in recognizing revenue on software
transactions and supersedes the guidance contained in SOP 91-1 which the
Company has heretofore been following. The Company generates revenues from
licensing rights to use its software products directly to end users. The
Company also generates revenues from sales of hardware and third party
software, and implementation, training, software customization and post-
contract support ("maintenance") services performed for customers who
license the Company's products. A typical system contract contains
multiple elements of two or more of the above items. In accordance with
SOP 97-2, revenue is allocated to each element of the contract based on
evidence of each element's fair market value. Provided the fees are fixed
and determinable and collection is considered probable, revenue from
licensing rights and sales of hardware and third party software are
recognized upon shipment. Revenue from implementation, training and
software customization services is recognized as the corresponding services
are performed. Maintenance revenue is recognized ratably over the
contractural maintenance period. The adoption of SOP 97-2 has, in certain
circumstances, resulted in the deferral of some portion of contract
revenues that would have otherwise been recognized under SOP 91-1. During
the quarter ended December 31, 1998, the impact of adopting SOP 97-2 was to
reduce net revenues by $253,000, decrease income from operations by
$192,000, and decrease net income by $115,000, or $0.02 per share on a
basic and diluted basis. For the nine months ended December 31, 1998, the
impact was to reduce net revenues by $1.0 million, increase the loss from
operations by $745,000, and increase the net loss by $443,000, or $0.07 per
share on a basic and diluted basis.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). This statement establishes
standards for the reporting of comprehensive income and its components.
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. For the three and nine
months ended December 31, 1998 and 1997, there were no differences between
net income (loss), as reported, and comprehensive income (loss).
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 fiscal years beginning after December 15, 1997,
but are not required for interim periods in the initial year of
application.
<PAGE 9>
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"), and community health centers. 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 500 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.
<PAGE 10>
QSI 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 healthcare organizations and further expanded
its information processing systems into the broader medical market. Today,
QSI primarily develops and markets 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**, to its product
line in 1995 and completed its acquisition of Clinitec in May 1996.
NextGen 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 also supports
the scanning and annotation of paper documents, photographs and X-rays, and
contains many other advanced features. NextGen is marketed both in
conjunction with the Company's practice management software offerings as
well as on a stand-alone basis where NextGen may interface with other
practice management systems. With the addition of NextGen, the Company
believes that it currently provides a comprehensive information management
solution for the medical marketplace.
In September 1996, QSI entered into a software licensing and development
agreement to utilize and market a computerized oral health records system
for dental practitioners ("Charting Product"). QSI continues to modify and
expand the product's source code to meet the needs of large dental groups
and has interfaced this charting system with the dental Legacy Product.
The dental charting software incorporates specific clinical information
associated with tooth and perio charting, video image management (including
interfacing with digital X-ray equipment and intra-oral cameras),
periodontal screening and recording ("PSR") examination results and patient
education, and maintains chart notes in both text and audio form. The
system is being 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. In addition, the Charting Product can be integrated
with components from the NextGen electronic medical records system to form
the base for a chartless, paperless dental office environment.
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 ("Windows Product") 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. MicroMed's product 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 95, Windows 98 and Windows NT are registered
trademarks of Microsoft Corporation.
<PAGE 11>
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 12>
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 has recently 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.
<PAGE 13>
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.
ACQUISITIONS.
During the past two fiscal 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
<PAGE 14>
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 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 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 products obsolete.
YEAR 2000 COMPLIANCE.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The
Year 2000 issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. This Year 2000
problem creates risk for the Company from unforeseen problems in its own
computer systems and from third parties with whom the Company deals on
financial transactions nationwide. While the Company is not aware of a
failure by any of its material vendors to remediate their respective Year
2000 problems, if any, there can be no assurance that the computerized
systems of these third parties will be Year 2000 compliant and, therefore,
the failure of such compliance could have a material adverse impact on the
Company's business, results of operations and financial condition.
The Windows Product, NextGen and Charting Product are designed to be Year
2000 compliant. However, there can be no assurance that such products do
not contain undetected errors or defects associated with Year 2000 date
functions. The Company is currently evaluating the impact of Year 2000
issues upon its medical and dental Legacy Product software and, pending the
conclusion of its evaluation, the impact of such Year 2000 issues upon the
Company and its financial performance is uncertain.
The Company has begun to review software used internally by the Company in
all support systems to determine whether they are Year 2000 compliant. The
Company plans to have formal Year 2000 initiatives developed to address any
conversion update or upgrade necessary to become Year 2000 compliant on
software currently used by the Company. Any new software or support
systems implemented in the future will be Year 2000 compliant or will have
updates or upgrades available before the Year 2000 to enable the system to
be Year 2000 compliant. Management is currently assessing the Year 2000
compliance expense and related potential effect on the Company's earnings.
To the extent possible, the Company will be developing and executing
contingency plans designed to allow continued operation in the event of the
failure of the Company's or third parties' computer information systems.
<PAGE 15>
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.
The pending Federal and state securities actions 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 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
<PAGE 16>
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 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 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.
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
<PAGE 17>
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
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 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, 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. The consolidated statements of operations
include the operations of MicroMed from May 15, 1997, the date of
MicroMed's acquisition.
Three Months Nine Months
Ended Ended
December 31, December 31,
---------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
Net Revenues:
Sales of computer systems,
upgrades and supplies 56.6% 63.6% 55.6% 64.7%
Maintenance and other services 43.4 36.4 44.4 35.3
------ ------ ------ ------
100.0 100.0 100.0 100.0
Cost of Products and Services 45.7 46.8 48.0 45.5
------ ------ ------ ------
Gross Profit 54.3 53.2 52.0 54.5
Selling, General and
Administrative Expenses 38.4 41.4 42.0 40.4
Research and Development Costs 9.5 9.2 11.0 10.1
Purchased In-Process
Research and Development - - - 21.3
------ ------ ------ ------
Income (Loss) from Operations 6.4 2.6 (1.0) (17.3)
Investment Income 1.2 3.7 1.1 3.5
------ ------ ------ ------
Income (Loss) before Provision for
(Benefit from) Income Taxes 7.6 6.3 0.1 (13.8)
Provision for
(Benefit from) Income Taxes 3.4 3.2 0.8 (4.1)
------ ------ ------ ------
Net Income (Loss) 4.2% 3.1% (0.7)% (9.7)%
====== ====== ====== ======
<PAGE 19>
For the Three-Month Periods Ended December 31, 1998 and 1997.
- --------------------------------------------------------------
The Company's net income for the three months ended December 31, 1998 was
$369,000, or $0.06 per share on a basic and diluted basis, as compared to
net income of $232,000, or $0.04 per share on a basic and diluted basis,
for the three months ended December 31, 1997.
Net Revenues. Net revenues for the three months ended December 31, 1998
increased 17.1% to $8.8 million from $7.5 million for the three months
ended December 31, 1997. Sales of computer systems, upgrades and supplies
increased 4.3% to $5.0 million from $4.8 million while net revenues from
maintenance and other services grew 39.6% to $3.8 million from $2.7 million
during the comparable periods. The increase in net revenues from sales of
computer systems, upgrades and supplies was negatively affected by the
impact of adopting SOP 97-2 as of April 1, 1998 resulting in the deferral
of certain revenues from system contracts executed and shipped during the
quarter ended December 31, 1998. 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 from which to generate maintenance
and other service revenue than the more recently formed Clinitec and
MicroMed organizations, each of which also contributed, to a lesser degree,
to the increase in such revenues.
Cost of Products and Services. Cost of products and services for the three
months ended December 31, 1998 increased 14.6% to $4.0 million from $3.5
million for the three months ended December 31, 1997 while cost of products
and services as a percentage of net revenues decreased to 45.7% from 46.8%
during the comparable periods. The increase in cost of products and
services in amount during the December 31, 1998 quarter as compared to the
December 31, 1997 quarter results primarily from the effects of increased
sales and increased product development, customer service, support, and
training personnel at both Clinitec and MicroMed during the December 31,
1998 quarter as compared to the December 31, 1997 quarter. The decrease in
the cost of products and services as a percentage of net revenues results
primarily from the impact of increased sales and the costs associated with
the above personnel growing at a proportionately lesser rate on a period to
period basis than the growth in net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 1998
increased 8.7% to $3.4 million as compared to $3.1 million for the three
months ended December 31, 1997. Selling, general and administrative
expenses increased at MicroMed as MicroMed expanded its selling and
administrative infrastructure as compared to the prior year's comparable
quarter. The increase at MicroMed was offset by reductions in selling,
general and administrative expenses at QSI. Selling, general and
administrative expenses as a percentage of net revenues decreased to 38.4%
from 41.4% as a result of the increase in net revenues between the
comparable quarters.
<PAGE 20>
Research and Development Costs. Research and development costs for the
three months ended December 31, 1998 increased 20.6% to $842,000 from
$698,000 for the three months ended December 31, 1997. The increase is
principally the result of an increase in MicroMed's research and
development efforts. Research and development costs as a percentage of net
revenues increased to 9.5% as compared to 9.2% for the respective periods
primarily as a result of the effect of costs associated with the increased
research and development efforts growing at a proportionally greater rate
than net revenues during the comparable quarters.
Investment Income. Investment income for the three months ended December
31, 1998 decreased 60.8% to $109,000 as compared to investment income of
$278,000 for the three months ended December 31, 1997. The Company has an
investment in a fund which trades in special situation securities. The
Company's investment is included in short-term investments and the Company
classifies this investment as trading securities. In accordance with
generally accepted accounting principles, realized and unrealized gains and
losses on trading securities are recorded in the statement of operations.
During the quarter ended December 31, 1998 as a result of market
conditions, the Company recognized a loss of $39,000 in connection with
this investment. The investment was substantially liquidated during the
quarter and the carrying value of the remaining investment is $26,000 at
December 31, 1998. Also contributing to the change in investment income
for the December 1998 quarter as compared to the December 1997 quarter was
a decrease in average funds available for investment during the quarter
ended December 31, 1998 as compared to the quarter ended December 31, 1997.
The decrease in available funds is primarily the result of the final
payment made to acquire the MicroMed business in June 1998 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, 1998 was $298,000 as compared to $242,000 for the
three months ended December 31, 1997. The provisions for income taxes for
the three months ended December 31, 1998 and 1997 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.
For the Nine-Month Periods Ended December 31, 1998 and 1997.
- ------------------------------------------------------------
For the nine months ended December 31, 1998, the Company incurred a net
loss of $(171,000), or $(0.03) per share on a basic and diluted basis. In
comparison, after recognizing a $4.7 million charge for purchased in-
process research and development in connection with the MicroMed
acquisition, the Company incurred a net loss of $(2.2) million, or $(0.36)
per share on a basic and diluted basis, for the nine months ended December
31, 1997. Excluding the charge, net of the related income tax benefit, net
income for the nine months ended December 31, 1997 would have been
$837,000, or $0.14 per share on a basic and diluted basis.
<PAGE 21>
Net Revenues. Net revenues for the nine months ended December 31, 1998
increased 8.0% to $24.0 million from $22.2 million for the nine months
ended December 31, 1997. Sales of computer systems, upgrades and supplies
decreased 7.1% to $13.3 million from $14.4 million while net revenues from
maintenance and other services grew 35.6% to $10.6 million from $7.8
million during the comparable periods. The decrease in net revenues from
sales of computer systems, upgrades and supplies was principally due to the
impact of adopting SOP 97-2 as of April 1, 1998 resulting in the deferral
of certain revenues from system contracts executed and shipped during the
nine months ended December 31, 1998 combined with the effect of an overall
decrease in new system sales during the period. 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 from which
to generate maintenance and other service revenue than the more recently
formed Clinitec and MicroMed organizations, each of which also contributed,
to a lesser degree, to the increase in such revenues.
Cost of Products and Services. Cost of products and services for the nine
months ended December 31, 1998 increased 13.9% to $11.5 million from $10.1
million for the nine months ended December 31, 1997 while cost of products
and services as a percentage of net revenues increased to 48.0% from 45.5%
during the comparable periods. The increase in cost of products and
services in amount during the December 31, 1998 period as compared to the
December 31, 1997 period results from a combination of the effects of: the
increase in maintenance and other service revenues; increased product
development, customer service, support, and training personnel at both
Clinitec and MicroMed during the December 31, 1998 period; a change in the
mix of new systems sales toward systems with higher hardware content in the
1998 period; and, the impact of the acquisition of MicroMed. The increase
in the cost of products and services as a percentage of net revenues for
the period ended December 31, 1998 as compared to the period ended December
31, 1997 results primarily from a combination of the overall increase in
the costs associated with the above personnel growing at a proportionately
greater rate on a period to period basis than the growth in net revenues
together with an increase in the percentage of revenues from new systems
sales with higher hardware content. Systems sales with significant
hardware components generally yield lower margins than those systems sales
without significant hardware components. The mixture of sales with and
without significant hardware components fluctuates from period to period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended December 31, 1998
increased 12.2% to $10.1 million from $9.0 million for the nine months
ended December 31, 1997 primarily as a result of: the inclusion of such
MicroMed expenses for the entire nine-month period ended December 31, 1998
as compared to the inclusion of such MicroMed expenses for only that
portion of the corresponding period ended December 31, 1997 following the
May 1997 MicroMed acquisition; an additional $236,000 provision for
<PAGE 22>
doubtful accounts relating to one of MicroMed's customers; an increase in
Clinitec's and MicroMed's selling efforts, sales personnel and
administrative infrastructure offset in part by a decrease in such
infrastructure at QSI. In addition, primarily as a result of the less
mature Clinitec and MicroMed infrastructures, selling, general and
administrative expenses as a percentage of net revenues increased to 42.0%
from 40.4% for the respective periods.
Research and Development Costs. Research and development costs for the
nine months ended December 31, 1998 increased 16.9% to $2.6 million from
$2.2 million for the nine months ended December 31, 1997. The increase is
the result of increased year-to-date research and development efforts by
Clinitec and MicroMed as well as consolidation of MicroMed's research and
development costs for the entire 1998 period as compared to consolidating
such expenses only for that portion of the corresponding 1997 period
following the May 1997 purchase of the MicroMed business. Research and
development costs as a percentage of net revenues increased to 11.0% as
compared to 10.1% for the respective periods as a result of the effect of
costs associated with the increased research and development efforts
growing at a proportionately greater rate than net revenues during the
comparable periods.
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 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. There was no similar acquisition
transaction during the nine-month period ended December 31, 1998.
Investment Income. Investment income for the nine months ended December
31, 1998 decreased 66.4% to $260,000 from $773,000 for the nine months
ended December 31, 1997. The Company has an investment in a fund which
trades in special situation securities. The Company's investment is
included in short-term investments and the Company classifies this
investment as trading securities. In accordance with generally accepted
accounting principles, realized and unrealized gains and losses on trading
securities are recorded in the statement of operations. During the nine
months ended December 31, 1998 as a result of market conditions, the
Company recognized a loss of $242,000 in connection with this investment.
The investment was substantially liquidated in December 1998 and the
carrying value of the remaining investment is $26,000 at December 31, 1998.
Also contributing to the change in investment income for the December 1998
period as compared to the December 1997 period was a
<PAGE 23>
decrease in average funds available for investment during the period ended
December 31, 1998. The decrease in available funds is primarily the result
of the timing and amounts of the cash payments in May 1997 and June 1998
made to acquire MicroMed, together with amounts used to fund the growth of
Clinitec and MicroMed.
Provision for (Benefit from) Income Taxes. The provision for income taxes
for the nine months ended December 31, 1998 was $202,000 as compared to a
benefit of $914,000 for the nine months ended December 31, 1997. The
provision for and benefit from income taxes for the nine months ended
December 31, 1998 and 1997, respectively, differ from the combined
statutory rates 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.
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
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. Correspondingly,
cash and cash equivalents decreased $6.5 million for the nine months ended
December 31, 1997 principally as a result of the payment of the initial
cash portion of the purchase price for the MicroMed business.
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. 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 net of the related
deferred tax benefit, offset by an increase in accounts receivable.
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
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, used for
the initial payment in connection with the MicroMed acquisition, plus
additions to equipment and improvements and capitalized software.
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. Net cash used in financing activities for the nine months
ended December 31, 1997 was $257,000 consisting of the purchase of 40,100
<PAGE 24>
shares of the Company's Common Stock offset in part by the 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.
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, 1998, the Company repurchased 30,000 shares at a
cost of $150,000. Since the inception of the repurchase authorization
through January 29, 1999, 92,500 shares have been repurchased at a cost of
$518,000.
At December 31, 1998, the Company had cash and cash equivalents of $13.6
million and short-term investments of $291,000. Short-term investments
include a $26,000 investment (with a historical cost of $25,000) 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 cash payments made
in May 1997 and June 1998 totaling $8.6 million, 245,454 shares of the
Company's Common Stock issued in June 1998 valued at $1.8 million, or $7.48
per share, and the related acquisition costs and loans made to MicroMed
prior to the acquisition, net of cash acquired, totaling $527,000. The
shares of Common Stock issued in connection with the MicroMed acquisition
may not be sold or otherwise transferred in any manner until June 1999.
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 1999 will be comparable to fiscal 1998.
The Company believes that its cash and cash equivalents and short-term
investments on hand at December 31, 1998, 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 25>
YEAR 2000 COMPLIANCE.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium ("Year 2000") approaches. The
Year 2000 issue is whether computer systems will properly recognize date
sensitive information when the year changes to 2000. This Year 2000
problem creates risk for the Company from unforeseen problems in its own
computer systems and from third parties with whom the Company deals on
financial transactions nationwide. While the Company is not aware of a
failure by any of its material vendors to remediate their respective Year
2000 problems, if any, there can be no assurance that the computerized
systems of these third parties will be Year 2000 compliant and, therefore,
the failure of such compliance could have a material adverse impact on the
Company's business, results of operations and financial condition.
The Windows Product, NextGen and Charting Product are designed to be Year
2000 compliant. However, there can be no assurance that such products do
not contain undetected errors or defects associated with Year 2000 date
functions. The Company is currently evaluating the impact of Year 2000
issues upon its medical and dental Legacy Product software and, pending the
conclusion of its evaluation, the impact of such Year 2000 issues upon the
Company and its financial performance is uncertain.
The Company has begun to review software used internally by the Company in
all support systems to determine whether they are Year 2000 compliant. The
Company plans to have formal Year 2000 initiatives developed to address any
conversion update or upgrade necessary to become Year 2000 compliant on
software currently used by the Company. Any new software or support
systems implemented in the future will be Year 2000 compliant or will have
updates or upgrades available before the Year 2000 to enable the system to
be Year 2000 compliant. Management is currently assessing the Year 2000
compliance expense and related potential effect on the Company's earnings.
To the extent possible, the Company will be developing and executing
contingency plans designed to allow continued operation in the event of the
failure of the Company's or third parties' computer information systems.
<PAGE 26>
PART II. OTHER INFORMATION.
-------- ------------------
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(b) Exhibits:
---------
The Exhibits listed on the accompanying Index to Exhibits
on page 27 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.
Date: February 9, 1999 By /s/ Sheldon Razin
----------------------------------
Sheldon Razin
President and Chairman
of the Board of Directors;
Principal Executive Officer
Date: February 9, 1999 By /s/ Robert G. McGraw
----------------------------------
Robert G. McGraw
Chief Financial Officer;
Principal Accounting Officer
<PAGE 28>
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
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27.0 Financial Data Schedule, is filed herewith. 28