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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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.)
18191 Von Karman Avenue, Irvine California 92612
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 255-2600
Indicate by check mark whether the Registrant (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 twelve 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 ninety days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date: 6,133,302 shares of Common
Stock, $.01 par value, as of November 7, 2002
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PART I - CONSOLIDATED FINANICAL INFORMATION
Item 1. Financial Statements
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands) September 30, March 31,
2002 2002
(unaudited)
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $29,796 $25,443
Short-term investments -- 255
Accounts receivable, net 13,878 13,695
Inventories, net 891 1,118
Deferred tax assets 1,368 1,368
Other current assets 1,239 1,013
------- -------
Total current assets 47,172 42,892
Equipment and improvements, net 1,844 1,578
Capitalized software costs, net 2,179 2,103
Deferred tax assets 2,778 2,778
Goodwill, net 1,840 1,840
Other assets 796 952
------- -------
Total assets $56,609 $52,143
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,327 $ 2,657
Deferred service revenue 8,326 6,155
Other current liabilities 3,390 3,281
------- -------
Total liabilities 13,043 12,093
------- -------
Commitments and contingencies -- --
Shareholders' equity:
Common stock, $0.01 par value, 20,000 shares authorized,
6,130 and 6,105 shares issued and outstanding, respectively 61 61
Additional paid-in capital 34,853 34,674
Retained Earnings 8,652 5,315
------- -------
Total shareholders' equity 43,566 40,050
------- -------
Total liabilities and shareholders' equity $56,609 $52,143
------- -------
See notes to consolidated financial statements.
1
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Net Revenues:
Sales of computer systems, upgrades and supplies $ 6,814 $ 5,110 $13,239 $10,704
Maintenance and other services 6,180 5,387 12,062 10,702
------- ------- ------- -------
12,994 10,497 25,301 21,406
Cost of Products and Services 5,660 4,547 10,580 9,281
------- ------- ------- -------
Gross Profit 7,334 5,950 14,721 12,125
Selling, General and Administrative Expenses 3,442 3,294 7,115 6,539
Research and Development Costs 1,213 1,000 2,348 2,107
------- ------- ------- -------
Income from Operations 2,679 1,656 5,258 3,479
Investment Income 123 190 227 396
------- ------- ------- -------
Income before Provision for Income Taxes 2,802 1,846 5,485 3,875
Provision for Income Taxes 1,092 714 2,148 1,485
------- ------- ------- -------
Net Income $ 1,710 $ 1,132 $ 3,337 $ 2,390
======= ======= ======= =======
Net Income per Share, basic $ 0.28 $ 0.19 $ 0.55 $ 0.40
======= ======= ======= =======
Net Income per Share, diluted $ 0.27 $ 0.18 $ 0.53 $ 0.39
------- ------- ------- -------
See notes to consolidated financial statements.
2
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended September 30,
2002 2001
-------- --------
Cash Flows from Operating Activities:
Net Income $ 3,337 $ 2,390
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,061 1,039
Changes in:
Accounts receivable (183) (616)
Inventories 227 104
Other current assets (206) (208)
Other assets 141 (118)
Accounts payable (1,330) (131)
Deferred service revenue 2,171 532
Other current liabilities 10 346
-------- --------
Net Cash Provided By Operating Activities 5,228 3,338
-------- --------
Cash Flows From Investing
Activities:
Proceeds from the sale of short term investments 235
Net additions to equipment and improvements (709) (147)
Additions to capitalized software costs (679) (689)
-------- --------
Net Cash Used In Investing Activities (1,153) (836)
-------- --------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options 278 204
-------- --------
Net Cash Provided by Financing Activities 278 204
-------- --------
Net Increase in Cash and Cash Equivalents 4,353 2,706
Cash and Cash Equivalents, beginning of period 25,443 18,471
-------- --------
Cash and Cash Equivalents, end of period $ 29,796 $ 21,177
-------- --------
Supplemental Information - During the six months ended September 30, 2002 and
2001, the Company made income tax payments, net of refunds received, of
$2,503,000 and $1,444,000, respectively.
See notes to consolidated financial statements.
3
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited consolidated financial statements as of September 30,
2002 and the three and six month periods ended September 30, 2002 and 2001, 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. These financial statements should be read in conjunction with the
audited financial statements presented in the Company's Annual Report on form
10-K for the fiscal year ended March 31, 2002. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments which are
necessary for a fair presentation of the results of operations and cash flows
for the 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 prior period amounts in the accompanying consolidated
financial statements have been reclassified to conform with the September 30,
2002 presentation.
2. Intangible Assets
The Company adopted Financial Accounting Standards Board No. 142 "Goodwill and
Other Intangible Assets" ("FASB 142") effective April 1, 2001. In accordance
with FASB 142, the Company does not amortize goodwill. The balance of goodwill
is related to the Company's NextGen Healthcare Information Systems (NextGen)
Division. In accordance with FASB 142, the Company has compared the fair value
of the NextGen Division with the carrying amount of assets associated with the
Division and determined that none of the goodwill recorded as of June 30, 2002
was impaired. The fair value of the NextGen Division was determined using an
estimate of future cash flows of the Division and a risk adjusted discount rate
to compute a net present value of future cash flows.
As of September 30, 2002, the Company had the following amounts related to
intangible assets:
(In thousands) Gross Carrying Accumulated Net Intangible
Amount Amortization Assets
-------------- ----------- --------------
Capitalized software development (3 yrs) $ 7,342 $(5,163) $ 2,179
Aggregate amortization expense six months ended September 30, 2002 $ 619
The unamortized balance of capitalized software development costs is
estimated to be amortized as follows:
Estimated Amortization Expense
For the year ended March 31, (in thousands)
---------------------------- ------------------------------
2003 $ 619
2004 $ 922
2005 $ 548
2006 $ 90
3. Stock Repurchase Plan
In October 2001, the Company's Board of Directors authorized the repurchase on
the open market of up to 5% of the shares of the Company's outstanding Common
stock, subject to compliance with applicable laws and regulations. There is no
requirement that the Company repurchase such shares. This stock repurchase
authorization expires on the date of the fiscal 2003 Annual Shareholders
Meeting, currently
4
scheduled for August 29, 2003. During the three months ended September 30, 2002,
the Company did not repurchase any of its shares. Since the October 2001
authorization through September 30, 2002, no shares were repurchased.
4. Income Taxes
The provision for income taxes for the three and six month periods ended
September 30, 2002 and 2001 differs from the expected combined statutory rates
primarily due to the estimated impact of the effect of varying state income tax
rates.
5. Net Income Per Share
The following table reconciles the weighted average shares outstanding for basic
and diluted net income per share for the periods indicated.
(in thousands except per share amounts) Three Months Ended Six Months Ended
September 30, September 30,
------------------ -------------------
2002 2001 2002 2001
------ ------ ------ ------
Net income $1,710 $1,132 $3,337 $2,390
Basic net income per common share:
Weighted average of common shares outstanding 6,122 5,997 6,114 5,997
------ ------ ------ ------
Basic net income per common share $ 0.28 $ 0.19 $ 0.55 $ 0.40
====== ====== ====== ======
Diluted net income per share:
Weighted average of common shares outstanding 6,122 5,997 6,114 5,997
Effect of potentially dilutive securities (options) 229 207 233 192
------ ------ ------ ------
Weighted average number of common and
shares - Diluted 6,351 6,204 6,347 6,189
------ ------ ------ ------
Diluted net income per common share $ 0.27 $ 0.18 $ 0.53 $ 0.39
====== ====== ====== ======
6. Operating Segment Information
The Company has prepared operating segment information in accordance with
Statement of Accounting Standards ("SFAS") No. 131 "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS No. 131") to report components
that are evaluated regularly by the Company's chief operating decision maker, or
decision making group in deciding how to allocate resources and in assessing
performance.
The Company's reportable operating segments include its NextGen Healthcare
Information Systems Division and the QSI Division. The company's NextGen
Healthcare Information Systems division sells proprietary electronic medical
records software and practice management systems under the NextGen(R)(1) product
name. The QSI division develops and markets dental and medical practice
management software suites utlitizing a UNIX(2) operating system. Both divisions
also market electronic connectivity services to their respective client basis.
The disaggregated financial results of the segments reflect allocation of
certain functional expense categories consistent with the basis and manner in
which Company management internally disaggregates financial information for the
purpose of assisting in making internal operating decisions. Certain corporate
overhead costs are not allocated to the individual segments by Management. The
Company evaluates performance based on stand-alone segment operating income.
Because the Company does not
- ----------
(1) NextGen is a registered trademark of NextGen Healthcare Information
Systems, Inc.
(2) UNIX is a registered trademark of AT&T Corporation.
5
evaluate performance based on return of assets at the operating segment level,
assets are not tracked internally by segment. Therefore, segment asset
information is not presented.
Operating segment data for the three and six month periods ended September
30, 2002 and 2001 is as follows:
(in thousands) NextGen
Healthcare
Information Unallocated
Systems Corporate
QSI Division Division Expenses Consolidated
------------ ------------ ------------ ------------
Six Months Ended
September 30, 2002
Revenue $ 8,632 $16,669 $25,301
Operating income (loss) $ 2,302 $ 4,211 $(1,255) $ 5,258
Six Months Ended
September 30, 2001
Revenue $ 8,545 $12,861 -- $21,406
Operating Income (Loss) $ 2,489 $ 1,926 $ (936) $ 3,479
Three Months Ended
September 30, 2002
Revenue $ 4,403 $ 8,591 -- $12,994
Operating Income (Loss) $ 1,136 $ 2,138 $ (595) $ 2,679
Three Months Ended
September 30, 2001
Revenue $ 4,220 $ 6,277 -- $10,497
Operating Income (Loss) $ 1,312 $ 877 $ (533) $ 1,656
7. Composition of Accounts Receivable
Included in accounts receivable are amounts related to maintenance and services
which were billed but not yet rendered as of the end of the period. Undelivered
maintenance and services are included on the consolidated balance sheet as part
of the deferred revenue balance.
(in thousands)
September 30, March 30,
2002 2002
(unaudited)
------------- ---------
ACCOUNTS RECEIVABLE:
Accounts receivable, net of reserve for bad debts,
excluding undelivered maintenance and services $ 9,883 $10,403
Undelivered maintenance and services billed in advance,
included in deferred revenue 3,995 3,292
------- -------
Net accounts receivable $13,878 $13,695
======= =======
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, 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
6
continue to develop new products and increase systems sales in markets
characterized by rapid technological evolution, consolidation within the
Company's target marketplace and among the Company's competitors, 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. 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., through its NextGen Healthcare Information Systems,
Inc. (NextGen(3)) and QSI (QSI) divisions (collectively, the "Company"),
develops and markets healthcare information systems that automate medical and
dental group practices, physician hospital organizations ("PHOs"), management
service organizations ("MSOs"), ambulatory care centers, community health
centers, and medical and dental schools. In response to the growing need for
more comprehensive, cost-effective information solutions for medical and dental
practices, the Company's systems allow clients the opportunity to redesign
office workflow processes, improve productivity, reduce information processing
and administrative costs, and utilize electronic medical records to store and
access patient information. The Company's proprietary software systems cover a
number of important practice elements including, but not limited to, general
patient information, electronic patient records, appointment scheduling,
billing, insurance claims submission and processing, eligibility verification,
managed care plan implementation, referral management, treatment outcome
studies, treatment planning, drug formularies, dental charting, and letter
generation. Several of the Company's software systems may be operated remotely
using thin client connectivity or a standard web browser. In addition to
providing fully integrated software solutions to its clients, the Company offers
comprehensive hardware and software installation services, maintenance and
support services, and system training services.
The Company currently has a base of approximately 800 clients, with each
client generally including between one and 500 physicians or dentists. The
Company believes that as healthcare providers are increasingly required to
reduce costs and maintain the quality of healthcare, the Company will be able to
capitalize on its strategy of providing fully integrated information systems and
superior client service.
The Company, a California corporation formed in 1974, was founded with an
early focus on providing information systems and services for dental group
practices. In the mid-1980's, the Company capitalized on the increasing focus on
medical cost containment and further expanded its information processing systems
to serve the medical market. Today, the Company has dedicated products serving
both the medical and dental markets.
The Company's QSI Division develops and markets dental practice management
and medical practice management software suites utilizing a UNIX(4) operating
system. Its Clinical Product Suite ("CPS") utilizes a Windows NT(5) operating
system and can be fully integrated with the Company's dental practice management
applications. CPS incorporates a wide range of clinical tools including, but not
limited to, periodontal charting and digital imaging of X-ray and inter-oral
camera images as part of an electronic patient record. In addition, the QSI
Division develops and markets the Company's QUIC product suite which
incorporates a variety of products that enhance the connectivity between
provider and payor, and provider and patient. The QSINet Application Service
Provider ("ASP")/Internet product offering is also developed and marketed in
this Division. QSINet enables providers to extend patient appointment
scheduling, electronic bill payment, and other functions to patients via the
Internet.
- ----------
(3) The Company's NextGen Division, formerly known as "MicroMed Healthcare
Information Systems" or "MicroMed Division", changed its name in fiscal 2002.
(4) UNIX is a registered trademark of AT&T Corporation.
(5) Microsoft Windows, Windows NT, Windows 95, Windows 98, and Windows 2000 are
registered trademarks of Microsoft Corporation.
7
The Company's NextGen Healthcare Information Systems, Inc. Division
develops and sells proprietary electronic medical records software and practice
management systems under the NextGen(R)(6) product name. Major product
categories of the NextGen suite include Electronic Medical Records
(NextGen(emr)), Enterprise Practice Management (NextGen(epm)), Enterprise
Appointment Scheduling (NextGen(eas)), Enterprise Master Patient Index
(NextGen(epi)), Managed Care, Electronic Data Interchange, System Interfaces,
Internet Operability (NextGen(web)), a patient-centric and provider-centric Web
portal solution (NextMD.com(7)), and a handheld product (NextGen(pda)). The
Company's enterprise practice management and electronic medical records software
packages can run via private intranet or via the Internet in an ASP environment.
Enhancements to these products continued during the quarter.
Risk Factors
Competition. The markets for healthcare information systems are intensely
competitive, and the Company faces significant competition from a number of
different sources. 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 Company competes in all of its markets with other major healthcare
related companies, information management companies, systems integrators, and
other software developers. 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. Also, there can be no
assurance that the Company's applications will achieve broad market acceptance
or will successfully compete with other competing software products.
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, the Company's
maintenance revenues can be expected to decrease over time due to the combined
effects of potential attrition of existing clients and a shortfall in new client
additions.
Fluctuation in Quarterly Operating Results. The Company's revenues and
operating results have fluctuated in the past, and may fluctuate in the future
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 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
governmental and 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. Further, 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 or deferral of even one such sale can have a
significant adverse impact on the Company's quarterly profitability.
- ----------
(6) NextGen is a registered trademark of NextGen Healthcare Information Systems,
Inc.
(7) NextMD.com is a trademark of NextGen Healthcare Information Systems, Inc.
8
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 sales are dependent upon a client's initial decision to
replace, or substantially modify its existing information system, and
subsequently a decision as to which products and services to purchase. These are
major decisions for healthcare providers, and accordingly, the sales cycle for
the Company's systems can vary significantly and typically ranges from three to
twelve months from initial contact to contract execution/shipment.
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.
The Company recognizes revenue pursuant to Statement of Position ("SOP")
No. 97-2, "Software Revenue Recognition" ("SOP 97-2"). Additionally, in December
1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101
became effective for the Company in the third quarter of fiscal 2001.
There can be no assurance that the application and subsequent
interpretation of these pronouncements 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 SAB
101, or that such changes, if adopted, would not result in delays or
cancellations of potential sales of the Company's products.
Due to all of the foregoing factors, it is possible that in some future
quarter(s) 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.
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 percentage 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 products, or that new 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
9
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 may be materially adversely affected.
In response to increasing market demand, the Company is currently
developing new generations of certain of its software products. There can be no
assurance that the Company will successfully develop these new software products
or that these products will operate successfully, or that any such development,
even if successful, will be completed concurrently with or prior to introduction
of competing products. Any such failure or delay could adversely affect the
Company's competitive position and/or could make the Company's current products
obsolete.
Litigation. The Company faces one private Federal securities litigation
action (see "Part II - Other Information, Item 1. Legal Proceedings."). 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 this action.
However, the uncertainty associated with substantial unresolved litigation may
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 may 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 acquirers from bidding for the Company or reducing the consideration
such acquirers would otherwise be willing to pay in connection with an
acquisition.
There can be no assurance that such litigation will not result in
liability in excess of the Company's 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.
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 the Company believes that existing copyright laws offer only
limited practical protection.
There can be no assurance that the legal protections and precautions taken
by the Company will be adequate to prevent misappropriation of the Company's
technology or that competitors will not independently develop technologies
equivalent or superior to the Company's. Further, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an extent
as do the laws of the United States and are often not enforced as vigorously as
those in the United States.
The Company does not believe that its operations or products infringe on
the intellectual property rights of others. However, there can be no assurance
that others will not assert infringement or trade secret claims against the
Company with respect to its current or future products or that any such
assertion will not require the Company to enter into a license agreement or
royalty arrangement with the party asserting the claim. As competing healthcare
information systems increase in complexity and overall capabilities and the
functionality of these systems further overlaps, providers of such systems may
become increasingly subject to infringement claims. Responding to and defending
any such claims may distract the attention of Company management and have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, claims may be brought against third parties
from which the Company purchases software, and such claims could adversely
affect the Company's ability to access third party software for its systems.
Ability to Manage Growth. The Company has in the past experienced periods
of growth which have placed, and may continue to place, a significant strain on
the Company's non-cash resources. The Company also anticipates expanding its
overall software development, marketing, sales, support, and
10
customer service 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 retaining its employees is particularly significant. The Company
is also dependent on its ability to attract high quality personnel, particularly
in the areas of sales and applications development.
The industry in which the Company operates 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.
The loss of the 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. In addition, a court or government agency may take the
position that the Company's delivery of health information directly, including
through licensed practitioners, or delivery of information by a third party site
that a consumer accesses through the Company's web sites, exposes the Company to
malpractice or other personal injury liability for wrongful delivery of
healthcare services or erroneous health information. The Company maintains
insurance to protect against claims associated with the use of its products and
services, but there can be no assurance that its insurance coverage would
adequately cover any claim asserted against the Company. A successful claim
brought against the Company in excess of its insurance coverage could have a
material adverse effect on the Company's business, results of operations and
financial condition. Even unsuccessful claims could result in the Company's
expenditure of funds in litigation and management time and resources.
There can be no assurance that the Company will not be subject to product
liability claims, that such claims will not result in liability in excess of its
insurance coverage, that the Company's insurance will cover such claims or that
appropriate insurance will continue to be available to the Company in the future
at commercially reasonable rates. Such claims could have a material adverse
affect on the Company's business, results of operations and financial condition.
Uncertainty in Healthcare Industry; Government Regulation. The healthcare
industry is subject to changing political, economic and regulatory influences,
which have been increasing over the past several years. This increase has the
potential to heighten governmental involvement in healthcare, lower
reimbursement rates and otherwise change the operating environment for the
Company's clients.
Healthcare providers may react to current proposals as well as the
uncertainty surrounding future proposals by curtailing or deferring investments,
including investments in the kinds of systems and services offered by the
Company. Additionally, cost-containment measures instituted by healthcare
providers and payors as a result of regulatory reform or otherwise could result
in a reduction in the availability of capital funds, and such a reduction could
have an adverse effect on the Company's ability to sell its systems and related
services. Conversely, changes in the regulatory environment can serve to
increase the needs of healthcare organizations for cost-effective data
management and thereby enhance the overall market for healthcare management
information systems. The Company cannot predict what
11
impact, if any, such proposals or healthcare reforms might have on the Company's
business, financial condition and results of operations.
Numerous federal and state laws and regulations, the common law, and
certain contractual obligations govern collection, dissemination, use and
confidentiality of protected health information (which includes individually
identifiable health information) , including but not limited to:
o State privacy and confidentiality laws;
o The Company's contracts with customers and partners;
o State laws regulating healthcare professionals;
o Medicaid laws; and
o Requirements of the Health Insurance Portability and Accountability
Act (HIPAA) of 1996 (note: while a number of HIPAA elements have
been finalized, significant portions of the legislation remain to be
finalized, and there exists no definitive timeline as to when these
pending items will be resolved)
Any failure by the Company or by its personnel or partners to comply with
applicable elements of these or other requirements may result in a material
liability to the Company.
Although the Company has systems in place for safeguarding applicable
patient health information from unauthorized disclosure which the company
believes are adequate , these systems may not preclude claims against the
Company for violation of applicable law or other requirements. Other third party
sites or links that consumers access through the Company's web sites also may
not maintain systems to safeguard this protected health information, or may
circumvent systems the Company put in place to protect the protected health
information from disclosure. In addition, future laws or changes in current laws
may necessitate costly adaptations to the Company's systems.
HIPAA mandates the satisfaction of national standards when electronically
transmitting certain patient healthcare information, and prescribes
administrative, operational, and security measures to protect the
confidentiality of patient's protected health information. These proposed and
finalized regulations establish new federal standards for the security and
privacy of health information. The Company anticipates that these regulations
may directly affect the Company's products and services, but the Company cannot
fully predict the impact at this time. While HIPAA compliance requires the
client to implement technological and non-technological solutions, the Company's
intention is to assist in providing tools and technologies that facilitate
client compliance with the final regulations, but there can be no assurance that
the Company will be able to do so in a timely manner., achieving compliance with
applicable regulations could be costly and distract management's attention and
other resources from the Company's historical business, and any noncompliance by
the Company could result in civil and criminal penalties. In addition,
development of related Federal and state regulations and policies on
confidentiality of health information could negatively affect the Company's
business.
In addition, the Company's software may be subject to regulation by the
U.S. Food and Drug Administration (the "FDA") as a medical device. Such
regulation could require the registration of the applicable manufacturing
facility and software and hardware products, application of detailed
record-keeping and manufacturing standards, and FDA approval or clearance prior
to marketing. An approval or clearance requirement 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, financial condition and results of operations.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operations is based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported
12
amounts of assets, liabilities, revenues and expenses, and related disclosures
of contingent assets and liabilities. On an on-going basis, management evaluates
estimates, including those related to revenue recognition, uncollectible
accounts receivables, and intangible assets for, reasonableness. Management
bases its estimates on historical experience and on various other assumptions
that management believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
The Company believes revenue recognition, the allowance for doubtful
accounts, and goodwill impairment are among the most critical accounting
policies that impact its consolidated financial statements.
Revenue Recognition. The Company's revenues are primarily generated from
the sale of software licenses, maintenance fees, and electronic data interchange
services. Revenue recognition is governed by Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"). Per SOP 97-2, if the arrangement
does not require significant production, modification, or customization of
software, revenue should be recognized when all of the following criteria are
met:
o persuasive evidence of an arrangement exists;
o delivery has occurred;
o the vendor's fee is fixed or determinable; and
o collectibility is probable.
In accordance with generally accepted accounting principles in the United
States of America, the recognition of software license revenues is based on
management's assessment that the above criteria have been met. In general, the
first two criteria are met with a signed contract and evidence that the Company
has shipped its software to the customer. In those cases where undelivered
elements of a system sale exists, the Company defers revenue related to the
undelivered element based on vendor specific objective evidence of each
element's fair value. The Company bases each element's fair value on its price
list which is used in pricing all contracts. Discounts for individual elements
are aggregated, and the total discount is allocated back to the individual
elements in its proportion of fair value to the total contract fair value. The
Company determines that the fee is fixed or determinable based on the contract
terms, which specify payment terms tied to dates and not to any future
deliverables. Probability of collection is based on a credit review of new
customers. The timing or amount of revenue recognition may have been different
if different assessments of the above criteria had been made at the time
transactions were recorded in revenue.
Valuation Allowances. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of customers to make
required payments. If the financial condition of customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Goodwill Impairment. The Company's long-lived assets include goodwill of
$1.8 million as of September 30, 2002 and 2001, respectively. The Company
adopted SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142")
effective April 1, 2001. The statement applies to the amortization of goodwill
and other intangible assets. The Company has ceased amortizing amounts related
to goodwill effective April 1, 2001. The balance of goodwill is related to the
Company's NextGen Division. The Company has compared the fair value of the
NextGen Division with the carrying amount of assets associated with the Division
and determined that none of the goodwill recorded as of September 30, 2002 was
impaired. The fair value of the NextGen Division was determined using a
reasonable estimate of future cash flows of the Division and a risk adjusted
discount rate to compute a net present value of future cash flows.
The process of evaluating goodwill for impairment involves the
determination of the fair value of the relevant Company business segments.
Inherent in such fair value determinations are certain judgments and estimates,
including the interpretation of current economic indicators and market
valuations, and assumptions about the Company's strategic plans with regard to
operations. To the extent additional information arises or the strategies of the
Company change, it is possible that the Company's conclusion
13
regarding goodwill impairment could change and result in a material effect on
its financial position or results of operations.
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 Income.
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
----------- ----------- ----------- -----------
Net Revenues:
Sales of computer systems, upgrades and supplies 52.4% 48.7% 52.3% 50.0%
Maintenance and other services 47.6 51.3 47.7 50.0
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of Products and Services 43.6 43.3 41.8 43.4
----- ----- ----- -----
Gross Profit 56.4 56.7 58.2 56.6
Selling, General and Administrative Expenses 26.5 31.4 28.1 30.5
Research and Development Costs 9.3 9.5 9.3 9.8
----- ----- ----- -----
Income from Operations 20.6 15.8 20.8 16.3
Investment Income 1.0 1.8 .9 1.8
----- ----- ----- -----
Income before Provision for Income
Taxes 21.6 17.6 21.7 18.1
Provision for Income Taxes 8.4 6.8 8.5 6.9
----- ----- ----- -----
Net Income 13.2% 10.8% 13.2% 11.2%
----- ----- ----- -----
For the Three-Month Periods Ended September 30, 2002 and 2001
The Company's net income for the three months ended September 30, 2002 was
$1,710,000 or $0.28 per share on a basic and $0.27 per share on a diluted basis,
as compared to net income of $1,132,000, or $0.19 per share on a basic and $0.18
on a diluted basis, for the three months ended September 30, 2001.
Net Revenues. Net revenues for the three months ended September 30, 2002
increased 24% to $13.0 million from $10.5 million for the three months ended
September 30, 2001. Sales of computer systems, upgrades and supplies increased
33% to $6.8 million from $5.1 million while revenues from maintenance and other
services grew 15% to $6.2 million from $5.4 million during the comparable
period. The increase in revenues from sales of computer systems, upgrades and
supplies was principally the result of an increase in license and services
revenue at the Company's NextGen Division. The increase in maintenance and other
services revenue resulted principally from an increase in maintenance revenues
generated from the Company's expanded NextGen client base which represented $0.5
million of the $0.8 million dollar increase in this line item.
Cost of Products and Services. Cost of products and services for the three
months ended September 30, 2002 rose 27% to $5.7 million from $4.5 million in
the prior year quarter. Cost of products and services as a percentage of net
revenues increased to 43.6% from 43.3%. The dollar increase in the cost of
products and services was primarily the result of a higher volume of hardware in
conjunction with the increased volume of NextGenemr and NextGenepm license sales
as well as the impact of higher labor costs associated with installation,
training, and support. The cost of products and services as a percentage of net
revenues increased slightly in the quarter ended September 30, 2002, largely as
a result of an increase in the hardware component of systems sales revenues.
14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2002 increased
approximately 3.0% to approximately $3.4 million as compared to $3.3 million for
the three months ended September 30, 2001. Selling, general and administrative
expenses as a percentage of net revenues declined to 26.5% as compared to 31.4%
in the year earlier quarter. The increase in the dollar amount of such expenses
resulted primarily from increased staffing and compensation expenses, as well as
increased sales and marketing expenses at the Company's NextGen Division.
Research and Development Costs. Research and development costs for the
three months ended September 30, 2002 increased by 21% to $1,213,000 from
$1,000,000 in the prior year's quarter. The increase in research and development
costs is attributed primarily to increased investments in the NextGen product
suites. Research and development costs as a percentage of net revenues declined
to 9.3% as compared to 9.5% for the quarter ended September 30, 2001. This
decline was driven by the fact that revenues grew faster than the increase in
research and development expense. The Company has, over time, changed the mix of
its overall research and development expenditures to increase funds available
for the NextGen Division while correspondingly decreasing the level of
expenditure at its QSI Division. This has facilitated increased research and
development spending at the NextGen Division while moderating the overall growth
rate of research and development costs.
Investment Income. Investment income for the three months ended September
30, 2002 decreased by 35% from approximately $190,000 to $123,000 for the three
months ended September 30, 2001. Investment income in the quarter declined due
to the lower interest rates earned on the Company's balances during the quarter
vis a vis the year earlier quarter. The decrease in interest income was
partially offset by higher cash balances.
Provision for Income Taxes. The provision for income taxes for the three
months ended September 30, 2002 was approximately $1,092,000 as compared to
approximately $714,000 for the three months ended September 30, 2001. The
provision for income taxes for the three months ended September 30, 2002 and
2001 differs from the combined statutory rates primarily due to the impact of
the effect of varying state income tax rates.
For the Six-Month Periods Ended September 30, 2002 and 2001
The Company's net income for the six months ended September 30, 2002 was
$3.3 million, or $0.55 per share on a basic and $.53 per share on a diluted
basis, as compared to $2.4 million, or $0.40 per share on a basic and $0.39 per
share on a diluted basis for the six months ended September 30, 2001.
Net Revenues Net revenues for the six months ended September 30, 2002
increased 18% to $25.3 million from $21.4 million for the six months ended
September 30, 2001. Sales of computer systems, upgrades and supplies increased
23% to $13.2 million from $10.7 million while revenues from maintenance and
other services grew 12% to $12.0 million from $10.7 million during the
comparable periods. The increase in revenues from sales of computer systems,
upgrades and supplies was principally the result of increases in the sales at
the Company's NextGen Division. The $1.3 million dollar increase in maintenance
and other services revenue resulted principally from an increase of $1.1 million
in maintenance revenues from the NextGen division's growing client base.
Cost of Products and Services. Cost of products and services for the six
months ended September 30, 2002 increased 14% to $10.6 million from $9.3 million
for the six months ended September 30, 2001 while cost of products and services
as a percentage of net revenues decreased to 41.8% from 43.4% during the
comparable periods. The cost of products and services as a percentage of net
revenues decreased primarily as a result of the impact of a change in the
relative mix of hardware content of systems sales slightly offset by higher
labor costs. The mix of hardware content included in systems sales each quarter
varies from period to period. Because gross margins from hardware are
significantly lower than margins achieved from software sales, the hardware
content each quarter influences the gross margins of the company either higher
or lower.
15
Selling, General and Administrative Expenses Selling, general and
administrative expenses for the six months ended September 30, 2002 increased 9%
to $7.1 million as compared to $6.5 million for the six months ended September
30, 2001. Selling, general and administrative expenses as a percentage of net
revenues decreased to 28.1% from 30.5% in the year earlier period. The increase
in the amount of such expenses resulted primarily from additions to sales
personnel, higher commission expenses, and higher corporate expenses.
Research and Development Costs Research and development costs for the six
months ended September 30, 2002 and 2001 were $2.3 million and $2.1 million
respectively. Research and development costs as a percentage of net revenues
decreased to 9.3% from 9.8% due to the fact that revenues increased more quickly
than R&D expense in the respective periods.
Investment Income. Investment income for the six months ended September
30, 2002 was down 43% at approximately $227,000 compared to $396,000 in the six
months ended September 30, 2001. Investment income in the six months ended
September 30, 2002 declined primarily due to the effect of a drop in short term
interest rates which occurred during the period. This was partially offset by
higher cash balances.
Provision for Income Taxes. The provision for income taxes for the six
months ended September 30, 2002 was approximately $2,148,000 as compared to
approximately $1,485,000 for the six months ended September 30, 2001. The
provision for income taxes for the six months ended September 30, 2002 and 2001
differ from the combined statutory rates primarily due to the impact of varying
state income tax rates.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for
the past six months ended September 30, 2002 and 2001 (unaudited):
(in thousands) Six Months Ended September 30,
2002 2001
-------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 29,796 $21,177
-------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents during the period $ 4,353 $ 2,706
-------------------------------------------------------------------------------------------
Net income during the period $ 3,337 $ 2,390
-------------------------------------------------------------------------------------------
Net cash provided by operations during the period $ 5,228 $ 3,338
-------------------------------------------------------------------------------------------
Number of days of sales outstanding at start of period 98 114
-------------------------------------------------------------------------------------------
Number of days of sales outstanding at end of period 97 121
-------------------------------------------------------------------------------------------
The Company's principal source of cash was cash provided by operations.
The Company was able to generate operating cash flows significantly in excess of
net income in the quarter ended September 30, 2002 primarily as a result of
improved turnover of accounts receivable. Provided turnover of accounts
receivable and revenues and profitability remain consistent with the quarter
ended September 30, 2002, the Company anticipates being able to continue to
generate cash from operations primarily from the net income of the company.
Cash and cash equivalents increased $4,353,000 between March 31, 2002 and
September 30, 2002 primarily as a result of cash provided by operating
activities. Cash and cash equivalents increased approximately $2,706,000 during
the six months ended September 30, 2001, also primarily as a result of cash
generated by operating activities. Also, during the six months ended September
30, 2002, the Company liquidated approximately $235,000 in short-term equity
investments, and moved those funds into cash and cash equivalent accounts.
Net cash used in investing activities for the six months ended September
30, 2002 and 2001 was $1,153,000 and $836,000 respectively. Net cash used in
investing activities for the six months ended
16
September 30, 2002 consisted of additions to equipment and improvements and
capitalized software and was partially offset by the proceeds from the sale of
short term investments. Net cash used in investing activities for the three
months ended September 30, 2001 consisted of additions to equipment and
improvements and capitalized software. Management currently anticipates that
additions to equipment and improvements for fiscal 2003 will be in excess of
expenditures made during fiscal 2002 due to the relocation of the Company's
principal administrative offices in California and the relocation of the
company's principal office of the Company's NextGen division.
At September 30, 2002, the Company had cash and cash equivalents of $29.8
million. Except for the Company's intention to expend funds for the development
of complementary products to its existing product line, new 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, and certain investments in furniture, fixtures, and equipment related
to its relocation to new facilities in California and Pennsylvania, the Company
has no other significant capital commitments at this time.
The Company believes that its cash and cash equivalents on hand at
September 30, 2002, together with cash flows from operations, if any, will be
sufficient to meet its working capital and capital expenditure requirements for
the balance of fiscal 2003.
Item 3. Qualitative and Quantitative Disclosures About Market Risk
The Company has a significant amount of cash and short-term investments with
maturities less than three months. This cash portfolio exposes the Company to
interest rate risk as short-term investment rates can be volatile. Given the
short-term maturity structure of the Company's investment portfolio, the Company
believes that it is not subject to principal fluctuations and the effective
interest rate of the Company's portfolio tracks closely to various short-term
money market interest rate benchmarks.
Item 4. Controls and Proceedings
Our Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) have concluded, based on
their evaluation as of October 31, 2002 ("Evaluation Date"), that the design and
operation of our "disclosure controls and procedures" (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
("Exchange Act")) are effective to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is accumulated, recorded, processed, summarized and reported to our management,
including our principal executive officer and our principal financial officer,
as appropriate to allow timely decisions regarding whether or not disclosure is
required.
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the Evaluation Date,
nor were there any significant deficiencies or material weaknesses in our
internal controls. As a result, no corrective actions were required or
undertaken.
There were no significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the Evaluation Date,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 22, 1997, a purported class action entitled JOHN P. CAVENY v.
QUALITY SYSTEMS, INC., ET AL. was filed in the Superior Court of the State of
California for the County of
17
Orange, in which Mr. Caveny, on behalf of himself and all others who purchased
the Company's Common Stock between June 26, 1995 and July 3, 1996, alleges that
the Company, and Sheldon Razin, Robert J. Beck, Gregory S. Flynn, Abe C.
LaLande, Donn Neufeld, Irma G. Carmona, John A. Bowers, Graeme H. Frehner, and
Gordon L. Setran (all of the foregoing individuals were either officers,
directors or both during the period from June 26, 1995 through July 3, 1996), as
well as other defendants not affiliated with the Company, violated California
Corporations Code Sections 25400 and 25500, California Civil Code Sections 1709
and 1710, and California Business and Professions Code Sections 17200 et. seq.,
by issuing positive statements about the Company that allegedly were knowingly
false, in part, in order to assist the Company and the individual defendants in
selling Common Stock at an inflated price in the Company's March 5, 1996 public
offering and at other points during the class period. The complaint seeks
compensatory and punitive damages in unspecified amounts, disgorgement,
declaratory and injunctive relief, and attorneys' fees.
The Company and the other named defendants successfully demurred to the
plaintiffs' claim under California Civil Code Sections 1709 and 1710, and that
claim, which served as the only basis for plaintiffs' request for punitive
damages, has been dismissed from both actions.
On January 25, 1999, the court denied plaintiffs' motion to certify the class
representative and class legal counsel. Plaintiffs appealed that decision as to
class legal counsel. On February 25, 2000, the Fourth District Court of Appeals
affirmed the order disqualifying the class legal counsel. On May 9, 2000, the
Court of Appeals issued its Remittur certifying its decision as final.
In May 2000, plaintiffs associated in additional class legal counsel, and moved
for approval by the court. Upon defendants' objection, the court on August 17,
2000, denied plaintiffs' motion, and ordered plaintiffs to retain new class
counsel.
At the end of November 2000, the plaintiffs retained new class counsel who
substituted in for plaintiffs' previous class counsel. The Company and the other
named defendants did not oppose plaintiffs' motion for approval of the new class
counsel. On January 24, 2001, the court granted the motion to certify class
legal counsel.
On March 27, 2001, the court approved a notice of class certification to be
mailed to shareholders who are potential class members. Between April 9, 2001
and May 9, 2001, class notice was mailed to potential class members.
Merits-related discovery in the action, which had been stayed pending the
appointment of class counsel, is now ongoing. In March 2002, defendant Graeme H.
Frehner and certain other defendants not affiliated with the Company were
dismissed from the action with prejudice by stipulated order. The parties are
scheduled to appear in court for the next status conference on December 11,
2002. Trial in the action has been set for March 24, 2003.
Management is unable to assess the outcome of this case and therefore no accrual
has been made to the financial statements for any loses resulting from this
claim.
On May 14, 1997, a second purported class action entitled WENDY WOO v. QUALITY
SYSTEMS, INC., ET AL. was filed in the same court, essentially repeating the
allegations in the Caveny lawsuit and seeking identical relief. This action has
for all purposes been consolidated with the Caveny action.
The Company is a party to various other legal proceedings incidental to its
business, none of which are considered by the Company to be material.
Item 2. Changes in Securities and Use of Proceeds.
None.
18
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submissions of Matters to a Vote of Securities Holders.
On August 29, 2002, the Company held its Annual Meeting of Shareholders. At the
meeting, the shareholders elected as directors Sheldon Razin (with 4,324,588
affirmative votes and 75,934 votes withheld), Ahmed Hussein (with 4,251,972
affirmative votes and 148,550 votes withheld), Mohammed-Tawfick El-Bardai (with
4,183,554 affirmative votes and 216,968 votes withheld), Dale Hanson (with
4,391,178 affirmative votes and 9,344 votes withheld), Frank Meyer (with
4,380,528 affirmative votes and 19,994 votes withheld), William Small (with
4,325,278 affirmative votes and 75,244 votes withheld), and Emad Zikry (with
4,303,038 affirmative votes and 97,484 votes withheld)
The shareholders also ratified the appointment of Grant Thornton LLP as the
independent public accountants for the Company for the fiscal year ending March
31, 2003 (with 4,383,428 affirmative votes, 16,700 against, and 394 abstaining.)
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
99.1 Officers' Certification
Reports on Form 8-K:
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
QUALITY SYSTEMS, INC.
Date: November 12 , 2002 By: /s/ LOUIS SILVERMAN
---------------------------------
Louis Silverman
Chief Executive Officer
Date: November 12, 2002 By: /s/ PAUL HOLT
---------------------------------
Paul Holt
Chief Financial Officer;
Principal Accounting Officer
19