UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2004
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, Suite 450, Irvine, California 92612
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (949) 255-2600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of May 27, 2004: $150,729,695 (based on the closing sales
price of the Registrant's Common Stock as reported in the NASDAQ National Market
System on that date).*
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of May 27, 2004: 6,325,604.
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III, Items 10, 11, 12, 13 and 14, of the Form
10-K is incorporated by reference from Registrant's Definitive Proxy Statement
for its 2004 annual meeting which is to be filed with the Commission within 120
days of its fiscal year ended on March 31, 2004.
* For purposes of this report, in addition to those shareholders which fall
within the definition of "affiliates" under Rule 405 of the Securities Act of
1933, as amended, holders of ten percent or more of the Registrant's Common
Stock are deemed to be affiliates for purposes of this Report.
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CAUTIONARY STATEMENT
Statements made in this report, the Annual Report to Shareholders in which
this report is made a part, other reports and proxy statements filed with the
Securities and Exchange Commission, communications to shareholders, press
releases and oral statements made by our representatives that are not historical
in nature, or that state our or management's intentions, hopes, beliefs,
expectations or predictions of the future, may constitute "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"). Forward-looking statements can often
be identified by the use of forward-looking terminology, such as "could,"
"should," "will," "will be," "will lead," "will assist," "intended," "continue,"
"believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," or
"estimate" or variations thereof or similar expressions. Forward-looking
statements are not guarantees of future performance or results. They involve
risks, uncertainties and assumptions. It is important to note that any such
performance and actual results, financial condition or business, could differ
materially from those expressed in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below as well as those discussed elsewhere in reports filed with
the Securities and Exchange Commission. Other unforeseen factors not identified
herein could also have such an effect. We undertake no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in future operating results, financial
condition, or business, over time.
PART I
Item 1. Business
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K, including discussions of the
Registrant's product development plans, business strategies and market factors
influencing the Registrant's results, are forward-looking statements that
involve certain risks and uncertainties. Actual results may differ from those
anticipated by the Registrant as a result of various factors, both foreseen and
unforeseen, including, but not limited to, the Registrant's ability to continue
to develop new products and increase systems sales in markets characterized by
rapid technological evolution, consolidation within the Registrant's target
marketplace and among the Registrant's competitors, and competition from larger,
better capitalized competitors. Many other economic, competitive, governmental
and technological factors could impact the Registrant's ability to achieve our
goals. Interested persons are urged to review the risks described under "Item 1.
Business. Risk Factors" and in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as in the Registrant's
other public disclosures and filings with the Securities and Exchange
Commission.
Company Overview
Quality Systems Inc., comprised of the QSI Division ("QSI Division") and a
wholly owned subsidiary, NextGen Healthcare Information Systems, Inc. ("NextGen
Division") (collectively, the "Company", "we", "our", or "us") develops and
markets healthcare information systems that automate medical and dental
practices, networks of practices such as physician hospital organizations
(PHO's) and management service organizations ("MSO's"), ambulatory care centers,
community health centers, and medical and dental schools.
The Company, a California corporation formed in 1974, was founded with an
early focus on providing information systems to dental group practices. In the
mid-1980's, we capitalized on the increasing focus on medical cost containment
and further expanded our information processing systems to serve the medical
market. In the mid 1990's we made two acquisitions that accelerated our
penetration of the medical market. These two acquisitions formed the basis for
what is today the NextGen Division. Today, we serve both the medical and dental
markets through our two divisions.
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The two divisions operate largely as stand-alone operations with each
division maintaining it's own distinct product lines, product platforms,
development, implementation and support teams, sales staffing, and branding. The
two divisions share the resources of the "corporate office" which includes a
variety of accounting and other administrative functions. Additionally, there
are a small number of clients who are simultaneously utilizing software from
each of our two divisions.
The QSI Division, co-located with the Company's Corporate Headquarters in
Irvine, California, currently focuses on developing, marketing and supporting
software suites sold to dental and certain niche medical practices. In addition,
the division supports a number of medical clients that utilize the division's
UNIX(1) based medical practice management software product.
The NextGen Division, with headquarters in Horsham, Pennsylvania and a
second significant location in Atlanta, Georgia, focuses principally on
developing and marketing products and services to medical practices.
Both divisions develop and market practice management software which is
designed to automate and streamline a number of the administrative functions
required for operating a medical or dental practice. Examples of practice
management software functions include scheduling and billing capabilities. It is
important to note that in both the medical and dental environments, practice
management software systems have been implemented by the vast majority of
practices. Therefore, we actively compete for the replacement market.
In addition, both divisions develop and market software that automates the
patient record and enhances patient-provider interactions. Adoption of this
software, commonly referred to as clinical software, is in its relatively early
stages. Therefore, we are typically competing to replace paper-based patient
record alternatives as opposed to replacing previously purchased systems.
Electronic Data Interchange ("EDI")/connectivity products are intended to
automate a number of manual, often paper-based or telephony intensive
communications between patients and/or providers and/or payors. Two of the more
common EDI services are forwarding insurance claims electronically from
providers to payors and assisting practices with issuing statements to patients.
Most practices utilize at least some of these services from us or one of our
competitors. Other EDI/connectivity services are used more sporadically by
client practices. We typically compete to displace incumbent vendors for claims
and statements accounts, and attempt to increase usage of other elements in our
EDI/connectivity product line. In general, EDI services are only sold to those
accounts utilizing software from one of our divisions.
The QSI Division's practice management software suite utilizes a UNIX
operating system. Its Clinical Product Suite (CPS) utilizes a Windows NT(2)
operating system and can be fully integrated with the practice management
software from each division. 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 the electronic patient record. The
division develops, markets, and manages our EDI/connectivity applications. The
QSInet Application Service Provider (ASP/Internet) offering is also developed
and marketed by the division.
Our NextGen Division develops and sells proprietary electronic medical
records software and practice management systems under the NextGen(R)(3) 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)), NextGen Image Control System (NextGen(ics)), Managed Care
Server (NextGen(mcs)), Electronic Data Interchange, System Interfaces, Internet
Operability (NextGen(web)), a Patient-centric and Provider-centric Web Portal
Solution (NextMD(4).com), and a handheld product (NextGen(pda)). NextGen
products utilize Microsoft Windows technology and can operate in a client-server
environment as well as via private intranet, the Internet, or in an ASP
environment.
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(1) UNIX is a registered trademark of the AT&T Corporation.
(2) Microsoft Windows, Windows NT, Windows 95, Windows 98, Windows XP, and
Windows 2000 are registered trademarks of the Microsoft Corporation.
(3) NextGen is a registered trademark of NextGen Healtcare Information
Systems, Inc
(4) NextMD is a registered trademark of NextGen Healtcare Information Systems,
Inc
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We continue to pursue product enhancement initiatives within each
division. The majority of such expenditures are currently targeted for the
NextGen Division product line and client base. During the year ended March 31,
2004, the NextGen Division released NextGen Image Control System (NextGen(ics)).
This module works in conjunction with both NextGen(epm) and NextGen(emr) to
address the high volume scanning needs of clients. Management does not expect
that NextGen(ics) will add materially to Company revenue in the near term, and
views this offering as part of the continued build-out of the division's product
line as well as a viable means of addressing an area where the division had been
reliant on third party alternatives.
Product enhancements completed by the QSI Division during fiscal 2004
include laser generated forms and an electronic signature capability within the
division's CPS product line. While these enhancements are not projected to
materially increase divisional revenue or profits, the enhancements are designed
to maintain and/or increase client satisfaction within the division's
established base of customers.
Inclusive of divisional EDI revenue, the NextGen Division accounted for
approximately 77% of our revenue for fiscal 2004 compared to 68% in fiscal 2003.
The QSI Division accounted for 23% and 32% of revenue in fiscal 2004 and 2003,
respectively. The NextGen Division's revenue grew at annual rates of 46% and 37%
in fiscal 2004 and 2003, respectively, while the QSI Division's revenue declined
by 5% in fiscal 2004 after growing by 1% during fiscal 2003.
In addition to the aforementioned software solutions which we offer
through our two divisions, each division offers comprehensive hardware and
software installation services, maintenance and support services, and system
training services.
We currently have a base of approximately 850 clients, with each client
generally including between one and 500 physicians or dentists.
We had 319 full time and 8 part time employees as of March 31, 2004. Full
time employees by functional area as of March 31, 2004 and 2003 was as follows:
- ------------------------------------------------------------------------------------------------
As of March 31, 2004
- ------------------------------------------------------------------------------------------------
NextGen QSI Corporate Consolidated
- ------------------------------------------------------------------------------------------------
Sales & Marketing 43 5 48
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Support/Implementation 103 43 146
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Software Development 81 14 95
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Administration 9 4 17 30
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Total 236 66 17 319
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
As of March 31, 2003
- ------------------------------------------------------------------------------------------------
NextGen QSI Corporate Consolidated
- ------------------------------------------------------------------------------------------------
Sales & Marketing 33 5 38
- ------------------------------------------------------------------------------------------------
Support/Implementation 77 44 121
- ------------------------------------------------------------------------------------------------
Software Development 60 15 75
- ------------------------------------------------------------------------------------------------
Administration 9 4 16 29
- ------------------------------------------------------------------------------------------------
Total 179 68 16 263
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For the purposes of Statement of Accounting Standards ("SFAS") No. 131
"Disclosures About Segments of an Enterprise and Related Information" we have
provided a breakdown utilizing the management approach outlined in Notes to
Consolidated Financial Statements No. 13 "Operating Segment Information."
Our principal executive offices are located at 18191 Von Karman Avenue,
Suite 450, Irvine, California 92612 and our telephone number is 949-255-2600.
Our Internet address is www.qsii.com. Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, amendments to those reports
and other Securities and Exchange Commission, or "SEC" filings, are available
free of charge through a link on our website as soon as reasonably practicable
after such reports are electronically filed with, or furnished to, the SEC. We
have adopted a Code of Business Conduct and Ethics that applies to our employees
including our Chief Executive Officer and Chief Financial Officer. We intend to
satisfy the disclosure requirement under Item 10 of Form 8-K regarding an
amendment to, or waiver from, a provision of this Code of Business Conduct and
Ethics by posting such information on our website, at the address and location
specified above. Information contained on our website is not part of this report
or any other report filed with the SEC.
Industry Background
To compete in the continually changing healthcare environment, providers
are increasingly using technology to help maximize the efficiency of their
business practices, to assist in enhancing patient care, and to maintain the
privacy of patient information.
As the reimbursement environment continues to evolve, more healthcare
providers enter into contracts, often with multiple entities, which define the
terms under which care is administered and paid for. The diversity of payor
organizations, as well as additional government regulation and changes in
reimbursement models, have greatly increased the complexity of pricing, billing,
reimbursement, and records management for medical and dental practices. To
operate effectively, healthcare provider organizations must efficiently manage
patient care and other information and workflow processes which increasingly
extend across multiple locations and business entities.
In response, healthcare provider organizations have placed increasing
demands on their information systems. Initially, these information systems
automated financial and administrative functions. As it became necessary to
manage patient flow processes, the need arose to integrate "back-office" data
with such clinical information as patient test results and office visits. The
Company believes information systems must facilitate management of patient
information incorporating administrative, financial and clinical information
from multiple entities. In addition, large healthcare organizations increasingly
require information systems that can deliver high performance in environments
with multiple concurrent computer users.
Many existing healthcare information systems were designed for limited
administrative tasks such as billing and scheduling and can neither accommodate
multiple computing environments nor operate effectively across multiple
locations and entities. We believe that practices that leverage technology to
more efficiently handle patient clinical data as well as administrative,
financial and other practice management data, will be best able to enhance
patient flow, pursue cost efficiencies, and improve quality of care. As
healthcare organizations transition to new computer platforms and newer
technologies, we believe such organizations will be migrating toward the
implementation of enterprise-wide, patient-centric computing systems embedded
with automated clinical patient records.
Company Strategy
The Company's strategy is, at present, to focus on maintenance and growth
of it's core software business. Among the key elements central to this strategy
are:
o Continued development and enhancement of select software solutions
in target markets;
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o Continued investments in the Company's infrastructure including but
not limited to product development, sales, implementation, and
support;
o Continued efforts to make infrastructure investments within an
overall context of maintaining reasonable expense discipline; and
o Addition of new customers through maintaining and expanding sales,
marketing and product development activities.
While these are the key elements of our current strategy, there can be no
guarantees that our strategy will not change, or that we will succeed in
achieving these goals individually or collectively.
Products
In response to the growing need for more comprehensive, cost-effective
healthcare information solutions for physician and dental practices, our systems
provide our clients with the ability to redesign patient care and other workflow
processes while improving productivity through facilitation of managed access to
patient information. Utilizing our proprietary software in combination with
third party hardware and software solutions, our products enable the integration
of a variety of administrative and clinical information operations. Leveraging
more than 30 years of experience in the healthcare information services
industry, we believe that we continue to add value by providing our clients with
sophisticated, full-featured software systems along with comprehensive systems
implementation, maintenance and support services. Any single transaction may or
may not include software, hardware or services.
Practice Management Systems. Our products consist primarily of proprietary
healthcare software applications together with third party hardware and other
non-industry specific software. The systems range in capacity from one to
hundreds of users, allowing us to address the needs of both small and large
organizations. The systems are modular in design and may be expanded to
accommodate changing client requirements.
The QSI Division's character-based practice management system is available
in both dental and medical versions and primarily uses the IBM RS6000(5) central
processing unit and IBM'S AIX(6) version of the UNIX operating system as a
platform for our application software enabling a wide range of flexible and
functional systems. The hardware components, as well as the requisite operating
system licenses, are purchased from manufacturers or distributors of those
components. We configure and test the hardware components and incorporate our
software and other third party packages into completed systems tailored to
accommodate particular client requirements. We continually evaluate third party
hardware components with a view toward utilizing hardware that is functional,
reliable and cost-effective.
NextGen(epm) is the NextGen division's practice management offering.
NextGen(epm) has been developed using a graphical user interface ("GUI")
client-server platform for compatibility with Windows 2000, Windows NT and
Windows XP operating systems and relational databases that are ANSI
SQL-compliant. NextGen(epm) is scalable and includes a master patient index,
enterprise-wide appointment scheduling with referral tracking, clinical support,
and centralized or decentralized patient financial management based on either a
managed care or fee-for-service model. The system's three-tiered architecture
allows work to be performed on the database server, the application server and
the client workstation.
We also offer practice management solutions for both dental and medical
practices through the Internet. These products are marketed under the QSINet and
NextGenweb trade names, respectively.
Clinical Systems. Our dental charting software system, the Clinical
Product Suite (CPS), is a comprehensive solution designed specifically for the
dental group practice environment. CPS integrates the dental practice management
product with a computer-based clinical information system that incorporates a
wide range of clinical tools, including:
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(5) RS6000 is a registered trademark of International Business Machines
Corporation.
(6) AIX is a registered trademark of International Business Machines
Corporation.
-7-
o Electronic charting of dental procedures, treatment plans and
existing conditions;
o Periodontal charting via light-pen, voice-activation, or keyboard
entry for full periodontal examinations and PSR scoring;
o Digital imaging of X-ray and intra-oral camera images;
o Computer-based patient education modules, viewable chair-side to
enhance case presentation;
o Full access to patient information, treatment plans, and insurance
plans via a fully integrated interface with our dental practice
management product; and
o Document and image scanning for digital storage and linkage to the
electronic patient record.
The result is a comprehensive clinical information management system that
helps practices save time, reduce costs, improve case presentation, and enhance
the delivery of dental services and quality of care. Clinical information is
managed and maintained electronically thus forming an electronic patient record
that allows for the implementation of the "chartless" office.
CPS incorporates Windows-based client-server technology consisting of one
or more file servers together with any combination of one or more desktop,
laptop, or pen-based PC workstations. The file server(s) used in connection with
CPS utilize(s) a Windows NT or Windows 2000 or Windows XP operating system and
the hardware is typically a Pentium(7)-based single or multi-processor platform.
Based on the server configuration chosen, CPS is scalable from one to hundreds
of workstations. A typical configuration may also include redundant disk
storage, magnetic tape units, intra- and extra-oral cameras, digital X-ray
components, digital scanners, conventional and flat screen displays, and
printers. The hardware components, including the requisite operating system
licenses, are purchased from third party manufacturers or distributors either
directly by the customer or by us for resale to the customer.
NextGen provides clinical software applications that are complementary to,
and interface with, our medical practice management offerings as well as many of
the other leading practice management software systems on the market. The
applications incorporated into our practice management solutions and others such
as scheduling, eligibility, billing and claims processing are augmented by
clinical information captured by NextGen(emr), including services rendered and
diagnoses used for billing purposes. We believe that we currently provide a
comprehensive information management solution for the medical marketplace.
NextGen(emr) was developed with client-server architecture and a GUI and
utilizes Microsoft Windows 2000, Windows NT or Windows XP on each workstation
and either Windows 2000, Windows NT, Windows XP or UNIX on the database server.
NextGen(emr) maintains data using industry standard relational database engines
such as Microsoft SQL Server(8) or Oracle(9). The system is scalable from one to
hundreds of workstations.
NextGen(emr) stores and maintains clinical data including:
o Data captured using user-customized input "templates";
o Scanned or electronically acquired images, including X-rays and
photographs;
o Data electronically acquired through interfaces with clinical
instruments or external systems;
o Other records, documents or notes, including electronically captured
handwriting and annotations; and
o Digital voice recordings.
NextGen(emr) also offers a workflow module, prescription management,
automatic document and letter generation, patient education, referral tracking,
interfaces to billing and lab systems, physician alerts and reminders, and
powerful reporting and data analysis tools.
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(7) Pentium is a registered trademark of Intel Corporation.
(8) Microsoft and SQL Server is a registered trademark of Microsoft
Corporation.
(9) Oracle is a registered trademark of Oracle Corporation.
-8-
NextGen(pda), the Pocket-PC-based suite of solutions, allows mobile health
professionals to utilize many of NextGen's functions using a palm-sized device.
Connectivity Services. The Company makes available electronic data
interchange ("EDI") capabilities and connectivity services to our customers. The
EDI/connectivity capabilities encompass direct interfaces between our products
and external third party systems, as well as transaction-based services.
Services include:
o Electronic claims submission through our relationships with a number
of payors and national claims clearinghouses;
o Electronic patient statement processing, appointment reminder cards
and calls, recall cards, patient letters, and other correspondence;
o Electronic insurance eligibility verification; and
o Electronic posting of remittances from insurance carriers into the
accounts receivable application.
Internet Applications. Our NextGen Division maintains an Internet-based
consumer health portal, NextMD.com. NextMD.com is a vertical portal for the
healthcare industry, linking patients with their physicians, insurers,
laboratories, and online pharmacies, while providing a centralized source of
health-oriented information for both consumers and medical professionals.
Patients whose physicians are linked to the portal are able to request
appointments, send appointment changes or cancellations, receive test results
on-line, request prescription refills, view and/or pay their statements, and
communicate with their physicians, all in a secure, on-line environment. Our
NextGen suite of information systems are or can be linked to NextMD.com,
integrating a number of these features with physicians' existing systems.
Our QSI Division also provides a web-based application called QSINet which
allows clients to access information from their practice management system via
the Internet. This application also enables providers to offer their patients
convenient services such as on-line appointment scheduling and electronic bill
payment through the client's website, and posts this data directly to the
client's existing practice management system.
Sales and Marketing
We sell and market our products nationwide primarily through a direct
sales force. The efforts of the direct sales force are augmented by a small
number of reseller relationships established by us. Software license sales to
resellers represented less than 10% of total revenue for the years ended March
31, 2004 and 2003.
Our direct sales force typically makes presentations to potential clients
by demonstrating the system and our capabilities on the prospective client's
premises. Our sales and marketing employees identify prospective clients through
a variety of means, including referrals from existing clients, industry
consultants, contacts at professional society meetings, trade shows and
seminars, trade journal advertising, direct mail advertising, and telemarketing.
Our sales cycle can vary significantly and typically ranges from three to
twelve months from initial contact to contract execution. Software licenses are
normally delivered to a customer almost immediately upon receipt of an order.
Implementation and training services are normally rendered based on a mutually
agreed upon timetable. As part of the fees paid by our clients, we receive
up-front licensing fees. Clients have the option to purchase maintenance
services which, if purchased, are invoiced on a monthly or quarterly basis.
Several clients have purchased our practice management software and, in
turn, are providing either time-share or billing services to single and group
practice practitioners. Under the time-share or billing service agreements, the
client provides the use of our software for a fee to one or more practitioners.
Although we typically do not receive a fee directly from the distributor's
customers, implementation of such arrangements has, from time to time, resulted
in the purchase of additional software capacity by the distributor, as well as
new software purchases made by the distributor's customers should such customers
decide to perform the practice management functions in-house.
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We continue to concentrate our direct sales and marketing efforts on
medical and dental practices, networks of such practices including MSOs and
PHOs, professional schools, community health centers and other ambulatory care
settings.
MSOs, PHOs and similar networks to which we have sold systems provide use
of our software to those group and single physician practices associated with
the organization or hospital on either a service basis or by directing us to
contract with those practices for the sale of stand-alone systems.
We have also entered into marketing assistance agreements with certain of
our clients pursuant to which the clients allow us to demonstrate to potential
clients the use of systems on the existing clients' premises.
From time to time we assist prospective clients in identifying third party
sources for financing the purchase of our systems. The financing is typically
obtained by the client directly from institutional lenders and typically takes
the form of a loan from the institution secured by the system to be purchased or
a leasing arrangement. We do not guarantee the financing nor retain any
continuing interest in the transaction.
We have numerous clients and do not believe that the loss of any single
client would have a material adverse effect on us. No client accounted for ten
percent or more of net revenue during the fiscal years ended March 31, 2004,
2003, or 2002.
Customer Service and Support
We believe our success is attributable in part to our customer service and
support departments. We offer support to our clients seven days a week, 24 hours
a day.
Our client support staff is comprised of specialists who are knowledgeable
in the areas of software and hardware as well as in the day-to-day operations of
a practice. System support activities range from correcting minor procedural
problems in the client's system to performing complex database reconstructions
or software updates.
We utilize automated online support systems which assist clients in
resolving minor problems and facilitate automated electronic retrieval of
problems and symptoms following a client's call to the automated support system.
Additionally, our online support systems maintain call records, available at
both the client's facility and our offices.
We offer our clients support services for most system components,
including hardware and software, for a fixed monthly or quarterly fee. Customers
also receive access to future unspecified versions of the software, on a
when-and-if available basis, as part of support services. We also subcontract,
in certain instances, with third party vendors to perform specific hardware
maintenance tasks.
Implementation and Training
We offer full service implementation and training services. When a client
signs a contract for the purchase of a system that includes implementation and
training services, a client manager/implementation specialist trained in medical
and/or dental group practice procedures is assigned to assist the client in the
installation of the system and the training of appropriate practice staff.
Implementation services include loading the software, training customer
personnel, data conversion, running test data, and assisting in the development
and documentation of procedures. Implementation and training services are
provided by our employees as well as certified third parties and certain
resellers.
Training may include a combination of computer assisted instruction
("CAI") for certain of our products, remote training techniques and training
classes conducted at the client's or our office(s). CAI consists of workbooks,
computer interaction and self-paced instruction. CAI is also offered to clients,
for an additional charge, after the initial training program is completed for
the purpose of training new and additional employees. Remote training allows a
trainer at our offices to train one or more people at a client site via
telephone and computer connection, thus allowing an interactive and
client-specific mode of training without the expense and
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time required for travel. In addition, our on-line "help" and other
documentation features facilitate client training as well as ongoing support.
Competition
The markets for healthcare information systems are intensely competitive.
The industry is highly fragmented and includes numerous competitors, none of
which we believe dominates these markets. The electronic patient records and
connectivity markets, in particular, are subject to rapid changes in technology,
and we expect that competition in these market segments will increase as new
competitors enter the market. We believe our principal competitive advantages
are the features and capabilities of our products and services, our high level
of customer support, and our extensive experience in the industry.
Product Enhancement and Development
The healthcare information management and computer software and hardware
industries are characterized by rapid technological change requiring us to
engage in continuing investments to update, enhance, and improve our systems.
During fiscal years 2004, 2003, and 2002, we expended approximately $8.7
million, $6.8 million, and $5.7 million, respectively, on research and
development activities, including capitalized software amounts of $2.6 million,
$1.7 million, and $1.5 million, respectively. In addition, a portion of our
product enhancements have resulted from software development work performed
under contracts with our clients.
Employees
As of May 27, 2004, we employed 335 persons, of which 325 were full-time
employees. We believe that our future success depends in part upon recruiting
and retaining qualified sales, marketing and technical personnel as well as
other employees.
Risk Factors
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations will likely suffer. Any of these or
other factors could harm our business and future results of operations and may
cause you to lose all or part of your investment.
We face significant competition. The markets for healthcare information
systems are intensely competitive and we face significant competition from a
number of different sources. Several of our competitors have significantly
greater name recognition as well as substantially greater financial, technical,
product development and marketing resources than we do.
We compete in all of our 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 ourselves or our competitors, may result in price or
market share erosion that could have a material adverse effect on our business,
results of operations and financial condition. Also, there can be no assurance
that our applications will achieve broad market acceptance or will successfully
compete with other available software products.
Our inability to make initial sales of our systems to newly formed groups
and/or healthcare providers that are replacing or substantially modifying their
healthcare information systems could have a material adverse effect on our
business, results of operations and financial condition. If new systems sales do
not materialize, our near term and longer term revenue will be negatively
affected.
Our quarterly operating results have historically fluctuated and may do so
in the future. Our revenue has 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:
o the size and timing of orders from clients;
-11-
o the length of sales cycles and installation processes;
o the ability of our clients to obtain financing for the purchase of
our products;
o changes in pricing policies or price reductions by us or our
competitors;
o the timing of new product announcements and product introductions by
us or our competitors;
o changes in revenue recognition or other accounting guidelines
employed by us and/or established by the Financial Accounting
Standards Board or other rule-making bodies;
o the availability and cost of system components;
o the financial stability of clients;
o market acceptance of new products, applications and product
enhancements;
o our ability to develop, introduce and market new products,
applications and product enhancements;
o our success in expanding our sales and marketing programs;
o deferrals of client orders in anticipation of new products,
applications or product enhancements;
o execution of or changes to Company strategy;
o personnel changes; and
o general market/economic factors.
Our software products are generally shipped as orders are received and
accordingly, we have historically operated with a minimal backlog of license
fees. As a result, revenue in any quarter is dependent on orders booked and
shipped in that quarter and is not predictable with any degree of certainty.
Furthermore, our systems can be relatively large and expensive and individual
systems sales can represent a significant portion of our revenue and profits for
a quarter such that the loss or deferral of even one such sale can have a
significant adverse impact on our quarterly revenue and profitability.
Clients often defer systems purchases until our quarter end, so quarterly
results generally cannot be predicted and frequently are not known until the
quarter has concluded.
Our sales are dependent upon clients' initial decision to replace or
substantially modify their existing information systems, 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 our
systems can vary significantly and typically ranges from three to twelve months
from initial contact to contract execution/shipment.
Because a significant percentage of our 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, we believe
that interim period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Further, our historical operating results are not necessarily
indicative of future performance for any particular period.
We currently recognize revenue pursuant to Statement of Position No. 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as modified by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect of Certain
Transactions", Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements" ("SAB 101"), and SAB 104, "Revenue Recognition" ("SAB
104"). SAB 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 104
modifies certain guidance provided in SAB 101.
There can be no assurance that application and subsequent interpretations
of these pronouncements will not further modify our revenue recognition
policies, or that such modifications would not have a material adverse effect on
the operating results reported in any particular quarter or year.
-12-
Due to all of the foregoing factors, it is possible that our operating
results may be below the expectations of public market analysts and investors.
In such event, the price of our Common Stock would likely be materially
adversely affected.
The price of our shares and the trading volume of our shares have been
volatile historically and may continue to be volatile. Volatility may be caused
by a number of factors including but not limited to:
o actual or anticipated quarterly variations in operating results;
o rumors about our performance, software solutions, or merger and
acquisition activity;
o changes in expectations of future financial performance or changes
in estimates of securities analysts;
o governmental regulatory action;
o health care reform measures;
o client relationship developments;
o purchases or sales of company stock;
o changes occurring in the markets in general; and
o other factors, many of which are beyond our control.
Furthermore, the stock market in general, and the market for software,
healthcare and high technology companies in particular, has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of our common stock, regardless of actual operating
performance.
Two of our directors are significant shareholders which makes it possible
for them to have significant influence over the outcome of all matters submitted
to our shareholders for approval, which influence may be alleged to conflict
with our interests and the interests of our other shareholders. Two of our
directors and principal shareholders beneficially owned approximately 40% of the
outstanding shares of our common stock at March 31, 2004. As such, these
shareholders will have significant influence over the outcome of all matters
submitted to our shareholders for approval, including the election of our
directors and other corporate actions. In addition, such influence by one or
both of these affiliates could have the effect of discouraging others from
attempting to take us over, and/or reducing the market price offered for our
common stock in such an event.
We are dependent on our principal products and our new product
development. We currently derive substantially all of our net revenue from sales
of our healthcare information systems and related services. We believe that a
primary factor in the market acceptance of our systems has been our ability to
meet the needs of users of healthcare information systems. Our future financial
performance will depend in large part on our ability to continue to meet the
increasingly sophisticated needs of our clients through the timely development
and successful introduction and implementation of new and enhanced versions of
our systems and other complementary products. We have historically expended a
significant percentage of our net revenue on product development and believe
that significant continuing product development efforts will be required to
sustain our growth. Continued investment in our sales staff and our client
implementation and support staffs will also be required to support future
growth.
There can be no assurance that we will be successful in our product
development efforts, that the market will continue to accept our 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, our business, results of operations and financial
condition could be materially adversely affected. At certain times in the past,
we have also experienced delays in purchases of our products by clients
anticipating our launch of new products. There can be no assurance that material
order deferrals in anticipation of new product introductions from ourselves or
other entities will not occur.
-13-
If the emerging technologies and platforms of Microsoft and others upon which we
build our products do not gain broad market acceptance, or if we fail to develop
and introduce in a timely manner new products and services compatible with such
emerging technologies, we may not be able to compete effectively and our ability
to generate revenue will suffer. Our software products are built and depend upon
several underlying and evolving relational database management system platforms
such as those developed by Microsoft. To date, the standards and technologies
upon which we have chosen to develop our products have proven to have gained
industry acceptance. However, the market for our software products is subject to
ongoing rapid technological developments, quickly evolving industry standards
and rapid changes in customer requirements, and there may be existing or future
technologies and platforms that achieve industry standard status, which are not
compatible with our products.
We face the possibility of subscription pricing and/or application service
provider, ("ASP") delivered offerings. We currently derive substantially all of
our revenue from traditional software license, maintenance and service fees, as
well as the resale of computer hardware. Today, customers pay an initial license
fee for the use of our products, in addition to a periodic maintenance fee. If
the marketplace demands subscription pricing and/or ASP-delivered offerings, we
may be forced to adjust our sales, marketing and pricing strategies accordingly,
by offering a higher percentage of our products and services through these
means. Shifting to subscription pricing and/or ASP-delivered offerings could
materially adversely impact our financial condition, cash flows and quarterly
and annual revenue and results of operations, as our revenue would initially
decrease substantially. There can be no assurance that the marketplace will not
embrace subscription pricing and/or ASP-delivered offerings.
The industry in which we operate is subject to significant 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 our
existing products obsolete and unmarketable. There can be no assurance that we
will be successful in developing and marketing new products that respond to
technological changes or evolving industry standards. New product development
depends upon significant research and development expenditures which depend
ultimately upon sales growth. Any material weakness in revenue or research
funding could impair our ability to respond to technological advances or
opportunities in the marketplace and to remain competitive. If we are 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, our business, results of operations and financial condition may be
materially adversely affected.
In response to increasing market demand, we are currently developing new
generations of certain of our software products. There can be no assurance that
we 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 our competitive
position or could make our current products obsolete.
We face the possibility of claims based upon our web site. We could be
subject to third party claims based on the nature and content of information
supplied on our Web site by us or third parties, including content providers or
users. We could also be subject to liability for content that may be accessible
through our Web site or third party Web sites linked from our Web site or
through content and information that may be posted by users in chat rooms,
bulletin boards or on Web sites created by professionals using our applications.
Even if these claims do not result in liability to us, investigating and
defending against these claims could be expensive and time consuming and could
divert management's attention away from our operations.
We face the possibility of claims from activities of strategic partners.
We rely on third parties to provide services that impact our business. For
example, we use national clearinghouses in the processing of some insurance
claims and we outsource some of our hardware maintenance services and the
printing and delivery of patient statements for our customers. We also have
relationships with certain third parties where these third parties serve as
sales channels through which we generate a portion of our revenue. Due to these
third-party relationships, we could be subject to claims as a result of the
activities, products, or services of these third-party service providers even
though we were not directly involved in the circumstances leading to those
claims. Even
-14-
if these claims do not result in liability to us, defending and investigating
these claims could be expensive and time-consuming, divert personnel and other
resources from our business and result in adverse publicity that could harm our
business.
We may engage in future acquisitions, which may be expensive and time
consuming and from which we may not realize anticipated benefits. We may acquire
additional businesses, technologies and products if we determine that these
additional businesses, technologies and products are likely to serve our
strategic goals. We currently have no commitments or agreements with respect to
any acquisitions. The specific risks we may encounter in these types of
transactions include the following:
o Potentially dilutive issuances of our securities, the incurrence of
debt and contingent liabilities and amortization expenses related to
intangible assets, which could adversely affect our results of
operations and financial conditions;
o Difficulty in effectively integrating any acquired technologies or
software products into our current products and technologies;
o Difficulty in predicting and responding to issues related to product
transition such as development, distribution and customer support;
o The possible adverse impact of such acquisitions on existing
relationships with third party partners and suppliers of
technologies and services;
o The possibility that staff or customers of the acquired company
might not accept new ownership and may transition to different
technologies or attempt to renegotiate contract terms or
relationships, including maintenance or support agreements;
o The possibility that the due diligence process in any such
acquisition may not completely identify material issues associated
with product quality, product architecture, product development,
intellectual property issues, key personnel issues or legal and
financial contingencies; and
o Difficulty in integrating acquired operations due to geographical
distance, and language and cultural differences.
A failure to successfully integrate acquired businesses or technology for
any of these reasons could have a material adverse effect on the Company's
results of operations.
We face the risks and uncertainties that are associated with litigation
against us. We face the risks associated with litigation concerning the
operation of our business. The uncertainty associated with substantial
unresolved litigation may have an adverse impact on our business. In particular,
such litigation could impair our relationships with existing customers and our
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 our business, results of
operations and financial condition. Such litigation may also have the effect of
discouraging potential acquirers from bidding for us 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 our insurance coverage, that our insurance will cover
such claims or that appropriate insurance will continue to be available to us in
the future at commercially reasonable rates.
We rely heavily on our proprietary technology. We are heavily dependent on
the maintenance and protection of our intellectual property and we rely largely
on license agreements, confidentiality procedures, and employee nondisclosure
agreements to protect our intellectual property. Our software is not patented
and existing copyright laws offer only limited practical protection.
There can be no assurance that the legal protections and precautions we
take will be adequate to prevent misappropriation of our technology or that
competitors will not independently develop technologies equivalent or superior
to ours. Further, the laws of some foreign countries do not protect our
-15-
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.
We do not believe that our 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 us with
respect to our current or future products or that any such assertion will not
require us to enter into a license agreement or royalty arrangement or other
financial arrangement with the party asserting the claim. Responding to and
defending any such claims may distract the attention of Company management and
have a material adverse effect on our business, results of operations and
financial condition. In addition, claims may be brought against third parties
from which we purchase software, and such claims could adversely affect our
ability to access third party software for our systems.
We are dependent on our license rights from third parties. We depend upon
licenses for some of the technology used in our products from third-party
vendors. Most of these licenses can be renewed only by mutual consent and may be
terminated if we breach the terms of the license and fail to cure the breach
within a specified period of time. We may not be able to continue using the
technology made available to us under these licenses on commercially reasonable
terms or at all. As a result, we may have to discontinue, delay or reduce
product shipments until we can obtain equivalent technology. Most of our
third-party licenses are non-exclusive. Our competitors may obtain the right to
use any of the technology covered by these licenses and use the technology to
compete directly with us. In addition, if our vendors choose to discontinue
support of the licensed technology in the future or are unsuccessful in their
continued research and development efforts, we may not be able to modify or
adapt our own products.
We face the possibility of damages resulting from internal and external
security breaches, and viruses. In the course of our business operations, we
compile and transmit confidential information, including patient health
information, in our processing centers and other facilities. A breach of
security in any of these facilities could damage our reputation and result in
damages being assessed against us. In addition, the other systems with which we
may interface, such as the Internet and related systems, may be vulnerable to
security breaches, viruses, programming errors, or similar disruptive problems.
The effect of these security breaches and related issues could reduce demand for
our services. Accordingly, we believe that it is critical that these facilities
and related infrastructures not only be secure, but also be viewed by our
customers as free from potential breach. Maintaining such standards, protecting
against breaches and curing security flaws, may require us to expend significant
capital. The success of our strategy to offer our EDI services and Internet
solutions depends on the confidence of our customers in our ability to securely
transmit confidential information. Our EDI services and Internet solutions rely
on encryption, authentication and other security technology licensed from third
parties to achieve secure transmission of confidential information. We may not
be able to stop unauthorized attempts to gain access to or disrupt the
transmission of communications by our customers. Anyone who is able to
circumvent our security measures could misappropriate confidential user
information or interrupt us, or our customers', operations. In addition, our EDI
and Internet solutions may be vulnerable to viruses, physical or electronic
break-ins, and similar disruptions. Any failure to provide secure electronic
communication services could result in a lack of trust by our customers causing
them to seek out other vendors, and/or, damage our reputation in the market
making it difficult to obtain new customers.
We are subject to the development and maintenance of the Internet
infrastructure which is not within our control. We deliver Internet-based
services and, accordingly, we are dependent on the maintenance of the Internet
by third parties. The Internet infrastructure may be unable to support the
demands placed on it and our performance may decrease if the Internet continues
to experience it's historic trend of expanding usage. As a result of damage to
portions of its infrastructure, the Internet has experienced a variety of
performance problems which may continue into the foreseeable future. Such
Internet related problems may diminish Internet usage and availability of the
Internet to us for transmittal of our Internet-based services. In addition,
difficulties, outages, and delays by Internet service providers, online service
providers and other web site operators may obstruct or diminish access to our
Web site by our customers resulting in a loss of potential or existing users of
our services.
-16-
Our failure to manage growth could harm us. We have in the past
experienced periods of growth which have placed, and may continue to place, a
significant strain on our non-cash resources. We also anticipate expanding our
overall software development, marketing, sales, client management and training
capacity. In the event we are 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 us. In addition, our ability to
manage future increases, if any, in the scope of our operations or personnel
will depend on significant expansion of our research and development, marketing
and sales, management, and administrative and financial capabilities. The
failure of our management to effectively manage expansion in our business could
have a material adverse effect on our business, results of operations and
financial condition.
Our operations are dependent upon our key personnel. If such personnel
were to leave unexpectedly, we may not be able to execute our business plan. Our
future performance depends in significant part upon the continued service of our
key technical and senior management personnel, many of whom have been with us
for a significant period of time. These personnel have acquired specialized
knowledge and skills with respect to our business. We do not maintain key man
life insurance on any of our employees. Because we have a relatively small
number of employees when compared to other leading companies in the same
industry, our dependence on maintaining our relationship with key employees is
particularly significant. We are also dependent on our ability to attract and
retain high quality personnel, particularly in the areas of sales and
applications development.
The industry in which we operate is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel. There can be
no assurance that our current employees will continue to work for us. Loss of
services of key employees could have a material adverse effect on our business,
results of operations and financial condition. Furthermore, we may need to grant
additional equity incentives to key employees and provide other forms of
incentive compensation to attract and retain such key personnel. Failure to
provide such types of incentive compensation could jeopardize our recruitment
and retention capabilities.
Our products may be subject to product liability legal claims. Certain of
our products provide applications that relate to patient clinical information.
Any failure by our products to provide accurate and timely information could
result in claims against us. In addition, a court or government agency may take
the position that our delivery of health information directly, including through
licensed practitioners, or delivery of information by a third party site that a
consumer accesses through our web sites, exposes us to assertions of
malpractice, other personal injury liability, or other liability for wrongful
delivery/handling of healthcare services or erroneous health information. We
maintain insurance to protect against claims associated with the use of our
products as well as liability limitation language in our end-user license
agreements, but there can be no assurance that our insurance coverage or
contractual language would adequately cover any claim asserted against us. A
successful claim brought against us in excess of or outside of our insurance
coverage could have a material adverse effect on our business, results of
operations and financial condition. Even unsuccessful claims could result in our
expenditure of funds for litigation and management time and resources.
Certain healthcare professionals who use our Internet-based products will
directly enter health information about their patients including information
that constitutes a record under applicable law that we may store on our computer
systems. Numerous federal and state laws and regulations, the common law, and
contractual obligations, govern collection, dissemination, use and
confidentiality of patient-identifiable health information, including:
o state and federal privacy and confidentiality laws;
o our contracts with customers and partners;
o state laws regulating healthcare professionals;
o Medicaid laws;
o the Health Insurance Portability and Accountability Act of 1996
("HIPAA") and related rules proposed by the Health Care Financing
Administration; and
-17-
o Health Care Financing Administration standards for Internet
transmission of health data.
The U.S. Congress has finalized the Health Insurance Portability and
Accountability Act of 1996 that established elements including, but not limited
to, new federal privacy and security standards for the use and protection of
Protected Health Information. Any failure by us or by our personnel or partners
to comply with applicable requirements may result in a material liability to us.
Although we have systems and policies in place for safeguarding Protected
Health Information from unauthorized disclosure, these systems and policies may
not preclude claims against us for alleged violations of applicable
requirements. Also, third party sites and/or links that consumers may access
through our web sites may not maintain adequate systems to safeguard this
information, or may circumvent systems and policies we have put in place. In
addition, future laws or changes in current laws may necessitate costly
adaptations to our policies, procedures, or systems.
There can be no assurance that we will not be subject to product liability
claims, that such claims will not result in liability in excess of our insurance
coverage, that our insurance will cover such claims or that appropriate
insurance will continue to be available to us in the future at commercially
reasonable rates. Such product liability claims could have a material adverse
affect on our business, results of operations and financial condition.
We are subject to the effect of payor and provider conduct which we cannot
control. Electronic data transmission services are offered by certain payors to
healthcare providers that establish a direct link between the provider and
payor. This process reduces revenue to third party EDI service providers such as
us. Accordingly, we are unable to insure that we will continue to generate
revenue at or in excess of prior levels for such services. A significant
increase in the utilization of direct links between healthcare providers and
payers could have a material adverse effect on our transaction volume and
financial results. In addition, we cannot provide assurance that we will be able
to maintain our exiting links to payors or develop new connections on terms that
are economically satisfactory to us, if at all.
There is significant uncertainty in the healthcare industry in which we
operate and we are subject to the possibility of changing 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 change governmental involvement in healthcare and
reimbursement rates, and otherwise alter the operating environment for us and
our clients. Healthcare providers may react to these proposals, and the
uncertainty surrounding such proposals, by curtailing or deferring investments,
including those for our systems and related services. Cost-containment measures
instituted by healthcare providers as a result of regulatory reform or otherwise
could result in a reduction in the allocation of capital funds. Such a reduction
could have an adverse effect on our ability to sell our systems and related
services. On the other hand, changes in the regulatory environment have
increased and may continue to increase the needs of healthcare organizations for
cost-effective data management and thereby enhance the overall market for
healthcare management information systems. We cannot predict what impact, if
any, such proposals or healthcare reforms might have on our business, financial
condition and results of operations.
The HIPAA regulations, as adopted by the Department of Health and Human
Services ("HHS"), established, among other things:
o a national standard for electronic transactions and code sets to be
used in those transactions involving certain common health care
transactions;
o privacy regulations to protect the privacy of plan participants and
patients' medical records; and
-18-
o security regulations designed to establish security controls and
measures to protect the privacy and confidentiality of personal
identifiable health information when it is electronically stored,
maintained or transmitted (even if only internally transmitted
within a medical practice).
While the privacy and transaction and code set standards are currently in
effect, the security regulation will become effective by 2005. As these
regulations mature and become better defined, we anticipate that these
regulations will continue to directly affect certain of our products and
services, but we cannot fully predict the impact at this time. We have taken
steps to modify our products, services and internal practices as necessary to
facilitate our and our client's compliance with the final regulations, but there
can be no assurance that we will be able to do so in a timely or complete
manner. Achieving compliance with these regulations could be costly and distract
management's attention and other resources, and any noncompliance by us could
result in civil and criminal penalties.
In addition, development of related federal and state regulations and
policies regarding the confidentiality of health information or other matters
could positively or negatively affect our business.
In addition, our software may potentially 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 our business, financial condition and results of operations.
We may be subject to other e-commerce regulations. We may be subject to
additional federal and state statutes and regulations in connection with
offering services and products via the Internet. On an increasingly frequent
basis, federal and state legislators are proposing laws and regulations that
apply to Internet commerce and communications. Areas being affected by these
regulations include user privacy, pricing, content, taxation, copyright
protection, distribution, and quality of products and services. To the extent
that our products and services are subject to these laws and regulations, the
sale of our products and services could be harmed.
We are subject to changes in and interpretations of financial accounting
matters that govern the measurement of our performance. Based on our reading and
interpretations of relevant guidance, principles or concepts issued by, among
other authorities, the American Institute of Certified Public Accountants, the
Financial Accounting Standards Board, and the United States Securities and
Exchange Commission, Management believes our current sales and licensing
contract terms and business arrangements have been properly reported. However,
there continue to be issued interpretations and guidance for applying the
relevant standards to a wide range of sales and licensing contract terms and
business arrangements that are prevalent in the software industry. Future
interpretations or changes by the regulators of existing accounting standards or
changes in our business practices could result in future changes in our revenue
recognition and/or other accounting policies and practices that could have a
material adverse effect on our business, financial condition, cash flows,
revenue and results of operations.
Our earnings may be adversely affected if we change our accounting policy
with respect to employee stock options. Stock options have from time to time
been an important component of the compensation packages for many of our mid-
and senior-level employees. We currently do not deduct the expense of employee
stock option grants from our income. Many companies, however, are considering a
change to their accounting policies to record the value of stock options issued
to employees as an expense and changes in the accounting treatment of stock
options are currently under consideration by the Financial Accounting Standards
Board or other accounting standards-setting bodies. If we were to voluntarily or
involuntarily change our accounting policy with respect to the treatment of
employee stock option grants, our earnings could be materially adversely
affected.
Continuing worldwide political and economic uncertainties may adversely
impact our revenue and profitability. In the last three years, worldwide
economic conditions have experienced a downturn due to numerous factors
including but not limited to concerns about inflation and deflation, decreased
-19-
consumer confidence, the lingering effects of international conflicts, and
terrorist and military activities. These conditions make it extremely difficult
for our customers, our vendors and ourselves to accurately forecast and plan
future business activities, and they could cause constrained spending on our
products and services, and/or delay and lengthen sales cycles.
Item 2. Properties
Our principal administrative, accounting and QSI Division operations are
located in Irvine, California, under a lease that commenced May 15, 2002, and
expires April 30, 2005. We lease approximately 12,000 square feet of space at
this location. In April 2002, we executed a new lease for the principal office
of our NextGen Division. This lease includes approximately 32,000 square feet of
space in Horsham, Pennsylvania, and expires March 31, 2010. In addition, we
lease approximately 6,000 square feet of space in Santa Ana, California, to
house our assembly and warehouse operations, approximately 8,000 square feet of
space in Atlanta, Georgia, and an aggregate of approximately 4,000 square feet
of space in Kansas, Minnesota, Texas, Wisconsin, and Washington to house
additional sales, training, development and service operations. These leases,
excluding options, have expiration dates ranging from month-to-month to March
2010. Should the Company's near term growth continue, we will be required to
lease additional space. We believe that suitable additional or substitute space
is available, if needed, at commercially reasonable rates.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of fiscal year 2004.
Executive Officers of the Company
Our executive officers as of May 31, 2004 were as follows:
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Name Age Position
------------------------------------------------------------------------------------------
Louis E. Silverman 45 President, Chief Executive Officer
------------------------------------------------------------------------------------------
Patrick B. Cline 43 President, NextGen Healthcare Information Systems Division
------------------------------------------------------------------------------------------
Greg Flynn 46 Executive Vice President and General Manager of QSI Division
------------------------------------------------------------------------------------------
Paul Holt 38 Secretary, Chief Financial Officer
------------------------------------------------------------------------------------------
Our executive officers are elected by, and serve at the discretion of, the
Board of Directors. Additional information regarding our executive officers is
set forth below.
Louis E. Silverman was appointed President and Chief Executive Officer of
the company on July 31, 2000. Mr. Silverman was previously Chief Operations
Officer of CorVel Corp., a publicly traded national managed care services and
technology firm with headquarters in Irvine, California. Mr. Silverman holds a
Master of Business Administration degree from Harvard Graduate School of
Business Administration and a Bachelor of Arts degree from Amherst College.
Patrick B. Cline currently serves as President of our NextGen Healthcare
Information Systems Division. He served as our interim Chief Executive Officer
for the April - July 2000 period. Mr. Cline was a co-founder of Clinitec and has
served as its President since its inception in January 1994 and throughout its
transition to NextGen Healthcare Information Systems. Prior to co-founding
Clinitec, Mr. Cline served, from July 1987 to January 1994, as Vice President of
Sales and Marketing with Script Systems, a subsidiary of InfoMed, a healthcare
information systems company. From January 1994 to May 1994, after the founding
of Clinitec, Mr.
-20-
Cline continued to serve, on a part time basis, as Script Systems' Vice
President of Sales and Marketing. Mr. Cline has held senior positions in the
healthcare information systems industry since 1981.
Greg Flynn has served as the QSI Division's General Manager since April
2000 and as Executive Vice President since August 1998 after serving as Vice
President of Sales and Marketing from January 1996 to August 1998. Between June
1992 and January 1996, Mr. Flynn served as Vice President Administration. In
these capacities, Mr. Flynn has been responsible for numerous functions related
to our ongoing management and sales. Previously, Mr. Flynn served as our Vice
President, Corporate Communications. Mr. Flynn joined us in January 1982. He
holds a B.A. degree in English from the University of California, Santa Barbara.
Paul Holt was appointed Chief Financial Officer in November 2000. Mr. Holt
has served as our Controller from January 2000 to May 2000 and was appointed
interim Chief Financial Officer in May 2000. Prior to joining us, Mr. Holt was
the Controller of Sierra Alloys Co., Inc., a titanium metal manufacturing
company from August 1999 to December 1999. From May 1997 to July 1999, he was
Controller of Refrigeration Supplies Distributor, a wholesale distributor and
manufacturer of refrigeration supplies and heating controls. From March 1995 to
April 1997 he was Assistant Controller of Refrigeration Supplies Distributor.
Mr. Holt is a Certified Public Accountant and holds an M.B.A. from the
University of Southern California and a B.A. in Economics from the University of
California, Irvine.
-21-
PART II
Item 5. Market for Company's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our Common Stock is traded on the NASDAQ National Market under the symbol
"QSII". The following table sets forth for the quarters indicated the high and
low sales prices as reported by NASDAQ. The quotations reflect inter-dealer
prices, without retail markup, markdown, or commissions, and may not necessarily
represent actual transactions.
-------------------------------------------------
Quarter Ended High Low
-------------------------------------------------
June 30, 2002 $17.84 $14.45
-------------------------------------------------
September 30, 2002 $18.05 $14.92
-------------------------------------------------
December 31, 2002 $24.35 $16.10
-------------------------------------------------
March 31, 2003 $26.60 $20.05
-------------------------------------------------
June 30, 2003 $36.45 $22.50
-------------------------------------------------
September 30, 2003 $46.85 $25.15
-------------------------------------------------
December 31, 2003 $49.75 $39.81
-------------------------------------------------
March 31, 2004 $61.60 $39.00
-------------------------------------------------
At May 25, 2004, there were approximately 104 holders of record of our
Common Stock. We estimate the number of beneficial holders of our Common Stock
to be in excess of 4,300.
Through May 27, 2004, we have not paid cash dividends on shares of our
Common Stock. Payment of future dividends, if any, will be at the discretion of
our Board of Directors after taking into account various factors, including our
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
In October 2001, our Board of Directors authorized the repurchase on the
open market of up to 5% of the shares of our outstanding Common stock, subject
to compliance with applicable laws and regulations. There was no requirement
that we repurchase such shares. This stock repurchase authorization expired on
the date of our fiscal 2003 Annual Shareholders Meeting. Since the October 2001
authorization through the date of our fiscal 2003 Annual Shareholders Meeting,
no shares were repurchased.
We did not make any unregistered sales of our common stock during the
fourth quarter of our fiscal year ended March 31, 2004
Item 6. Selected Financial Data
The following selected financial data with respect to our Consolidated
Statements of Income Data for each of the five years in the period ended March
31, 2004 and the Consolidated Balance Sheet Data as of the end of each such
fiscal year are derived from our audited financial statements. The following
information should be read in conjunction with our Consolidated Financial
Statements and the related notes thereto and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations." included
elsewhere herein.
-22-
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(In thousands, except for per share data)
-----------------------------------------------------------------------
Year Ended March 31,
2004 2003 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Net revenue $70,934 $54,769 $44,422 $39,936 $36,373
Cost of products and services 28,673 23,755 19,253 17,283 16,395
-----------------------------------------------------------------------
Gross profit 42,261 31,014 25,169 22,653 19,978
Selling, general and administrative expenses 19,482 15,293 13,068 13,585 12,645
Research and development costs 6,139 5,062 4,243 4,081 3,726
-----------------------------------------------------------------------
Income from operations 16,640 10,659 7,858 4,987 3,607
Investment income 386 434 643 1,032 759
-----------------------------------------------------------------------
Income before provision for income taxes 17,026 11,093 8,501 6,019 4,366
Provision for income taxes 6,626 4,058 3,233 2,510 1,862
-----------------------------------------------------------------------
Net income $10,400 $ 7,035 $ 5,268 $ 3,509 $ 2,504
-----------------------------------------------------------------------
Net income per share, basic $ 1.67 $ 1.15 $ 0.87 $ 0.57 $ 0.40
-----------------------------------------------------------------------
Net Income per share, diluted $ 1.60 $ 1.10 $ 0.84 $ 0.57 $ 0.40
-----------------------------------------------------------------------
Weighted average shares outstanding, basic 6,218 6,127 6,025 6,130 6,208
-----------------------------------------------------------------------
Weighted average shares outstanding, diluted 6,483 6,389 6,240 6,203 6,261
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
-----------------------------------------------------------
March 31,
2004 2003 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents and short-term investments $51,395 $36,443 $25,698 $18,729 $16,169
-----------------------------------------------------------
Working capital 51,199 38,717 30,700 24,196 21,332
-----------------------------------------------------------
Total assets 86,678 67,602 52,143 44,883 44,136
-----------------------------------------------------------
Total liabilities 25,673 20,069 12,192 10,996 2,053
-----------------------------------------------------------
Shareholders' equity 61,005 47,533 40,050 33,887 32,083
- ---------------------------------------------------------------------------------------------------------------------
-23-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K, including discussions of our
product development plans, business strategies and market factors influencing
our results, may include forward-looking statements that involve certain risks
and uncertainties. Actual results may differ from those anticipated by us as a
result of various factors, both foreseen and unforeseen, including, but not
limited to, our ability to continue to develop new products and increase systems
sales in markets characterized by rapid technological evolution, consolidation,
and competition from larger, better capitalized competitors. Many other
economic, competitive, governmental and technological factors could impact our
ability to achieve our goals, and interested persons are urged to review the
risks described in "Item 1. Business. Risk Factors" as set forth above, as well
as in our other public disclosures and filings with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with, and is
qualified in our entirety by, the Consolidated Financial Statements and related
notes thereto included elsewhere in this Report. Historical results of
operations, percentage margin fluctuations and any trends that may be inferred
from the discussion below are not necessarily indicative of the operating
results for any future period.
Critical Accounting Policies. The discussion and analysis of our financial
condition and results of operations is based upon our 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 us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosures of contingent assets and liabilities. On an on-going basis, we
evaluate estimates, including those related to revenue recognition,
uncollectible accounts receivable, and intangible assets, for reasonableness. We
base our 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.
We believe revenue recognition, the allowance for doubtful accounts, and
goodwill impairment are among the most critical accounting policies that impact
our consolidated financial statements. We believe that significant accounting
policies, as described in Note 2 of our Consolidated Financial Statements,
"Summary of Significant Accounting Policies", should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Revenue Recognition. Our revenue is primarily generated from the sale of
software licenses, services, hardware, maintenance fees, and EDI services. We
currently recognize revenue pursuant to Statement of Position No. 97-2,
"Software Revenue Recognition", as modified by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect of Certain Transactions", Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", and SAB 104, "Revenue Recognition". SAB 101 summarizes the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 104 modifies certain guidance provided
in SAB 101.
Inherent in the revenue recognition process are significant management
estimates and judgments, which influence the timing and amount of revenue
recognition.
In accordance with the governing revenue recognition guidelines, if the
arrangement between vendor and purchaser 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
-24-
o collectibility is probable.
In accordance with generally accepted accounting principles in the United
States of America, the recognition of software license revenue is based on our
assessment that the above criteria have been met. In general, the first two
criteria are met with a signed contract and evidence that we have shipped our
software to the customer. We determine that our fee is fixed and determinable
based on the contract terms, which specify payment terms tied to specific dates
and not to any future deliverables. Probability of collection is based on a
credit review of customers. The timing or amount of revenue recognition may
differ if different assessments of the above listed criteria had been made at
the time transactions were recorded in revenue.
SOP 97-2, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. Our determination of the fair value
of each element in multi-element arrangements is based on vendor-specific
objective evidence ("VSOE"). We limit our assessment of VSOE for each element to
either the price charged when the same element is sold separately or the price
established by management having the relevant authority to do so, for an element
not yet sold separately. Management determines the price of individual elements
sold separately using a rolling average of stand alone transactions. VSOE
calculations are reviewed on a quarterly basis.
If evidence of fair value of all undelivered elements exists but evidence
of fair value does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred at VSOE and the remaining portion of the
arrangement fee is recognized as revenue, net of all discounts.
Contract accounting is applied where services include significant software
modification, development or customization. In such instances, the arrangement
fee is accounted for in accordance with SOP 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts", whereby the revenue is
recognized, generally using the percentage-of-completion method measured on
labor input hours. The complexity of the estimation process and judgment related
to the assumptions, risks and uncertainties inherent with the application of the
percentage-of-completion method of accounting affect the amounts of revenue
reported in its consolidated financial statements.
Valuation Allowances. We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. We perform ongoing credit evaluations of our customers and maintain
reserves for estimated credit losses. Reserves for potential credit losses are
determined by establishing both specific and general reserves. Specific reserves
are based on management's estimate of the probability of collection for certain
troubled accounts. General reserves are established based on our historical
experience of bad debt expense and the aging of our accounts receivable balances
net of deferred revenue and specifically reserved accounts. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, additional allowances would be required.
Goodwill Impairment. Our long-lived assets include goodwill of $1.8
million as of March 31, 2004 and 2003, respectively. We adopted SFAS No. 142
"Goodwill and Other Intangible Assets" ("SFAS 142") effective April 1, 2001. The
new statement applies to the amortization of goodwill and other intangible
assets. We ceased amortizing amounts related to goodwill beginning April 1,
2001. The balance of goodwill is related to our NextGen Division. Under SFAS
142, we are required to perform an annual assessment of the implied fair value
of goodwill and intangible assets with indefinite lives for impairment. We have
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, 2003 (the date of our last annual impairment test) 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 our 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 our strategic plans with regard to operations. To the extent
additional information arises or our strategies change, it is
-25-
possible that our conclusion regarding goodwill impairment could change and
result in a material effect on our financial position or results of operations.
Research and Development Tax Credits. During the year ended March 31,
2003, the Company filed amended federal and state tax returns for the fiscal
years ended March 31, 1998 through 2001, to take advantage of tax credits
related to our research and development activities. In addition, the Company
claimed research and development credit on its tax returns for the years ended
March 31, 2004, 2003 and 2002. The provision for income taxes for the year ended
March 31, 2004 accounts for approximately 50% of the aggregate federal tax
credits accumulated through March 31, 2004 due to the uncertainly concerning the
ultimate amount to be credited. The provision for income taxes for the year
ended March 31, 2003 accounts for a portion of the aggregate state and federal
tax credits claimed through the end of the period due to the uncertainly
concerning the ultimate amount to be refunded. Management's election to not
recognize all of the tax credits claimed represents a significant estimate which
affects the effective income tax rate for the Company in the years ending March
31, 2004 and 2003. Research and development credits taken by the Company involve
certain assumptions and judgments regarding qualification of expenses under the
relevant tax codes. While the Company has received all of federal refunds
claimed, none of the credits have been audited by the Internal Revenue Service.
Credits claimed for state income tax purposes are in the process of being
audited. However, no final conclusions have been received by the Company as of
June 1, 2004.
Results of Operations. The following table sets forth for the periods
indicated the percentage of net revenue represented by each item in our
Consolidated Statements of Operations.
--------------------------------
Year Ended March 31,
2004 2003 2002
- -----------------------------------------------------------------------------------
Net revenue:
Sales of computer systems, upgrades and supplies 55.7% 53.3% 50.7%
Maintenance and other services 44.3 46.7 49.3
--------------------------------
100.0 100.0 100.0
Cost of products and services 40.4 43.4 43.3
--------------------------------
Gross profit 59.6 56.6 56.7
Selling, general and administrative expenses 27.4 27.9 29.4
Research and development costs 8.7 9.2 9.6
--------------------------------
Income from operations 23.5 19.5 17.7
Investment income 0.5 0.8 1.4
--------------------------------
Income before provision for income taxes 24.0 20.3 19.1
Provision for income taxes 9.3 7.5 7.3
--------------------------------
Net income 14.7% 12.8% 11.8%
- -----------------------------------------------------------------------------------
For the Year Ended March 31, 2004 versus 2003
For the year ended March 31, 2004, our net income was $10,400,000 or $1.67
per share on a basic and $1.60 per share on a fully diluted basis. In
comparison, we earned $7,035,000 or $1.15 per share on a basic and
-26-
$1.10 on a fully diluted basis in the year ended March 31, 2003. The increase in
net income for the year ended March 31, 2004, was achieved through the
following:
o a 30% increase in revenue;
o an increase in our gross margin percentage from 56.6% to 59.6%; and
o Selling, general and administrative and research and development
expenses which grew at 27% and 21% respectively; slower than the
overall revenue growth rate.
Net Revenue. Net revenue for the year ended March 31, 2004 increased 30%
to $70.9 million from $54.8 million for the year ended March 31, 2003. NextGen
Division net revenue increased 46% from approximately $37.3 million to
approximately $54.4 million in the period, while QSI Division net revenue
declined by 5% during the period from approximately $17.4 million to $16.5
million.
The Company divides revenue into two categories, "Computer systems,
upgrades, and supplies" and "Maintenance and other". Revenue in the computer
systems, upgrades, and supplies category includes software license fees, third
party hardware and software, and implementation and training services related to
purchase of the Company's software systems. The majority of the revenue in the
Computer systems, upgrades, and supplies category is related to the sale of
software systems. Revenue in the maintenance and other category includes
maintenance, EDI, and other revenue. Maintenance and EDI revenue are the
principle sources of revenue in this category.
Computer Systems, Upgrades and Supplies. Company-wide sales of computer
systems, upgrades and supplies increased 35% to $39.5 million from $29.2
million.
The increase in revenue from sales of computer systems, upgrades and
supplies for the Company was principally the result of a 42% increase in such
revenue at the Company's NextGen Division whose sales in this category grew from
$26.2 million to $37.3 million. This increase was driven primarily by higher
sales of NextGen(emr) and NextGen(epm) software to both new and existing
clients, as well as related implementation services and hardware and third party
software. During the quarter ended March 31, 2004, the Company conducted a
successful program within its existing customer base which generated
approximately $0.8 million in add on license revenue for the quarter. The
Company may or may not conduct the same or similar programs in future quarters.
During the year and quarter ended March 31, 2004, licenses sales to existing
users increased over prior periods.
Category revenue in the QSI division declined from $3.0 million to $2.2
million.
Maintenance and Other. Company-wide revenue from maintenance and other
services grew 23% to $31.4 million from $25.6 million. The increase in this
category resulted principally from an increase in maintenance and EDI revenue
from the NextGen Division's client base. Total NextGen Division maintenance
revenue for the year ended March 31, 2004 grew 57% to $11.5 million from $7.3
million in the year ago period, while EDI revenue grew 76% to $3.0 million
compared to $1.7 million in the same period. QSI Division maintenance revenue
declined 5% from $8.0 million to $7.6 million in the same period while QSI
Divisional EDI revenue declined by approximately 2% from $5.4 million to $5.3
million.
The following table details revenue by category for the twelve month
periods ended March 31, 2004 and 2003:
---------------------------------------------------------------------------
Year Ended March 31, 2004 Year Ended March 31, 2003
(in thousands)
---------------------------------------------------------------------------
QSI NextGen Consolidated QSI NextGen Consolidated
- ----------------------------------------------------------------------------------------------------------------------
Computer Systems, Upgrades & Supplies $ 2,181 $37,344 $39,525 $ 2,956 $26,213 $29,169
======================================================================================================================
Maintenance 7,571 11,481 19,052 7,941 7,267 15,208
- ----------------------------------------------------------------------------------------------------------------------
EDI 5,310 3,015 8,325 5,426 1,733 7,159
- ----------------------------------------------------------------------------------------------------------------------
Other 1,429 2,603 4,032 1,100 2,133 3,233
======================================================================================================================
Total Maintenance & Other 14,310 17,099 31,409 14,467 11,133 25,600
======================================================================================================================
Total Revenue $16,491 $54,443 $70,934 $17,423 $37,346 $54,769
- ----------------------------------------------------------------------------------------------------------------------
-27-
Cost of Products and Services. Cost of products and services for the year
ended March 31, 2004 increased 21% to $28.7 million from $23.8 million for the
year ended March 31, 2003, while the cost of products and services as a
percentage of net revenue declined to 40.4% from 43.4% during the same period.
Our consolidated gross margins are impacted by the level of hardware content
included in system sales, the percentage of EDI revenue in our overall sales
mix, and certain headcount expenses directly related to the cost of delivering
our products and services. Consolidated gross margin percentages were also
impacted by the higher margin revenues of the NextGen Division which increased
it's share of total company revenue to 77% from 68% in the prior year.
-28-
----------------------------------------
Year Ended March 31,
----------------------------------------
2004 % 2003 %
====================================================================
Consolidated
--------------------------------------------------------------------
Net Revenue $70,934 100.0% $54,769 100.0%
--------------------------------------------------------------------
Cost of Product & Services 28,673 40.4% 23,755 43.4%
--------------------------------------------------------------------
Gross Margin 42,261 59.6% 31,014 56.6%
====================================================================
NextGen Division
--------------------------------------------------------------------
Net Revenue $54,443 100.0% $37,346 100.0%
--------------------------------------------------------------------
Cost of Product & Services 20,398 37.5% 14,511 38.9%
--------------------------------------------------------------------
Gross Margin 34,045 62.5% 22,835 61.1%
====================================================================
QSI Division
--------------------------------------------------------------------
Net Revenue $16,491 100.0% $17,423 100.0%
--------------------------------------------------------------------
Cost of Product & Services 8,275 50.2% 9,244 53.1%
--------------------------------------------------------------------
Gross Margin $ 8,216 49.8% $ 8,179 46.9%
====================================================================
Gross margins at the NextGen division for the year ended March 31, 2004
improved to 62.5% from 61.1% primarily due to a decrease in the relative level
of applicable headcount expense associated with delivering our products and
services, as well as a slightly lower proportionate level of hardware and third
party software content included in revenue. The QSI Division's gross margin
improved to 49.8% in the year ended March 31, 2004 from 46.9% in the same period
last year due to a proportionately lower hardware and third party software
content included in revenue.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 31, 2004 increased 27% to $19.5
million as compared to $15.3 million for the year ended March 31, 2003. The
increase in the amount of such expenses resulted primarily from increases of
$1.1 million in corporate expenses, principally in the area of professional
service fees, as well as $1.0 million in selling and administrative payroll and
benefits expenses, $0.9 million in commission expense, and $0.6 million in
travel and trade show expenses primarily in the NextGen division. Further
increases in selling, general and administrative expenses are expected.
Research and Development Costs. Research and development costs for the
year ended March 31, 2004 and 2003 were $6.1 million and $5.1 million,
respectively. The increase in research and development expenses were primarily
due to increased investment in the NextGen product line. Research and
development costs as a percentage of net revenue decreased to 8.7% from 9.2% due
in part, to the fact that revenue growth exceeded the increase in research and
development spending, and in part due to the fact that our investments in
capitalized software increased to $2.6 million from $1.7 million in the prior
year, reflecting increased expenditures directed at enhancements of NextGen
products. Research and development expenses are expected to continue at or above
current levels.
Investment Income. Investment income for the year ended March 31, 2004
decreased 11% to approximately $386,000 compared with $434,000 in the year ended
March 31, 2003. Investment income in the year ended March 31, 2004 declined
primarily due to the effect of the drop in short term interest rates versus the
-29-
prior year. The decline in interest rates was partially offset by an increase in
average funds available for investment during the year ended March 31, 2004.
Provision for Income Taxes. The provision for income taxes for the year
ended March 31, 2004 was approximately $6.6 million as compared to approximately
$4.1 million for the year ago period. The effective tax rates for fiscal 2004
and 2003 were 38.9% and 36.6%, respectively. The provision for income taxes for
the years ended March 31, 2004 and 2003 differ from the combined statutory rates
primarily due to the impact of varying state income tax rates and the impact of
research and development tax credits. The effective rate for the fiscal year
2004 increased from the prior year primarily due to a relatively smaller impact
of research and development tax credits as well as higher federal income tax
rates.
For the Year Ended March 31, 2003 versus 2002
For the year ended March 31, 2003, the Company's net income was $7,035,000
or $1.15 per share on a basic and $1.10 per share on a fully diluted basis. In
comparison, the Company earned $5,268,000 or $0.87 per share on a basic and
$0.84 on a diluted basis in the year ended March 31, 2002. The increase in net
income was achieved through a combination of an increase in revenue from
software systems sales, maintenance, and EDI services along with a decrease in
selling, general, and administrative expenses as a percentage of revenue.
Net Revenue. Net revenue for the year ended March 31, 2003 increased 23%
to $54.8 million from $44.4 million for the year ended March 31, 2002. Sales of
computer systems, upgrades and supplies increased 30% to $29.2 million from
$22.5 million while net revenue from maintenance and other service grew 17% to
$25.6 from $21.9 million during the comparable prior period. The increase in net
revenue from sales of computer systems, upgrades and supplies was principally
due to increased sales of the Company's NextGen(epm) and NextGen(emr) software
licenses to new customers. The increase in maintenance and other services net
revenue resulted primarily from the Company's increased client base together
with an increase in revenue generated from the Company's EDI services. These EDI
service revenue increases were principally in the Company's NextGen Division.
Revenue from the Company's EDI services increased 15% to $7.1 million for the
year ended March 31, 2003, compared to $6.2 million in the year ended March 31,
2002.
Software license sales to resellers represented less than 10% of total
revenue for the years ended March 31, 2003 and 2002.
The following table details revenue by category for the years ended March 31,
2003 and 2002:
- ----------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 2003 Year Ended March 31, 2002
--------------------------------------------------------------------------
(in thousands) QSI NextGen Consolidated QSI NextGen Consolidated
- ---------------------------------------------------------------------------------------------------------------------
Computer Systems, upgrades & supplies $ 2,956 $26,213 $29,169 $ 2,932 $19,588 $22,520
=====================================================================================================================
Maintenance 7,941 7,267 15,208 7,907 4,894 12,801
- ---------------------------------------------------------------------------------------------------------------------
EDI 5,426 1,733 7,159 5,242 942 6,184
- ---------------------------------------------------------------------------------------------------------------------
Other 1,100 2,133 3,233 1,143 1,774 2,917
=====================================================================================================================
Total Maintenance & Other 14,467 11,133 25,600 14,292 7,610 21,902
=====================================================================================================================
Total Revenue $17,423 $37,346 $54,769 $17,224 $27,198 $44,422
- ---------------------------------------------------------------------------------------------------------------------
-30-
Cost of Products and Services. Cost of products and services for the year
ended March 31, 2003 increased 23% to $23.4 million from $19.3 million for the
year ended March 31, 2002, while the cost of products and services as a
percentage of net revenue at 43.4% of revenue was roughly unchanged compared to
the prior year's 43.3% of revenue.
Gross margins for the Company are impacted by the level of hardware
content included in system sales, the percentage of EDI revenue in the Company's
overall sales mix, and certain headcount expenses. Gross margins at the NextGen
division for the year ended March 31, 2003 improved to 61.1% from 58.6%
primarily due to a decrease in the relative level of applicable headcount
expense associated with delivering the Company's products and services. The
increase in gross margins at the NextGen Division was offset by a higher level
of hardware content at the QSI Division, which drove a decrease in gross margin
to 46.9% in the year ended March 31, 2003 from 53.6% in the year ended March 31,
2002. In addition, the Company's gross margin percentage increased as the higher
margined NextGen Division increased its share of total Company revenue to 68%
from 61% in the prior year.
------------------------------------
Year Ended March 31,
------------------------------------
2003 % 2002 %
================================================================
Consolidated
----------------------------------------------------------------
Net Revenue $54,769 100.0% $44,422 100.0%
----------------------------------------------------------------
Cost of Product & Services 23,755 43.4% 19,253 43.3%
----------------------------------------------------------------
Gross Margin 31,014 56.6% 25,169 56.7%
================================================================
NextGen Division
----------------------------------------------------------------
Net Revenue $37,346 100.0% $27,198 100.0%
----------------------------------------------------------------
Cost of Product & Services 14,511 38.9% 11,264 41.4%
----------------------------------------------------------------
Gross Margin 22,835 61.1% 15,934 58.6%
================================================================
QSI Division
----------------------------------------------------------------
Net Revenue $17,423 100.0% $17,224 100.0%
----------------------------------------------------------------
Cost of Product & Services 9,244 53.1% 7,989 46.4%
----------------------------------------------------------------
Gross Margin $ 8,179 46.9% $ 9,235 53.6%
================================================================
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended March 31, 2003 increased 17% to $15.3 million from
$13.1 million for the year ended March 31, 2002, and decreased on a percentage
of revenue basis to 27.9% from 29.4% for the respective fiscal years. The
increase in selling, general and administrative expenses was driven primarily by
an increase in selling and compensation related expenses in the NextGen Division
and higher corporate related expenses.
Research and Development Costs. Research and development costs for the
year ended March 31, 2003 increased 19% to $5.1 million from $4.2 million for
-31-
the year ended March 31, 2002. The increase in research and development costs is
primarily the result of increased research and development efforts at the
NextGen Division. Research and development costs as a percentage of net revenue
declined to 9.2% compared to 9.6% in the prior year. Research and development
costs as a percentage of net revenue declined due, in part, to the fact that
revenue growth exceeded the increase in research and development spending, and,
in part due to the fact that the Company's investments in capitalized software
increased to $1.7 million from $1.5 million in the prior year, reflecting
increased expenditures directed at future enhancements of the NextGen(emr)
NextGen(epm) and NextGen(pda) products.
Investment Income. Investment income for the year ended March 31, 2003
declined 33% to $434,000 from $643,000 for the year ended March 31, 2002.
Investment income was impacted by a decline in average short term interest rates
during the year ended March 31, 2003 which decline was partially offset by an
increase in average funds available for investment during the year ended March
31, 2003.
Provision for Income Taxes. The provision for income taxes for the year
ended March 31, 2003 was $4,058,000 as compared to $3,233,000 for the year ended
March 31, 2002. The effective tax rates for fiscal 2003 and 2002 were 36.6% and
38.0%, respectively. The provision for income taxes for the year ended March 31,
2003 differed from the combined statutory rates primarily due to the effect of
varying state tax rates together with the impact of research and development tax
credits. The provision for income taxes for the year ended March 31, 2002,
differed from the combined statutory rates primarily due to the effect of
varying state tax rates.
Liquidity and Capital Resources. The following table presents selected
financial statistics and information for each of the past three fiscal years:
---------------------------
(in thousands) Year Ended March 31,
2004 2003 2002
-----------------------------------------------------------------------
Cash and cash equivalents at year end $51,395 $36,443 $25,443
-----------------------------------------------------------------------
Net increase in cash and cash equivalents $14,952 $11,000 $ 6,972
-----------------------------------------------------------------------
Net income $10,400 $ 7,035 $ 5,268
-----------------------------------------------------------------------
Net cash provided by operating activities $17,547 $13,183 $ 8,218
-----------------------------------------------------------------------
Days sales outstanding 98 104 111
-----------------------------------------------------------------------
Cash provided by operations is our principal source of cash. Cash from
operations for the year ended March 31, 2004 consisted principally of net income
before non-cash related expenses of depreciation, amortization, and provision
for bad debts, and increases in deferred revenue and other current liabilities,
offset by an increase in gross accounts receivable. We were able to generate
operating cash flows significantly in excess of net income in the year ended
March 31, 2004 primarily as a result of increases in deferred revenue of $5.6
million and improved turnover of accounts receivable. We were able to generate
operating cash flows significantly in excess of net income in the year ended
March 31, 2003 primarily as a result of improved turnover of accounts
receivable. Provided turnover of accounts receivable, increased revenue, and
profitability remain consistent with results experienced for the year ended
March 31, 2004, we anticipate continuing to generate cash from operations
primarily from net income. Net cash used in investing activities for the year
ended March 31, 2004 was $3.7 million and was primarily composed of investments
in capitalized software and equipment and improvements. We have no significant
capital commitments, and currently anticipate that additions to equipment and
improvements for fiscal 2005 will be equal to or greater than historical levels.
Net cash provided by financing activities for the year ended March 31,
2004 was $1.3 million, and was solely composed of proceeds from the exercise of
stock options and related tax benefits. Cash received from employee stock option
exercises can fluctuate from year to year.
-32-
At March 31, 2004, we had cash and cash equivalents of $51.4 million.
Management believes that our cash and cash equivalents on hand at March 31,
2004, together with the cash flows from operations, if any, will be sufficient
to meet our working capital and capital expenditure requirements for fiscal
2005.
The following table summarizes our significant contractual obligations at
March 31, 2004, and the effect that such obligations are expected to have on our
liquidity and cash in future periods:
- -------------------------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 to 3 years 3 to 5 years Beyond 5
1 Year Years
- -------------------------------------------------------------------------------------------------------------
Non-cancelable operating leases 3,974 1,193 1,382 1,196 203
- -------------------------------------------------------------------------------------------------------------
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
We have a significant amount of cash and short-term investments with
maturities less than three months. This cash portfolio exposes us to interest
rate risk as short-term investment rates can be volatile. Given the short-term
maturity structure of our investment portfolio, we believe that it is not
subject to principal fluctuations and the effective interest rate of our
portfolio tracks closely to various short-term money market interest rate
benchmarks.
Item 8. Financial Statements and Supplementary Data
Our Financial Statements identified in the Index to Financial Statements
appearing under "Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K" of this report are incorporated herein by reference to Item 15.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
Based on their evaluation of our disclosure controls and procedures as of
a date within 90 days of the filing date of this report, our officers including
our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures result in the effective recordation,
processing, summarization and reporting of information that is required to be
disclosed in the reports that we file under the Securities Exchange Act of 1934
and the rules thereunder.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation. However, in June, 2003, we received a letter from Grant Thornton LLP
expressing its opinion as to material weaknesses involving (i) the adequacy of
our current staffing levels and technical expertise concerning interpretation of
our software arrangements as it relates to revenue recognition (ii) the
independence of mental attitude of certain members of the board of directors
relating to our auditors and certain of their conclusions reached, and (iii) an
over reliance by the board and management upon such auditors to formulate
judgments and interpretations of the accounting literature applicable to our
revenue recognition practices. The Audit Committee has carefully reviewed the
issues and discussed them with both Grant Thornton LLP and management. The Audit
Committee engaged a third party expert to study what corrective action was
warranted. During the year ended March 31, 2004, the Company made several
enhancements to its internal processes including additional staffing, additional
professional education for staff in the area of revenue recognition, and the
initiation of the implementation of new software to assist in the accounting for
its rendered contracts.
-33-
PART III
Item 10. Directors and Executive Officers of the Company
Except for information concerning our executive officers which is included
under the caption "Executive Officers of the Company" following Part I, Item 4
of this Report, the information required by Item 10 is incorporated herein by
reference from our definitive proxy statement for our 2004 annual shareholders'
meeting to be filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year ended March 31, 2004.
Item 11. Executive Compensation
The information required by Item 11 is incorporated herein by reference
from our definitive proxy statement for our 2004 annual shareholders' meeting to
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year ended March 31, 2004.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by Item 12 is incorporated herein by reference
from our definitive proxy statement for our 2004 annual shareholders' meeting to
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year ended March 31, 2004.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated herein by reference
from our definitive proxy statement for our 2004 annual shareholders' meeting to
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year ended March 31, 2004.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated herein by reference
from our definitive proxy statement for our 2004 annual shareholders' meeting to
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year ended March 31, 2004.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page
----
(a) 1. Index to Financial Statements
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets at March 31, 2004 and 2003 F-2
Consolidated Statements of Income for the Years Ended March 31,
2004, 2003 and 2002 F-3
Consolidated Statement of Shareholders' Equity for the Years
Ended March 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2004, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts F-21
3. Exhibits
Index to Exhibits E-1
-34-
Exhibits
Sequential Page
Number Description Number
------ ----------- ------
3.1 Articles of Incorporation of the Company, as amended,
are hereby incorporated by reference to Exhibit 3.1 to
our Annual Report on Form 10-K for the year ended March
31, 1984, File No. 2-80056.
3.2 Bylaws of the Company, as amended, are hereby
incorporated by reference to Exhibit 3.3 to our
Registration Statement on Form S-1, File No. 2-80056.
3.3 Certificate of Amendment of Bylaws of the Company is
hereby incorporated by reference to Exhibit 3.2.1 to our
Registration Statement on Form S-1, File No. 333-00161.
3.4 Text of Sections 2 and 3 of Article II of the bylaws of
the Company is hereby incorporated by reference to
Exhibit 3.2.2 to our Quarterly report on Form 10-QSB for
the period Ended December 31, 1996, File No. 0-13801.
3.5 Certificate of Amendment of Bylaws of the Company, is
hereby incorporated by reference to Exhibit 3.2.3 to our
Annual Report on Form 10-K for the year ended March 31,
2000, File No. 0-13801.
3.6 Amendment of the Bylaws of the Company. The Corporate
Governance Provisions exhibit to Company's Definitive
Proxy Statement on schedule 14A for our 1999
Shareholder's Meeting, File No. 001-12537, which
concerns an amendment to the Company's Bylaws, is hereby
incorporated by reference.
10.2* 1989 Incentive Stock Option Plan is hereby incorporated
by reference to Exhibit 4.1 to our Registration
Statement on Form S-8, File No. 33-31949.
10.2.1* Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to our
Registration Statement on Form S-1, File No. 333-00161.
10.2.2* Form of Non-Qualified Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.3 to our
Registration Statement on Form S-1, File No. 333-00161.
10.3* Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to our
Registration Statement on Form S-1, File No. 2-80056.
-35-
Sequential Page
Number Description Number
------ ----------- ------
10.4* 1993 Deferred Compensation Plan is hereby incorporated
by reference to Exhibit 10.5 to our Annual Report on
Form 10-KSB for the year ended March 31, 1994, File No.
0-13801.
10.4.2* Profit Sharing and Retirement Plan, as amended, is
hereby incorporated by reference to Exhibit 10.4.2 to
our Annual Report on Form 10-KSB for the year ended
March 31, 1994, File No. 0-13801.
10.4.3* Profit Sharing and Retirement Plan, as amended,
amendments No. 2 and 3, are hereby incorporated by
reference to Exhibit 10.4.3 to our Annual Report on Form
10-KSB for the year ended March 31, 1996, File No.
0-13801.
10.5 Series "A" Convertible Preferred Stock Purchase
Agreement, as amended, dated April 21, 1995 between the
Company and Clinitec International, Inc., is hereby
incorporated by reference to Exhibit 10.11 to our Annual
Report on Form 10-KSB for the year ended March 31, 1995,
File No. 0-13801.
10.6 Form of Indemnification Agreement is hereby incorporated
by reference to Exhibit 10.10 to our Registration
Statement on Form S-1, File No. 333-00161.
10.7 Agreement and Plan of Merger, dated May 16, 1996, by and
among Quality Systems, Inc., CII Acquisition
Corporation, Clinitec International, Inc. and certain
shareholders of Clinitec International, Inc. and certain
exhibits are hereby incorporated by reference to Exhibit
2 to our Current Report on Form 8-K, dated May 17, 1996
and filed May 30, 1996.
10.8 Asset Purchase Agreement, dated May 15, 1997, by and
among NextGen Healthcare Information Systems, Inc., MHIS
Acquisition Corp., Quality Systems, Inc., and certain
shareholders of NextGen Healthcare Information Systems,
Inc. is hereby incorporated by reference to Exhibit 2 of
Company's Current Report on Form 8-K, dated May 15, 1997
and filed May 29, 1997, File No. 0-13801.
10.9* 1998 Employee Stock Contribution Plan is hereby
incorporated by reference to Exhibit 4.1 to our
Registration Statement on Form S-8, File No. 333-63131.
10.10* 1998 Stock Option Plan is hereby incorporated by
reference to Exhibit 4.1 to our Registration Statement
on Form S-8, File No. 333-67115.
10.11* Memorandum of Understanding regarding the April 3, 2000
resignation of Sheldon Razin between Sheldon Razin and
Quality Systems, Inc., is hereby incorporated by
reference to Exhibit 10.16 to our Annual Report on Form
10-K for the year ended March 31, 2000, File No.
0-13801.
10.12* Memorandum of Understanding Relating to Director
Nominees is hereby incorporated by reference to
Company's Definitive Proxy Statement for our 1999
Shareholder's Meeting, File No. 001-12537.
10.13* Employment Agreement dated July 20, 2000 between Quality
Systems, Inc. and Lou Silverman is hereby incorporated
by reference to Exhibit 10.18 to our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000, File
No. 0-13801.
-36-
Sequential Page
Number Description Number
------ ----------- ------
10.14 Lease Agreement between Company and Tower Place, L.P.
dated November 15, 2000, commencing February 5, 2001 is
hereby incorporated by reference to Exhibit 10.14 to our
Annual Report on Form 10-K for the year ended March 31,
2001, File No. 0-13801.
10.15 Lease Agreement between Company and Orangewood Business
Center Inc. dated April 3, 2000, amended February 22,
2001, is hereby incorporated by reference to Exhibit
10.15 to our Annual Report on Form 10-K for the year
ended March 31, 2001, File No. 0-13801.
10.16 Lease Agreement between Company and Craig Development
Corporation dated February 20, 2001 is hereby
incorporated by reference to Exhibit 10.16 to our Annual
Report on Form 10-K for the year ended March 31, 2001,
File No. 0-13801.
10.17 Sublease Agreement between Company and Infinium Software
dated February 22, 2002 is hereby incorporated by
reference to Exhibit 10.17 to our Annual Report on Form
10-K for the year ended March 31, 2003, File No.
0-13801.
10.18 Lease Agreement between Company and HUB Properties LLC
dated May 8, 2002 is hereby incorporated by reference to
Exhibit 10.18 to our Annual Report on Form 10-K for the
year ended March 31, 2003, File No. 0-13801.
14 Code of Business Conduct and Ethics.**
21 List of Subsidiaries. ** 43
23.1 Consent of Independent Certified Public Accountants. ** 44
31.1 Certification by Chief Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**
31.2 Certification by Chief Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002**
32.1 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002**
* This exhibit is a management contract or a compensatory plan or
arrangement.
** Filed herewith.
-37-
(b) Reports on Form 8-K:
On February 2, 2004, the Company filed a Report on Form 8-K with the SEC
concerning the Company's financial performance for the period ended December 31,
2003. A copy of the Company's press release announcing the results and certain
other information was attached to the Report on Form 8-K.
On February 6, 2004, the Company filed a Report on Form 8-K with the SEC
concerning a transcript of the conference call with management covering the
financial performance for the period ended December 31, 2003. A copy of a
transcript of the conference call was attached to the Report on Form 8-K.
-38-
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized.
QUALITY SYSTEMS, INC.
By: /s/ LOUIS SILVERMAN
-------------------------------------
Louis Silverman
President and Chief Executive Officer
Date: June 9, 2004
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ SHELDON RAZIN Chairman of the Board of Directors May 26, 2004
- --------------------------------
SHELDON RAZIN
/s/ LOUIS SILVERMAN Chief Executive Officer June 9, 2004
- --------------------------------
LOUIS SILVERMAN
/s/ PAUL HOLT Secretary, Chief Financial Officer June 9, 2004
- --------------------------------
PAUL HOLT
/s/ DALE HANSON Director May 26, 2004
-------------------------------
DALE HANSON
/s/ FRANK MEYER Director May 26, 2004
--------------------------------
FRANK MEYER
/s/ WILLIAM SMALL Director May 26, 2004
- ---------------------------------
WILLIAM SMALL
/s/ EMAD ZIKRY Director May 26, 2004
- ---------------------------------
EMAD ZIKRY
-39-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Quality Systems, Inc.
We have audited the accompanying consolidated balance sheets of Quality
Systems, Inc. as of March 31, 2004 and 2003, and the related
consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2004.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Quality Systems, Inc. as of March 31, 2004 and 2003, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended March 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited Schedule II of Quality Systems, Inc. for each of the
three years in the period ended March 31, 2004. In our opinion, this schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
/s/ Grant Thornton LLP
Irvine, California
May 25, 2004
-F1-
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
--------------------
March 31,
2004 2003
- --------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,395 $36,443
Accounts receivable, less allowance for doubtful accounts
of $1,293 and $990, respectively 20,336 17,561
Inventories, net 725 667
Net current deferred tax assets 2,979 2,029
Other current assets 1,437 2,086
-------------------
Total current assets 76,872 58,786
Equipment and improvements, net 2,012 1,777
Capitalized software costs, net 3,608 2,511
Net long-term deferred tax assets 1,104 1,819
Goodwill 1,840 1,840
Other assets, net 1,242 869
-------------------
Total assets $ 86,678 $67,602
-------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,655 $ 2,477
Deferred revenue 17,263 11,699
Accrued employee compensation and benefits 2,985 2,259
Other current liabilities 3,770 3,634
-------------------
Total current liabilities 25,673 20,069
-------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value, 20,000 shares authorized,
6,325 and 6,152 shares issued and outstanding, respectively 63 62
Additional paid-in capital 39,735 35,121
Retained earnings 22,750 12,350
Deferred compensation (1,543) --
-------------------
Total shareholders' equity 61,005 47,533
-------------------
Total liabilities and shareholders' equity $ 86,678 $67,602
===================
- --------------------------------------------------------------------------------------
See notes to consolidated financial statements.
-F2-
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
---------------------------
Year Ended March 31,
2004 2003 2002
- ---------------------------------------------------------------------------------
Net revenue:
Sales of computer systems, upgrades and supplies $39,525 $29,169 $22,520
Maintenance and other services 31,409 25,600 21,902
---------------------------
70,934 54,769 44,422
Cost of products and services 28,673 23,755 19,253
---------------------------
Gross profit 42,261 31,014 25,169
Selling, general and administrative expenses 19,482 15,293 13,068
Research and development costs 6,139 5,062 4,243
---------------------------
Income from operations 16,640 10,659 7,858
Investment income 386 434 643
---------------------------
Income before provision for income taxes 17,026 11,093 8,501
Provision for income taxes 6,626 4,058 3,233
---------------------------
Net income $10,400 $ 7,035 $ 5,268
===========================
Net income per share, basic $ 1.67 $ 1.15 $ 0.87
---------------------------
Net income per share, diluted $ 1.60 $ 1.10 $ 0.84
---------------------------
Weighted average shares outstanding - basic 6,218 6,127 6,025
---------------------------
Weighted average shares outstanding - diluted 6,483 6,389 6,240
- ---------------------------------------------------------------------------------
See notes to consolidated financial statements.
-F3-
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
-----------------------------------------------------------------------------
Common Shares Additional Total
------------- Paid-in Retained Deferred Shareholders'
Number $ Capital Earnings Compensation Equity
- ------------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 5,987 $ 60 $ 33,780 $ 47 $ -- $ 33,887
Exercise of stock options 118 1 795 -- -- 796
Tax benefit resulting from
stock options -- 99 -- -- 99
Net income -- 5,268 -- 5,268
============================================================================================================
Balance at March 31, 2002 6,105 61 34,674 5,315 -- $ 40,050
Exercise of stock options 47 1 351 -- -- 352
Tax benefit resulting from
stock options -- 96 -- -- 96
Net income -- -- 7,035 -- 7,035
============================================================================================================
Balance at March 31, 2003 6,152 62 35,121 12,350 -- 47,533
Exercise of stock options 173 1 1,307 -- -- 1,308
Tax benefit resulting from
stock options -- 1,454 -- -- 1,454
Intrinsic value of stock
option grant -- 1,853 -- (1,543) 310
Net income -- -- 10,400 -- 10,400
============================================================================================================
Balance at March 31, 2004 6,325 $ 63 $ 39,735 $ 22,750 $ (1,543) $ 61,005
============================================================================================================
See notes to consolidated financial statements.
-F4-
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
---------------------------------------
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------
2004 2003 2002
Cash flows from operating activities:
Net income $ 10,400 $ 7,035 $ 5,268
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 836 910 807
Amortization of capitalized software costs 1,490 1,267 1,279
Provision for bad debts 647 623 497
Non-cash compensation from stock option grants 310 -- --
Loss on short-term investments and other -- 21 3
Deferred income taxes (235) 298 380
Changes in:
Accounts receivable (3,422) (4,489) (857)
Inventories (58) 451 (88)
Other assets 276 (909) (481)
Accounts payable (822) (180) 828
Deferred revenue 5,564 5,544 560
Accrued compensation and benefits 726 584 302
Other current liabilities 1,591 2,028 (280)
---------------------------------------
Net cash provided by operating activities 17,303 13,183 8,218
---------------------------------------
Cash flows from investing activities:
Additions to capitalized software costs (2,587) (1,660) (1,477)
Additions to equipment and improvements (1,072) (1,109) (565)
Proceeds from the sale of short-term investments -- 234 --
---------------------------------------
Net cash used in investing activities (3,659) (2,535) (2,042)
---------------------------------------
Cash flows from financing activities:
Proceeds from exercise of stock options 1,308 352 796
---------------------------------------
Net cash provided by financing activities 1,308 352 796
---------------------------------------
Net increase in cash and cash equivalents 14,952 11,000 6,972
Cash and cash equivalents, beginning of year 36,443 25,443 18,471
---------------------------------------
Cash and cash equivalents, end of year $ 51,395 $ 36,443 $ 25,443
====================================================================================================
Supplemental Information. During fiscal 2004, 2003 and 2002 the
Company made income tax payments of $4,716, $4,280 and $3,386,
respectively
See notes to consolidated financial statements.
-F5-
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
1. Description of Business
Quality Systems, Inc., comprised of the QSI Division ("QSI Division") and
a wholly owned subsidiary, NextGen Healthcare Information Systems, Inc.
("NextGen Division") (collectively, the "Company"), develops and markets
proprietary healthcare information systems that automate medical and dental
group practices, community health centers, physician hospital organizations,
management service organizations, and dental schools. The Company's software
systems include general patient information, appointment scheduling, billing,
insurance claims submission and processing, managed care plan implementation and
referral management, treatment outcome studies, treatment planning, drug
formularies, electronic patient records, dental charting and letter generation.
In addition to providing fully integrated solutions, the Company provides its
clients with comprehensive hardware and software maintenance and support
services, system training services and electronic claims submission services.
The Company's principal administrative, accounting and QSI Division operations
are located in Irvine, California. The principal office of the NextGen Division
is located in Horsham, Pennsylvania.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiary. All significant intercompany amounts and transactions have
been eliminated.
Basis of Presentation. The accompanying consolidated financial statements
have been prepared in accordance with accounting principals generally accepted
in the United States of America.
Revenue Recognition. The Company currently recognizes revenue pursuant to
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" ("SOP 97-2"),
as amended by SOP 98-9 "Modification of SOP 97-2, "Software Revenue
Recognition". The Company generates revenue from licensing rights to use its
software products directly to end-users and value-added resellers (VARs). The
Company also generates revenue from sales of hardware and third party software,
and implementation, training, software customization and post-contract support
("maintenance") services performed for customers who license its products. A
typical system contract contains multiple elements of two or more of the above
items. SOP 97-2, as amended, requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of those elements. The fair value of an element must be
based on objective evidence that is specific to the vendor. When evidence of
fair value exists for the delivered and undelivered elements of a transaction,
then discounts for individual elements are aggregated and the total discount is
allocated to the individual elements in proportion to the elements' fair value
to the total contract fair value.
When evidence of fair value exists for the undelivered elements only, the
residual method, provided for under SOP 98-9, is required to be used. Under the
residual method, the Company defers revenue related to the undelivered elements
in a system sale based on vendor specific objective evidence ("VSOE") of each
element's fair value, which is based on the average sales price of those
elements when sold separately, and allocates the remainder of the contract price
net of all discounts to revenue recognized from the delivered elements. The
Company limits its assessment of VSOE for each element to either the price
charged when the same element is sold separately or the price established by
management having the relevant authority to do so, for an element not yet sold
separately. VSOE is reviewed on a quarterly basis. Undelivered elements of a
system sale generally may include implementation and training services, hardware
and third party software, maintenance or other services.
The Company bills for the entire contract amount upon contract execution.
Amounts billed in excess of the amounts contractually due are recorded in
accounts receivable as advance billings. Amounts are contractually due when
services are performed or in accordance with contractually specified payment
dates.
-F6-
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 generally recognized upon shipment and transfer of title. Revenue
from implementation, training and software customization services is recognized
as the corresponding services are performed. Maintenance revenue is recognized
ratably over the contractual maintenance period.
Certain system sales contracts contain payment terms based on the
performance of certain milestones or include services to provide significant
production or customization of the software. License and hardware revenue for
such contracts are recognized using the percentage of completion or completed
contract method, as appropriate.
License arrangements with Value-added resellers (VAR's) do not provide for
returns, and thus license revenue from VARs are generally recognized upon
shipment.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash,
money market funds and short term U.S. Treasuries with maturities of less than
90 days. The money market fund which has a portion of the Company's cash invests
in only investment grade money market instruments from a variety of industries,
and therefore bears minimal risk. The average maturity of the investments held
by the money market fund is approximately two months.
Short-Term Investments. The Company classifies its short-term investments
into one of the following categories:
o Trading - Debt securities that do not meet the "intent-to-hold"
criteria and equity securities, both of which are bought and held
principally for the purpose of being sold in the near term.
o Available-for-sale - Debt securities that do not meet the
"intent-to-hold" criteria and which are not classified as trading
securities, as well as all equity securities not otherwise
classified as trading securities.
o Held to maturity - Debt securities for which the Company has the
intent and the ability to hold to maturity.
Trading securities are carried on the balance sheet at fair market value
and unrealized gains and losses are recorded in the statement of operations.
Available-for-sale securities are carried in the balance sheet at fair market
value; realized gains and losses are recorded in the statement of operations
when they are earned or incurred, and unrealized gains and losses, net of tax
effect, are recognized as a component of shareholders' equity. Held to maturity
securities are carried in the balance sheet at cost (unless there are declines
in the values of individual securities that are not due to temporary declines),
and realized gains and losses are recorded in the statement of operations in the
period that they are earned or incurred. Realized gains and losses from
investment transactions are determined on a specific identification basis. The
Company had no short term investments at March 31, 2004 or 2003.
Accounts Receivable. The Company provides credit terms ranging from thirty
days to less than twelve months for most system and maintenance contract sales
and generally do not require collateral. The Company performs ongoing credit
evaluations of our customers and maintain reserves for estimated credit losses.
Reserves for potential credit losses are determined by establishing both
specific and general reserves. Specific reserves are based on management's
estimate of the probability of collection for certain troubled accounts. General
reserves are established based on our historical experience of bad debt expense
and the aging of our accounts receivable balances net of deferred revenue and
specifically reserved accounts. Accounts are written off as uncollectible only
after the Company has exhausted all possible means of collection.
Included in accounts receivable are amounts related to maintenance and
services which were billed, but which had not yet been rendered as of the end of
the fiscal year. Undelivered maintenance and services are included on the
balance sheet in deferred revenue.
Inventories. Inventories are valued at lower of cost (first-in, first-out)
or market and consist primarily of third party products in support of current
customer orders. Certain inventories are maintained for customer support
pursuant to service agreements and are amortized over a five-year period using
the straight-line method.
-F7-
Equipment and Improvements. Equipment and improvements are
stated at cost less accumulated depreciation and amortization.
Depreciation and amortization of equipment and improvements are
provided over the estimated useful lives of the assets, or the related
lease terms if shorter, by the straight-line method. Useful lives
range as follows:
Computers and electronic test equipment 3-5 years
Furniture and fixtures 5-7 years
Vehicles 7 years
Leasehold improvements 3-7 years
Software Development Costs. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
development costs are capitalized in accordance with the Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed." Such capitalized costs are
amortized on a straight line basis over the estimated economic life of the
related product of three years. The Company performs an annual review of the
recoverability of such capitalized software costs. At the time a determination
is made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, any remaining capitalized
amounts are written off.
Goodwill and Intangible Assets. The Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") effective April 1, 2001.
This statement applies to the amortization of goodwill and other intangible
assets. The Company ceased amortizing amounts related to goodwill starting April
1, 2001. The balance of goodwill is related to the NextGen Division. Under SFAS
142, management is required to perform an annual assessment of the implied fair
value of goodwill and intangible assets with indefinite lives for impairment.
The Company compared the fair value of the NextGen Division with the carrying
amount of its assets and determined that none of the goodwill recorded was
impaired as of June 30, 2003 (the date of the Company's last annual impairment
test). The fair value of the NextGen Division was determined using an estimate
of future cash flows for the NextGen Division over ten years and risk adjusted
discount rates of between 15 and 25 percent to compute a net present value of
future cash flows.
Long Lived Assets. The Company has adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" "SFAS 144". SFAS 144 establishes a single accounting model
for the Impairment or disposal of long-lived assets, including discontinued
operations. SFAS 144 superseded Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" , and APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The
adoption of this statement did not have a material effect on the Company's
consolidated financial statements. Management periodically reviews the carrying
value of long-lived assets to determine whether or not an impairment to such
value has occurred and has determined that there was no impairment at March 31,
2004.
Income Taxes. Income taxes are provided for the tax effects of
transactions reported in the financial statements and consists of taxes
currently due plus deferred taxes related to differences between the basis of
assets and liabilities for financial and tax reporting. The deferred income tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred income taxes also are recognized
for operating losses that are available to offset future taxable income and tax
credits that are available to offset future income taxes. Valuation allowances
are established as a reduction of net deferred income tax assets when management
determines that it is more likely than not that the deferred assets will not be
realized.
Earnings per Share. Pursuant to SFAS No. 128, "Earnings Per Share," the
Company provides dual presentation of "basic" and "diluted" earnings per share
("EPS").
-F8-
Basic EPS excludes dilution from common stock equivalents and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from common stock equivalents.
The following table reconciles the weighted average shares outstanding for
basic and diluted net income per share for the periods presented.
---------------------------------
Year Ended March 31,
(in thousands except per share amounts)
2004 2003 2002
- ---------------------------------------------------------------------------------------
Net income $10,400 $ 7,035 $ 5,268
---------------------------------
Basic net income per common share:
Weighted average of common shares outstanding 6,218 6,127 6,025
---------------------------------
Basic net income per common share $ 1.67 $ 1.15 $ 0.87
---------------------------------
Diluted net income per share:
Weighted average of common shares outstanding 6,218 6,127 6,025
Weighted average of common shares equivalents:
Weighted average options outstanding 265 262 215
---------------------------------
Weighted average number of common and
common equivalent shares 6,483 6,389 6,240
---------------------------------
Diluted net income per common share $ 1.60 $ 1.10 $ 0.84
- ---------------------------------------------------------------------------------------
Stock-Based Compensation. The Company accounts for stock-based employee
compensation as prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees". Effective March 31, 2003, the Company adopted Statement of
Financial Accounting Standards ("SFAS") 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 supercedes
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 148 requires pro forma disclosures of net
income and net income per share as if the fair value based method of accounting
for stock-based awards had been applied for both employee and non-employee
grants. It also requires disclosure of option status on a more prominent and
frequent basis. Such disclosure for the years ended March 31, 2004, 2003 and
2002 is presented immediately below. The Company accounts for stock options and
warrants issued to non-employees based on the fair value method, but has not
elected this treatment for grants to employees and board members. Under the fair
value based method, compensation cost is recorded based on the value of the
award at the grant date and is recognized over the service period.
The Company's fair value calculations for options granted in fiscal 2004
and 2002 were made using the Black-Scholes option pricing model with the
following assumptions: expected life - approximately 48 and 60 months from the
date of the grant; stock volatility - 55 to 57% , risk free interest rate of
3.0% and 3.5 to 4.5%; and, no dividends during the expected term. No options
were granted in fiscal 2003.
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of
awards had been amortized to expense over the vesting period of the awards, pro
forma net income and net income per share would have been as follows:
-F9-
----------------------------------------
Year Ended March 31,
(in thousands, except for per share amounts) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net Income $10,400 $7,035 $5,268
----------------------------------------
Proforma Option Compensation Cost (Net of Taxes) (225) (322) (340)
----------------------------------------
Proforma Net Income 10,175 6,713 4,928
========================================
Reported Basic Net Income Per Share $ 1.67 $ 1.15 $ 0.87
----------------------------------------
Proforma Basic Net Income Per Share 1.64 1.10 0.82
----------------------------------------
Reported Diluted Net Income Per Share 1.60 1.10 0.84
----------------------------------------
Proforma Diluted Net Income Per Share 1.57 1.05 0.79
- ------------------------------------------------------------------------------------------------------------
Fair Value of Option Awards Granted $ 2,078 $ 0 $ 884
============================================================================================================
Had the Company used a different model such as the binomial model to value
options, a different valuation may have been determined which may have changed
the reported expense.
Segment Disclosures. The Company presents reporting information regarding
operating segments in accordance with SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". Operating segments are identified as
components of an enterprise about which separate discrete financial information
is available for evaluation by the chief operating decision maker, or decision
making group, in making decisions on how to allocate resources and assess
performance.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. On an on-going basis, the
Company evaluates its estimates, including those related to uncollectible
receivables, vendor specific objective evidence, and the percentage of
completion related to certain service revenue. The Company bases its estimates
on historical experience and on various other assumptions that are believed 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.
New Accounting Pronouncements. In May 2003, the FASB issued Statement No.
150 ("SFAS 150"), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
150 did not have a material effect on the Company's consolidated financial
condition or results of operations, because the Company did not have such
financial instruments.
In May 2003, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 00-21, "Revenue Arrangements with
Multiple Deliverables." The consensus establishes revenue recognition guidance
for arrangements that have multiple deliverables. The consensus is effective for
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company continues to account for it's software arrangements with multiple
elements under SOP 97-2, as amended by SOP 98-9, thus the new consensus had no
impact on its financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
"Revenue Recognition", which supercedes portions of SAB 101. The primary
purpose of SAB 104 is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements, which was superceded as a
result of
-F10-
the issuance of EITF 00-21. While the wording of SAB 104 changed to reflect the
issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain
largely unchanged by the issuance of SAB 104. The adoption of SAB No. 104 did
not have a material effect on the Company's consolidated results of operations,
financial position or cash flows.
In December 2003, the FASB revised SFAS No. 132 -- "Employers' Disclosures
about Pensions and Other Postretirement Benefits" . The revisions to SFAS 132
retain the disclosure requirements contained in the original SFAS No. 132 but
require additional disclosures describing the types of plan assets, investment
strategy, measurement dates, plan obligations, cash flows, and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The adoption of SFAS No. 132 had no effect on the
Company's Consolidated Financial statement disclosures, as the Company does not
provide any defined benefit plans to its employees.
3. Intangible Assets - Capitalized Software Costs
As of March 31, 2004 and 2003, the Company had the following amounts
related to intangible assets with determinable lives:
------------------------
(in thousands) 2004 2003
-----------------------------------------------------------------------------
Capitalized software development (3 yrs)
Gross Carrying Amount $ 10,610 $ 8,023
------------------------
Accumulated Amortization (7,002) (5,512)
------------------------
Net Capitalized Software development $ 3,608 $ 2,511
------------------------
Aggregate amortization expense during year ended
March 31 $ 1,490 $ 1,267
==============================================================================
Information related to net capitalized software costs is as follows:
-----------------------
(in thousands) 2004 2003
- ------------------------------------------------------------------------------
Beginning of year $ 2,511 $ 2,103
Capitalized 2,587 1,660
Amortization (1,490) (1,252)
-----------------------
End of year $ 3,608 $ 2,511
==============================================================================
The following table represents the remaining estimated amortization of
intangible assets with determinable lives as of March 31, 2004 (in thousands):
-F11-
-----------------------------------------------------
For the year ended March 31,
-----------------------------------------------------
2005 $1,716
2006 1,246
2007 646
-----------------------------------------------------
Total $3,608
-----------------------------------------------------
4. Cash Equivalents and Short-Term Investments
At March 31, 2004 and 2003, the Company had cash equivalents of $51.4
million and $36.4 million, respectively, invested in both a major national
brokerage firm's institutional fund that specializes in U.S. government
securities and commercial paper with high credit ratings and short term U.S.
treasury securities.
Investment income for each of the three years ended March 31 consists of
the following:
----------------------------
Year Ended March 31,
(in thousands) 2004 2003 2002
-------------------------------------------------------
Interest income $ 386 $ 434 $ 665
Net unrealized losses -- -- (22)
----------------------------
$ 386 $ 434 $ 643
=======================================================
5. Composition of Certain Financial Statement Captions
------------------------
Year Ended March 31
(in thousands) 2004 2003
- ------------------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE:
Accounts receivable, excluding undelivered maintenance and services $ 13,131 $ 12,392
Undelivered maintenance and services billed in advance, included in
deferred revenue 8,498 6,159
Reserve for bad debts (1,293) (990)
------------------------
Net accounts receivable $ 20,336 $ 17,561
========================
INVENTORIES:
Computer systems and components, net of reserve for obsolescence of
$207 and $160, respectively $ 478 $ 348
Replacement parts for certain client systems, net of accumulated
amortization of $684 and $676, respectively 221 268
Miscellaneous parts and supplies 26 51
------------------------
$ 725 $ 667
========================
EQUIPMENT AND IMPROVEMENTS:
Computers and electronic test equipment $ 4,568 $ 3,869
Furniture and fixtures 1,509 1,321
Vehicles 8 8
Leasehold improvements 151 143
------------------------
6,236 5,341
Accumulated depreciation and amortization (4,224) (3,564)
------------------------
$ 2,012 $ 1,777
------------------------
DEFERRED REVENUE
Maintenance $ 3,794 $ 2,709
Implementation services 10,756 6,984
Undelivered software and other 2,713 2,006
------------------------
$ 17,263 $ 11,699
========================
OTHER CURRENT LIABILITIES:
Deferred compensation 1,013 679
Income taxes payable 273 --
Sales taxes payable 442 612
Customer deposits 397 450
Deferred Rent 352 339
Other accrued expenses 1,293 1,554
------------------------
$ 3,770 $ 3,634
================================================================================================
-F12-
6. Income Taxes
During the year ended March 31, 2003, the Company filed amended federal
returns for the fiscal years ended March 31, 1999 through 2001 and state tax
returns for the fiscal years ended March 31, 1998 through 2001, to take
advantage of available tax credits related to its research and development
activities. The tax credits reported on the aforementioned returns resulted in
refund claims of $418,000 for federal and $158,000 for state income tax
purposes. Additionally, the Company claimed research and development credits of
$207,000 and $222,000 for the years ended March 31, 2003 and 2002 respectively
and estimated $175,000 in tax credits for the year ended March 31, 2004. In the
quarter ended March 31, 2004, the state of California initiated an audit of the
Company's tax returns. The Company has not received any final results of that
audit as of May 31, 2004, however, preliminary results did not materially change
credits related to research and development
The provision for income taxes for the year ended March 31, 2004 accounts
for approximately 50% of the aggregate federal tax credits accumulated through
March 31, 2004 due to the uncertainly concerning the ultimate amount of federal
tax to be credited. The provision for income taxes for the year ended March 31,
2003 accounted for a portion of the aggregate state and federal tax credits
claimed through the end of the period due to the uncertainty concerning the
ultimate amount to be refunded.
The provision for income taxes consists of the following components:
---------------------------------
Year Ended March 31,
(in thousands) 2004 2003 2002
---------------------------------------------------------------
Current:
Federal taxes $ 5,551 $3,211 $ 1,849
State taxes 1,310 549 1,004
----------------------------------
6,861 3,760 2,853
----------------------------------
Deferred:
Federal taxes (179) 268 1,043
State taxes (56) 30 (663)
----------------------------------
(235) 298 380
----------------------------------
$ 6,626 $4,058 $ 3,233
===============================================================
-F13-
The provision for income taxes differs from the amount computed at the
federal statutory rate as follows:
-----------------------------------
Year Ended March 31,
2004 2003 2002
------------------------------------------------------------------------------
Federal income tax statutory rate 35.0% 34.0% 34.0%
Increases (decreases) resulting from:
State income taxes 4.9% 5.1% 4.6%
Research & development tax credits (1.0%) (1.9%) --
Other -- (0.6%) (0.6%)
==============================================================================
Effective income tax rate 38.9% 36.6% 38.0%
==============================================================================
The net deferred tax assets in the accompanying consolidated balance
sheets consist of the following at March 31, 2004 and 2003:
-------------------
(in thousands)
2004 2003
------------------------------------------------------------------------
Deferred tax assets:
Deferred revenue and bad debt allowance $ 2,477 $ 1,644
Inventory valuation 164 178
Purchased in-process research and development 2,348 2,544
Intangible assets 118 114
Accrued compensation 716 382
Deferred compensation 442 290
Other 147 68
-------------------
6,412 5,220
-------------------
Deferred tax liabilities:
Accelerated depreciation (927) (386)
Capitalized software (1,133) (663)
State income taxes (269) (323)
-------------------
(2,329) (1,372)
-------------------
Net Deferred Tax Assets $ 4,083 $ 3,848
========================================================================
-F14-
The deferred tax assets and liabilities have been shown net in the
accompanying consolidated balance sheets based on the long-term or short-term
nature of the items which give rise to the deferred amount.
The Company has available a balance of approximately $505,000 of research
and development credits which may be recognized as a whole or in part, once the
amount of the credit has been cleared by the tax authorities, or once the
statute of limitations related to the corresponding tax return has passed. The
available balance of research and development credits account for approximately
50% of the aggregate federal tax credits accumulated through March 31, 2004.
Management's election to not recognize all of the tax credits claimed represents
a significant estimate which affects the effective income tax rate for the
Company in the years ending March 31, 2004 and 2003. Research and development
credits taken by the Company involve certain assumptions and judgments regarding
qualification of expenses under the relevant tax codes.
7. Employee Benefit Plans and Employment Agreements
The Company has a profit sharing and retirement plan (collectively, the
"Retirement Plans") for the benefit of substantially all of its employees.
Participating employees may defer up to 15% of their compensation per year. The
annual contribution is determined by a formula set by the Company's Board of
Directors and may include matching and/or discretionary contributions. The
Retirement Plans may be amended or discontinued at the discretion of the Board
of Directors. Contributions of $161,000, $143,000 and $116,000 were made by the
Company to the Retirement Plans for the fiscal years ended March 31, 2004, 2003
and 2002, respectively.
The Company has a deferred compensation plan (the "Deferral Plan") for the
benefit of officers and key employees. Participating employees may defer all or
a portion of their compensation for a Deferral Plan year. In addition, the
Company may, but is not required to, make contributions into the Deferral Plan
on behalf of participating employees. Each participating employee's deferred
compensation and share of Company contributions has been invested in a life
insurance policy which has death benefit and mutual fund features. Investment
decisions are made by each participating employee from a family of mutual funds.
The Company is the owner and beneficiary of the life insurance policies and has
an obligation to pay the greater of the death benefit or the net cash surrender
value upon each employee's death or termination of employment. The net cash
surrender value of the life insurance policies and an equal amount of related
Company obligation for deferred compensation was $1,013,000 and $679,000 at
March 31, 2004 and 2003, respectively. The values of the life insurance policies
and the related Company obligation are included on the balance sheet in other
assets and other current liabilities, respectively. The Company made
contributions of $12,000 to the Deferral Plan for each of the fiscal years ended
March 31, 2004, 2003 and 2002, respectively.
The Company has a voluntary employee stock contribution plan for the
benefit of all full time employees. The plan is designed to allow employees to
acquire shares of the Company's common stock through automatic payroll
deduction. Each eligible employee may authorize the withholding of up to 10% of
his/her gross payroll each pay period to be used to purchase shares on the open
market by a broker designated by the Company. In addition, the Company will
match 5% of each employee's contribution and will pay all brokerage commissions
and fees in connection with each purchase. The amount of the Company match is
discretionary and subject to change. The plan is not intended to be an employee
benefit plan under the Employee Retirement Income Security Act of 1974, and is
therefore not required to comply with that act. Contributions of approximately
$3,000, $1,000 and $1,000 were made by the Company for fiscal years ended March
31, 2004, 2003 and 2002, respectively.
The Company has an Employment Agreement ("Agreement") with Mr. Louis E.
Silverman dated July 20, 2000 which details the terms of his employment as its
-F15-
Chief Executive Officer. Mr. Silverman is eligible for a cash bonus of up to 50%
of his annual base compensation based on performance goals established jointly
between himself and the Board of Directors.
Mr. Silverman's employment may be terminated for any reason by himself or
the Company upon 60 days written notice. Should Mr. Silverman terminate his
employment due to the Company's breach of the Agreement he will be entitled to
(i) a lump sum payment equal to six months base compensation; and (ii) 12 months
worth of accelerated vesting of stock options granted pursuant to the agreement.
Should Mr. Silverman's employment be terminated without cause or by himself for
good reason, he will be entitled to (i) unpaid base compensation and vacation
earned and accrued through his date of termination plus a lump sum equal to six
months base compensation, (ii) any other performance bonus earned and not paid,
and (iii) 12 months worth of accelerated vesting of stock options granted
pursuant to the agreement. Should Mr. Silverman's employment be terminated due
to a "change of control" he will be entitled to (i) unpaid base compensation and
vacation earned plus a lump sum payment equal to six months base compensation;
(ii) any performance bonus earned but not paid; and (iii) immediate vesting of
all unvested options. A "change of control" is defined as the earliest
occurrence of any of the following events: the direct or indirect sale, lease,
exchange or other transfer of 35% or more of the total assets of the Company,
the merger or consolidation of the Company with another company with the effect
that the shareholders of the Company immediately prior to the merger hold less
than 51% of the combined voting power of the then outstanding securities of the
surviving company; the replacement of a majority of the Company's Directors
without the approval of the Board of Directors; the purchase of 25% or more of
the combined voting power of the outstanding securities of the Company with the
exception of the purchase of securities by Sheldon Razin or Ahmed Hussein of
shares owned by either Sheldon Razin or Ahmed Hussein. The Agreement also grants
immediate vesting of all unvested options should a change of control occur
whether or not Mr. Silverman's employment is terminated.
8. Employee Stock Option Plans
During fiscal 1990, the Company's shareholders approved a stock option
plan (the "1989 Plan") under which 1,000,000 shares of Common Stock have been
reserved for the issuance of options. The 1989 Plan provides that salaried
officers, key employees and non-employee directors of the Company may, at the
discretion of the Board of Directors, be granted options to purchase shares of
Common Stock at an exercise price not less than 85% of their fair market value
on the option grant date. Upon an acquisition of the Company by merger or asset
sale, each outstanding option may be subject to accelerated vesting under
certain circumstances. The 1989 Plan terminated on June 30, 1999, however there
remain granted 250 outstanding options at March 31, 2004 under the 1989 Plan
which remain eligible for exercise until the expiration of their respective
terms in June of 2004.
In September 1998, the Company's shareholders approved a stock option plan
(the "1998 Plan") under which 1,000,000 shares of Common Stock have been
reserved for the issuance of options. The 1998 Plan provides that employees,
directors and consultants of the Company, at the discretion of the Board of
Directors or a duly designated compensation committee, be granted options to
purchase shares of Common Stock. The exercise price of each option granted shall
be determined by the Board of Directors at the date of grant. Upon an
acquisition of the Company by merger or asset sale, each outstanding option may
be subject to accelerated vesting under certain circumstances. The 1998 Plan
terminates on December 31, 2007, unless sooner terminated by the Board. At March
31, 2004, 512,800 shares were available for future grant under the 1998 Plan. As
of March 31, 2004, there were 330,337 outstanding options related to this plan.
On October 29, 2003, the Board of Directors granted 3,500 options to Emad
Zikry, a director of the Company, at an exercise price of $7.00 per share, as
director fees solely for his service on the Board of Directors. The options
vested immediately and expire on October 20, 2008. This option grant resulted in
compensation expense of approximately $130,000 recorded in the quarter ended
December 31, 2003 using the intrinsic value method.
On October 29, 2003, the Board of Directors granted 60,000 options to
employees at an exercise price of $15.46 per share. The options vest in four
equal annual installments beginning October 29, 2004 and expire on October 29,
2008. Based on the closing share price of the Company's stock on October 29,
2003
-F16-
($44.16 per share), this option grant will result in compensation expense of up
to $1,722,000 (assuming all employees granted options continue their employment
at the Company throughout the entire four year vesting period) to be amortized
evenly over the next four years. During the year ended March 31, 2004, the
Company recognized compensation expense of $180,000 related to these options.
A summary of option transactions under the 1989 & 1998 Plans for the three years
ended March 31, 2004 is as follows:
-------------------------------------
Weighted
Average
Number of Shares Exercise Price
- ----------------------------------------------------------------------------------------------
Outstanding, March 31, 2001 (143,429 exercisable
at a weighted average price of $6.76) 478,498 $ 7.16
Granted (weighted average fair value of $5.97) 139,940 11.99
Exercised (117,205) 6.83
Cancelled (5,750) 6.74
=====================================
Outstanding, March 31, 2002 (156,551 exercisable
at a weighted average price of $7.04) 495,483 $ 8.61
Granted 0 --
Exercised (47,406) 7.43
Cancelled 0 --
=====================================
Outstanding, March 31, 2003 (230,147 exercisable
at a weightedaverage price of $7.94) 448,077 $ 8.74
Granted (weighted average fair value of $32.72) 63,500 14.99
Exercised (173,240) 7.55
Cancelled (7,250) 8.98
=====================================
Outstanding, March 31, 2004 (159,989) exercisable
at a weighted average price of $8.73) 330,587 $ 10.52
- ----------------------------------------------------------------------------------------------
The outstanding stock options vest ratably over a four-year period
commencing from the respective option grant dates. Stock options outstanding at
March 31, 2004 are summarized as follows:
---------------------------------------------------------------------------
Weighted Avg.
Range of Number Remaining Weighted
Exercise Outstanding at Contractual Life Average
Prices March 31, 2004 (Yrs.) Exercise Price
- ---------------------------------------------------------------------------------------------------
Options Outstanding $ 6.25 - $ 7.01 57,188 0.5 $ 6.97
$ 7.75 - $ 11.24 153,459 1.7 $ 8.95
$12.99 - $ 15.46 119,940 3.5 $ 14.23
-------
330,587 2.1 $ 10.52
=======
- ---------------------------------------------------------------------------------------------------
-F17-
----------------------------------------------------------
Number
Range of Exercisable at Weighted Average
Exercise Prices March 31, 2004 Exercise Price
- -------------------------------------------------------------------------------
Options Exercisable $ 6.25 - $ 7.01 57,188 $ 6.97
$ 7.75 - $ 11.24 72,831 $ 8.35
$12.99 - $ 15.46 29,970 $ 12.99
-------
159,989 $ 8.73
=======
- -------------------------------------------------------------------------------
9. Commitments and Contingencies
Litigation. The Company is a party to various legal proceedings incidental
to its business, none of which are considered by management to be material.
Rental Commitments. The Company leases facilities and offices under
irrevocable operating lease agreements expiring at various dates through March
2010. Rent expense for the years ended March 31, 2004, 2003, and 2002 was
$1,226,000, $1,068,000, and $897,000, respectively. Rental commitments under
these agreements are as follows:
--------------------------------------
Year Ending March 31 Amount
--------------------------------------
2005 $1,193
2006 796
2007 586
2008 593
2009 603
Thereafter 203
--------------------------------------
Total $3,974
--------------------------------------
10. 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 its outstanding
Common stock, subject to compliance with applicable laws and regulations. There
was no requirement that the Company repurchase such shares. This stock
repurchase authorization expired on the date of the fiscal 2003 Annual
Shareholders Meeting. Under the authorization no shares were repurchased.
11. Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable,
accounts payable, deferred revenue and accrued liabilities. Management believes
that the fair value of cash, accounts receivable, accounts payable, deferred
revenue, and accrued liabilities approximate their carrying values due to the
short-term nature of these instruments.
12. Operating Segment Information
The Company has prepared operating segment information in accordance with
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" to report components that are evaluated regularly by
-F18-
its chief operating decision maker, or decision making group in deciding how to
allocate resources and in assessing performance. Reportable operating segments
include the NextGen Division and the QSI Division.
The accounting policies of the Company's operating segments are the same
as those described in Note 2 - Summary of Significant Accounting Policies,
except that 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, such as executive and accounting department
personnel related expenses, are not allocated to the individual segments by
management. Management evaluates performance based on stand-alone segment
operating income. Because the Company does not evaluate performance based on
return on 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 years ended March 31, was as follows:
------------------------------------------------------------------------
Unallocated
(in thousands) QSI Division NextGen Division Corporate Expenses Consolidated
- ----------------------------------------------------------------------------------------------------------
Year Ended March 31, 2004
Revenue $16,491 $54,443 -- $70,934
Operating Income (Loss) $ 4,877 $15,789 $(4,026) $16,640
Year Ended March 31, 2003
Revenue $17,423 $37,346 -- $54,769
Operating Income (Loss) $ 4,675 $ 8,902 $(2,918) $10,659
Year Ended March 31, 2002
Revenue $17,224 $27,198 -- $44,422
Operating Income (Loss) $ 5,196 $ 4,656 $(1,994) $ 7,858
- ----------------------------------------------------------------------------------------------------------
13. Selected Quarterly Operating Results (unaudited)
The following table presents quarterly unaudited consolidated financial
information for the eight quarters in the period ended March 31, 2004. Such
information is presented on the same basis as the annual information presented
in other sections of this report. In management's opinion, this information
reflects all adjustments that are necessary for a fair presentation of the
results for these periods.
-F19-
COMPARISON BY QUARTER *
-----------------------------------------------------------------------------
(in thousands) Quarter Ended (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
6/30/02 9/30/02 12/31/02 3/31/03 6/30/03 9/30/03 12/31/03 3/31/04
-----------------------------------------------------------------------------
Systems, upgrades and supplies sales $ 6,425 $ 6,814 $ 7,666 $ 8,264 $ 9,474 $10,026 $ 9,859 $10,166
Maintenance and other 5,882 6,180 6,734 6,804 6,832 7,616 8,340 8,621
-----------------------------------------------------------------------------
12,307 12,994 14,400 15,068 16,306 17,642 18,199 18,787
Costs of products and services 4,920 5,660 6,353 6,822 6,610 7,492 7,523 7,048
-----------------------------------------------------------------------------
Gross Profit 7,387 7,334 8,047 8,246 9,696 10,150 10,676 11,739
Selling, General, & Administrative 3,673 3,442 3,918 4,260 4,740 4,768 4,902 5,072
Research & Development 1,135 1,213 1,347 1,367 1,366 1,502 1,628 1,643
-----------------------------------------------------------------------------
2,579 2,679 2,782 2,619 3,590 3,880 4,146 5,024
Investment Income 104 123 109 98 100 89 95 102
-----------------------------------------------------------------------------
2,683 2,802 2,891 2,717 3,690 3,969 4,241 5,126
Provision for Income Taxes 1,057 1,092 956 954 1,413 1,561 1,630 2,022
-----------------------------------------------------------------------------
Net Income $ 1,626 $ 1,710 $ 1,935 $ 1,763 $ 2,277 $ 2,408 $ 2,611 $ 3,104
-----------------------------------------------------------------------------
Net Income per share - Basic $ .27 $ .28 $ .32 $ .29 $ .37 $ .39 $ .42 $ .49
Net Income per share - Diluted $ .26 $ .27 $ .30 $ .27 $ .35 $ .37 $ .40 $ .47
Weighted Average Shares
Outstanding - Basic 6,106 6,122 6,134 6,144 6,157 6,167 6,239 6,312
Weighted Average Shares
Outstanding - Diluted 6,333 6,351 6,403 6,431 6,466 6,491 6,549 6,582
- --------------------------------------------------------------------------------------------------------------------
* In the quarter ended December 31, 2002 the Company recorded a $165,000
reduction in the Company's provision for income taxes to reflect the cumulative
year to date benefit of the availability of certain state and federal research
and development tax credits. In the quarter ended March 31, 2003, the
application of the residual method for revenue recognition resulted in a
$475,000 reduction in revenue in the fourth quarter of fiscal 2003.
Schedule II
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)
---------------------------------------------------------------------------
Additions
Balance at Charged
beginning to costs Balance at
Description of period and expenses Deductions End of Period
---------------------------------------------------------------------------
For the year ended:
March 31, 2004 $ 990 $ 647 $ (344) $ 1,293
March 31, 2003 $ 813 $ 623 $ (446) $ 990
March 31, 2002 $ 1,335 $ 497 $(1,019) $ 813
---------------------------------------------------------------------------
-F20-
INDEX TO EXHIBITS
23.1 Consent of Independent Certified Public Accountants.
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
E-1
QUALITY SYSTEMS, INC.
LIST OF SUBSIDIARIES
1. NextGen Healthcare Information Systems, Inc, Inc., a California
corporation, is a wholly-owned subsidiary of Quality Systems, Inc.
-43-