January 19, 2006
VIA FACSIMILE, FEDERAL EXPRESS AND EDGAR CORRESPONDENCE
Mr Brad Skinner
Accounting Branch Chief
C/O Ms. Christine Davis, Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Quality Systems, Inc.
File no. 001-12537
Form 10-K for the year ended March 31, 2005
Dear Mr. Skinner:
On behalf of Quality Systems, Inc. (the "Company"), this letter responds
to your comment letter dated January 12, 2006 (a copy of which is attached for
your convenience and reference) concerning the filings with the Commission set
forth above. This letter includes responses to the comments for periods
referenced in your letter. Our numbered paragraphs below replicate the
corresponding numbered comments in your letter in bold, with our responses
following.
Form 10-K for the Fiscal Year Ended March 31, 2005
Item 7. Management Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources, page 39
1. You disclose that cash provided by operations is your principal source of
cash yet your discussion of operating cash flow is limited. When preparing the
discussion and analysis of operating cash flows, you should address material
changes in the underlying drivers that affect these cash flows. These
disclosures should also include a discussion of the underlying reasons for
changes in working capital items that affect operating cash flows. For example,
how have you considered expanding your disclosures to address the underlying
factors that resulted in the $13.9 million decrease in cash flows related to
accounts receivable. As part of your response, please tell us how you considered
the guidance in Section IV.B.1 of SEC Release 33-8350.
In consideration of the guidance provided in Section IV.B.1 of SEC Release
33-8350, we will include the following level of discussion of the underlying
drivers affecting cash flows from operations in our future filings:
Cash provided by operations has historically been our primary source of cash and
has primarily been driven by our net income and secondarily by non-cash expenses
including depreciation, amortization of capitalized software, provisions for bad
debts and inventory obsolescence, and stock option expenses.
The following table summarizes our statement of cash flows for the years ended
March 31, 2005 and 2004: (000's)
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2005 2004
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Net Income 16,109 10,400
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Non-cash expenses 4,352 3,337
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Tax Benefit from Stock Options 2,680 1,454
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Change in deferred income taxes 2,578 (235)
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Change in deferred revenue 8,214 5,564
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Change in accounts receivable (13,879) (3,400)
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Change in other assets & liabilities 1,559 183
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Net Cash Provided by Operating Activities 21,613 17,303
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Net Income
As referenced in the above table, net income makes up the majority of our cash
generated from operations for the years ended March 31, 2004 and 2005. Our
NextGen Division's contribution to net income has increased each year due to
that Division's operating income increasing more quickly than the Company as a
whole.
Non-Cash expenses
Non-cash expenses include depreciation, amortization of capitalized software,
provisions for bad debts and inventory obsolescence, and stock option expenses.
Total non-cash expenses grew by approximately $1.0 million in FY 2005 versus FY
2004. Approximately half of the increase was related to amortization of our
increased investment in software development related to our NextGen division in
both 2005 and 2004 and.
Tax Benefits from Stock Options/Change in Deferred Tax Assets
The quantity of stock options being exercised by employees in grew in 2005 over
2004 levels resulting in an increase of approximately $1.2 million dollars of
tax benefit in FY 2005 versus FY 2004.
As a result of certain timing differences between our book and tax income, net
deferred tax assets declined by approximately $2.6 million dollars in FY 2005.
Cash paid for income taxes was reduced by a corresponding amount which resulted
in a benefit to cash generated from operations in FY 2005.
Deferred Revenue
Cash from operations benefited significantly from increases in deferred revenue
primarily due to an increase in the volume of implementation and maintenance
services invoiced by the NextGen Division which had not yet been rendered or
recognized as revenue. Deferred revenue grew by approximately $8.2 million in FY
2005 versus $5.6 million in FY 2004.
Accounts Receivable
Accounts receivable grew by approximately $13.9 and $3.4 million in FY 2005 and
2004 respectively. The larger increase in accounts receivable in FY 2005 stemmed
from these main factors:
1) NextGen division revenue grew from $54.4 million in FY 2004 to $73.6
million in FY 2005, an increase of 35.2%.
2) The NextGen Division constituted a larger percentage of our
receivables at March 31, 2005 compared to March 31, 2005. Turnover
of accounts receivable in the NextGen division is slower than the
QSI division due to the fact that the majority of the QSI division's
revenue is coming from maintenance and EDI services
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which typically have shorter payment terms than systems sales
related revenue which historically have accounted for a major
portion of NextGen division sales.
3) We experienced an increase in the volume of undelivered services
billed in advance by the NextGen division which were unpaid as of
the end of each period and included in accounts receivable. This
resulted in an increase in both deferred revenue and accounts
receivable of approximately $4.5 and $2.3 million in FY 2005 and
2004 respectively
2. We note that your DSO appears to have increased to 119 days as of March 31,
2005 from 99 days as of March 31, 2004. Please describe for us, in reasonable
detail, the reasons for this apparent increase. Describe any changes in the
payment terms you offer or your collection policies and practices. Tell us how
you have considered providing disclosures about DSO in your MD&A.
We will include the following level of discussion regarding DSO's in our future
filings:
We did not change any of our payment or collections policies or processes during
FY 2004 or FY 2005. During fiscal year's 2004 and 2005, DSO's have ranged from
as low as 99 days to as high as 119 days. During these two years, DSO's have
generally gravitated toward the mid-point of this historical range, though DSO's
increased gradually throughout FY 2005.
At March 31, 2005, DSO's had increased from 115 days at the conclusion of the
prior quarter and 99 days as of March 31, 2004.
The increase in DSO's from March 31, 2004 to 2005 was primarily a result of the
following:
1. Increase in the volume of undelivered services billed in advance by
the NextGen division which were included in accounts receivable.
As detailed in our discussion of our revenue recognition accounting
policy, the Company bills the entire amount of a new contract upon
contract execution. Amounts billed but not recognized as revenue are
recorded in both accounts receivable and in deferred revenue. Unpaid
deferred revenue grew approximately $4.5 million during the course of FY
2005.
2. Increase in NextGen's share of consolidated accounts receivable
The NextGen division comprised a greater portion of total accounts
receivable at the end of FYE 2005 versus 2004. As of March 31, 2005,
NextGen accounted for approximately 90% of consolidated net accounts
receivable compared to 81% as of March 31, 2004. On average, DSO's at the
NextGen division are higher than DSO's for the QSI division due to the
larger proportion of NextGen division revenue
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generated from system sales where payment terms are generally longer in
duration than the maintenance and EDI services which make up the majority
of QSI division revenue
3. Normal fluctuations
We have historically experienced some degree of fluctuation in DSO's due
to the timing of contract payment terms on our systems sales and the
general effectiveness of our credit and collections staff.
Item 9A. Controls and Procedures, page 41
3. We note that you have evaluated the effectiveness of your disclosure controls
and procedures within 90 days of the filing date of your report. Rule 13a-15(b)
of the Exchange Act and 307 of Regulation S-K require that management evaluate
the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by the report. Please tell us management's conclusion as to
the effectiveness of the disclosure controls and procedures as of the end of the
period covered by this Form 10-K and confirm that you will conform your
disclosure to the required of Item 307 in future filings. Please provide similar
representations for the subsequent Form 10-Q's you have filed.
The following represents management's conclusion as to the effectiveness of the
disclosure controls and procedures as of the end of the period covered by the
Form 10-K which was March 31, 2005.
Based on their evaluation of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of March 31,
2005, our officers including our Chief Executive Officer and Chief
Financial Officer (our principal executive officer and principal financial
officer, respectively) 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 there under.
The following represents management's conclusion as to the effectiveness of the
disclosure controls and procedures as of the end of the period covered by the
Form 10-Q which was June 30, 2005.
Based on their evaluation of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of June 30,
2005, our officers including our Chief Executive Officer and Chief
Financial Officer (our principal executive officer and principal financial
officer, respectively) have concluded that our disclosure controls and
procedures result in the effective recordation, processing, summarization
and reporting of information that is required to be
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disclosed in the reports that we file under the Securities Exchange Act of
1934 and the rules there under.
The following represents management's conclusion as to the effectiveness of the
disclosure controls and procedures as of the end of the period covered by the
Form 10-Q which was September 30, 2005.
Based on their evaluation of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30,
2005, our officers including our Chief Executive Officer and Chief
Financial Officer (our principal executive officer and principal financial
officer, respectively) 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 there under.
We will conform our disclosure to comply with Item 307 in future filings.
4. We note your disclosure that your "disclosure controls and procedures result
in the effective recordation, processing, summarization and reporting of
information." Exchange Act Rule 13a-15(e) requires that you conclude whether
your disclosure controls and procedures are effective to ensure that the
information required to be disclosed "is recorded, processed, summarized and
reported, within the time periods specified in the Commission's rules and forms"
and are also designed to ensure that the "information required to be disclosed
in the reports that you file or submit under the Exchange Act is accumulated and
communicated to your management, including your chief executive officer and
chief financial officer, to allow timely decisions regarding required
disclosure." Please confirm, if true, that your disclosure controls and
procedures met all of the requirements of the rule as of March 31, 2005 and
subsequent interim periods and confirm that you will conform your disclosure in
future filings.
The following represents management's conclusion as to the effectiveness of the
disclosure controls and procedures as of the end of the period covered by the
Form 10-K which was March 31, 2005.
Based on their evaluation of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of March 31,
2005, our officers including our Chief Executive Officer and Chief
Financial Officer (our principal executive officer and principal financial
officer, respectively) have concluded that our disclosure controls and
procedures are effective to ensure that the information required to be
disclosed "is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms" and are also
designed to ensure that the "information required to be disclosed in the
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reports that you file or submit under the Exchange Act is accumulated and
communicated to your management, including your chief executive officer
and chief financial officer, to allow timely decisions regarding required
disclosure
We will conform our disclosure to comply with Exchange Act Rule 13a-15(e)
in future filings.
The following represents management's conclusion as to the effectiveness of the
disclosure controls and procedures as of the end of the period covered by the
Form 10-Q which was June 30 2005.
Based on their evaluation of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of June 30,
2005, our officers including our Chief Executive Officer and Chief
Financial Officer (our principal executive officer and principal financial
officer, respectively) have concluded that our disclosure controls and
procedures are effective to ensure that the information required to be
disclosed "is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms" and are also
designed to ensure that the "information required to be disclosed in the
reports that you file or submit under the Exchange Act is accumulated and
communicated to your management, including your chief executive officer
and chief financial officer, to allow timely decisions regarding required
disclosure
The following represents management's conclusion as to the effectiveness of the
disclosure controls and procedures as of the end of the period covered by the
Form 10-Q which was September 30, 2005.
Based on their evaluation of our disclosure controls and procedures (as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of September 30,
2005, our officers including ourChief Executive Officer and Chief
Financial Officer (our principal executive officer and principal financial
officer, respectively) have concluded that our disclosure controls and
procedures are effective to ensure that the information required to be
disclosed "is recorded, processed, summarized and reported, within the
time periods specified in the Commission's rules and forms" and are also
designed to ensure that the "information required to be disclosed in the
reports that you file or submit under the Exchange Act is accumulated and
communicated to your management, including your chief executive officer
and chief financial officer, to allow timely decisions regarding required
disclosure
We welcome any further questions or comments you my have.
Respectfully submitted,
/s/ Paul Holt
Paul Holt
Chief Financial Officer
Quality Systems, Inc.
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