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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 0-13801
QUALITY SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
California 95-2888568
(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
18191 Von Karman Avenue, Irvine California 92612
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 255-2600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date: 13,295,523 shares of Common
Stock, $0.01 par value, as of January 27, 2006.
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PART I
CONSOLIDATED FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, MARCH 31,
2005 2005
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 75,228 $ 51,157
Accounts receivable, net .................................. 37,861 33,362
Inventories, net .......................................... 670 960
Prepaid income tax ........................................ 2,579 15
Net current deferred tax assets ........................... 1,796 1,796
Other current assets ...................................... 1,976 1,677
------------ ------------
Total current assets ............................. 120,110 88,967
Equipment and improvements, net .............................. 3,270 2,697
Capitalized software costs, net .............................. 4,880 4,334
Goodwill ..................................................... 1,840 1,840
Other ........................................................ 1,830 1,604
------------ ------------
Total assets ..................................... $ 131,930 $ 99,442
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 3,371 $ 2,284
Deferred revenue .......................................... 33,036 24,115
Accrued compensation and related benefits ................. 4,299 3,436
Other current liabilities ................................. 3,389 4,021
------------ ------------
Total current liabilities ........................ 44,095 33,856
Deferred revenue, net of current ............................. 1,080 1,362
Net deferred tax liabilities ................................. 291 291
Deferred compensation ........................................ 1,529 1,202
------------ ------------
Total liabilities ................................ 46,995 36,711
------------ ------------
Commitments and contingencies ................................ -- --
Shareholders' equity:
Common stock, $0.01 par value; authorized 50,000 shares;
issued and outstanding 13,296 and 13,111 shares at
December 31, 2005 and March 31, 2005,
respectively .............................................. 133 131
Additional paid-in capital ................................... 50,710 44,499
Retained earnings ............................................ 34,883 19,213
Deferred compensation ........................................ (791) (1,112)
------------ ------------
Total shareholders' equity ....................... 84,935 62,731
------------ ------------
Total liabilities and shareholders' equity ....... $ 131,930 $ 99,442
============ ============
See accompanying condensed notes to consolidated financial statements.
1
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
Software, hardware and supplies ........ $ 10,835 $ 9,781 $ 37,469 $ 27,891
Implementation and training services ... 2,615 1,889 8,136 6,455
------------ ------------ ------------ ------------
System sales ............................ 13,450 11,670 45,605 34,346
------------ ------------ ------------ ------------
Maintenance and other services ......... 9,992 7,681 28,531 21,477
Electronic data interchange services ... 3,310 2,737 9,586 7,612
------------ ------------ ------------ ------------
Maintenance, EDI and other services ..... 13,302 10,418 38,117 29,089
------------ ------------ ------------ ------------
Total revenue ........................ 26,752 22,088 83,722 63,435
------------ ------------ ------------ ------------
Cost of revenue:
Software, hardware and supplies ........ 1,659 1,384 6,023 5,428
Implementation and training services ... 1,975 1,575 5,741 4,546
------------ ------------ ------------ ------------
Total cost of system sales .............. 3,634 2,959 11,764 9,974
------------ ------------ ------------ ------------
Maintenance and other services ......... 3,553 2,823 10,598 8,727
Electronic data interchange services ... 2,216 1,733 6,403 4,853
------------ ------------ ------------ ------------
Total cost of maintenance, EDI and
other services .......................... 5,769 4,556 17,001 13,580
------------ ------------ ------------ ------------
Total cost of revenue ................ 9,403 7,515 28,765 23,554
------------ ------------ ------------ ------------
Gross profit ......................... 17,349 14,573 54,957 39,881
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative... 8,016 6,420 24,968 16,786
Research and development costs ....... 2,208 1,707 5,926 5,137
------------ ------------ ------------ ------------
Total operating expenses ........... 10,224 8,127 30,894 21,923
------------ ------------ ------------ ------------
Income from operations ............... 7,125 6,446 24,063 17,958
Interest income ......................... 594 263 1,395 553
------------ ------------ ------------ ------------
Income before provision for income
taxes ................................... 7,719 6,709 25,458 18,511
Provision for income taxes .............. 2,904 2,488 9,774 7,193
------------ ------------ ------------ ------------
Net income ........................... $ 4,815 $ 4,221 $ 15,684 $ 11,318
============ ============ ============ ============
Net income per share:
Basic ................................. $ 0.36 $ 0.33 $ 1.19 $ 0.88
============ ============ ============ ============
Diluted ............................... $ 0.35 $ 0.32 $ 1.15 $ 0.86
============ ============ ============ ============
Weighted average shares outstanding:
Basic ................................... 13,245 12,952 13,169 12,800
============ ============ ============ ============
Diluted ................................. 13,686 13,282 13,624 13,134
============ ============ ============ ============
See accompanying condensed notes to consolidated financial statements.
2
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
Cash flows from operating activities:
Net income .................................................... $ 15,684 $ 11,318
Adjustments to reconcile net income to net cash provided by
operating activities: .........................................
Depreciation ................................................ 989 724
Amortization of capitalized software costs .................. 1,795 1,424
Provision for bad debts ..................................... 1,002 635
Provision for inventory obsolescence ........................ 119 19
Non-cash compensation from issuance of options .............. 321 323
Tax benefit from exercise of stock options .................. 3,535 2,067
Changes in assets and liabilities:
Accounts receivable ......................................... (5,501) (8,228)
Inventories ................................................. 171 (699)
Other current assets ........................................ (299) 84
Prepaid income tax .......................................... (2,564) --
Other assets ................................................ (226) (374)
Accounts payable ............................................ 1,087 614
Deferred revenue ............................................ 8,639 6,439
Accrued compensation and related benefits ................... 863 (681)
Income taxes payable ........................................ -- 1,533
Other current liabilities ................................... (632) 933
Deferred compensation ....................................... 327 48
------------ ------------
Net cash provided by operating activities ............................ 25,310 16,179
------------ ------------
Cash flows from investing activities:
Additions to equipment and improvements ....................... (1,562) (1,118)
Additions to capitalized software costs ....................... (2,341) (1,777)
------------ ------------
Net cash used in investing activities ................................ (3,903) (2,895)
------------ ------------
Cash flows from financing activities:
Dividends paid ................................................ (14) --
Proceeds from the exercise of stock options ................... 2,678 1,753
------------ ------------
Net cash provided by financing activities ............................ 2,664 1,753
------------ ------------
Net increase in cash and cash equivalents ............................ 24,071 15,037
Cash and cash equivalents at beginning of period ..................... 51,157 51,395
------------ ------------
Cash and cash equivalents at end of period ........................... $ 75,228 $ 66,432
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes, net of refunds $ 8,600 $ 3,741
============ ============
See accompanying condensed notes to consolidated financial statements.
3
QUALITY SYSTEMS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements as of December 31,
2005 and for the three and nine months ended December 31, 2005 and 2004, have
been prepared in accordance with the requirements of Form 10-Q and Article 10 of
Regulation S-X, and therefore do not include all information and footnotes which
would be presented were such financial statements prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). These financial statements should be read in conjunction with the
audited financial statements presented in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 2005. In the opinion of management, the
accompanying consolidated financial statements reflect all adjustments which are
necessary for a fair presentation of the results of operations and cash flows
for the periods presented. The results of operations for such interim periods
are not necessarily indicative of results of operations to be expected for the
full year.
References to dollar amounts in this financial statement section are in
thousands, except share and per share data, unless otherwise specified. Certain
prior year amounts have been reclassified to conform with fiscal year 2006
presentation.
2. Stock Split
On February 2, 2005, the Board of Directors declared a 2-for-1 stock split with
respect to the Company's outstanding shares of common stock. The stock split
record date was March 4, 2005 and the stock began trading post split on March
28, 2005. References to share and per share data contained in the consolidated
financial statements have been retrospectively adjusted to reflect the stock
split for all periods presented.
3. 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
inter-company accounts and transactions have been eliminated.
Revenue recognition. The Company currently recognizes revenue pursuant to
Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2), as
amended by Statement of Position No. 98-9 "Modification of SOP 97-2, Software
Revenue Recognition" (SOP 98-9). The Company generates revenue from the sale of
licensing rights to 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, implementation, training, software customization,
Electronic Data Interchange (EDI), post-contract support (maintenance) and other
services performed for customers who license its products.
A typical system contract contains multiple elements of the above items. SOP
98-9 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 vendor specific
objective evidence (VSOE). The Company limits its assessment of VSOE for each
element to either the price charged when the same element is sold separately
(using a rolling average of stand alone transactions) or the price established
by management having the relevant authority to do so, for an element not yet
sold separately. VSOE calculations are updated and reviewed at the end of each
quarter.
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 relative 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 used. Under the residual
method, the Company defers revenue related to the undelivered elements in a
system sale based on VSOE of fair value of each of the undelivered elements, and
allocates the remainder of the contract price net of all discounts to revenue
recognized from the delivered elements. Undelivered elements of a system sale
may include implementation and training services, hardware and third party
software, maintenance, future purchase discounts, or other services. If VSOE of
4
fair value of any undelivered element does not exist, all revenue is deferred
until VSOE of fair value of the undelivered element is established or the
element has been delivered.
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.
Provided the fees are fixed and determinable and collection is considered
probable, revenue from licensing rights and sales of hardware and third party
software is generally recognized upon shipment and transfer of title. Revenue
from implementation and training services is recognized as the corresponding
services are performed. Maintenance revenue is recognized ratably over the
contractual maintenance period.
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 Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1). Pursuant to SOP 81-1, the Company uses the percentage of
completion method provided all of the following conditions exist:
o contract includes provisions that clearly specify the enforceable rights
regarding goods or services to be provided and received by the parties,
the consideration to be exchanged, and the manner and terms of settlement;
o the customer can be expected to satisfy its obligations under the
contract;
o the Company can be expected to perform its contractual obligations; and
o reliable estimates of progress towards completion can be made.
The Company measures completion using labor input hours. Costs of providing
services, including services accounted for in accordance with SOP 81-1, are
expensed as incurred.
If a situation occurs in which a contract is so short term that the financial
statements would not vary materially from using the percentage-of-completion
method or in which the Company is unable to make reliable estimates of progress
of completion of the contract, the completed contract method is utilized.
From time to time, the Company offers future purchase discounts on its products
and services as part of its sales arrangements. Pursuant to AICPA TPA 5100.51,
such discounts which are incremental to the range of discounts reflected in the
pricing of the other elements of the arrangement, which are incremental to the
range of discounts typically given in comparable transactions, and which are
significant, are treated as an additional element of the contract to be
deferred. Amounts deferred related to future purchase options are not recognized
until either the customer exercises the discount offer or the offer expires.
Cash and cash equivalents. Cash and cash equivalents generally consist of cash,
money market funds and short term U.S. Treasuries. The Company invests a portion
of its cash in a money market fund which invests in only investment grade money
market instruments from a variety of industries, and therefore bears minimal
risk. The average maturity of the investments owned by the money market fund is
approximately two to three months.
Accounts receivable. The Company provides credit terms typically ranging from
thirty days to less than twelve months for most system and maintenance contract
sales and generally does not require collateral. The Company performs credit
evaluations of its customers and maintains 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 the Company's historical experience of bad
debt expense and the aging of the Company's accounts receivable balances net of
deferred revenues and specifically reserved accounts. Accounts are written off
as uncollectible only after the Company has expended extensive collection
efforts.
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
period. Undelivered maintenance and services are included on the balance sheet
in deferred revenue.
5
Inventories. Inventories consist of hardware for specific customer orders and
spare parts, and are valued at lower of cost (first-in, first-out) or market.
Management provides a reserve to reduce inventory to its net realizable value.
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
Leasehold improvements lesser of lease term or estimated useful life of asset
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 Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" (SFAS 86). Such costs are amortized on a
straight line basis over the estimated economic life of the related product,
which is generally three years. The Company reviews 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.
Stock-based compensation. The Company accounts for stock-based employee
compensation using the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), and has adopted the disclosure provisions from the Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (SFAS 148) that supercedes Statement of
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 to employee grants. It also requires
disclosure of option status on a more prominent and frequent basis. Such
disclosure for the three and nine months ended December 31, 2005 and 2004 is
presented 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 of Director 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.
On August 8, 2005, the Board of Directors granted 9,500 options under the
Company's 1998 Stock Option Plan to selected employees at an exercise price
equal to the market price of the Company's common stock on the date of the grant
($64.89 per share). The options vest in four equal annual installments beginning
August 8, 2006 and expire on August 8, 2012. No compensation expense has been
recorded for these options.
On October 5, 2005, the Board of Directors granted a total of 62,000 stock
options under the Company's 1998 Stock Option Plan to non-management Directors
pursuant to the Company's previously announced compensation plan for
non-management directors, at an exercise price equal to the market price of the
Company's common stock on the date of the grant ($68.13 per share). The options
fully vested on January 5, 2006 and expire on October 5, 2012. No compensation
expense has been recorded for these options.
The Company's fair value calculations for options granted on August 8, 2005 and
October 5, 2005 were made using the Black-Scholes option pricing model with the
following assumptions: expected life - approximately 57 months; stock volatility
- - 47.7%, risk free interest rate of 3.7%; and no dividends during the expected
term. At the time the options were granted, the Company had no commitment to any
future dividends and had not paid any dividends other than a one-time dividend
in fiscal year 2005. Therefore, management believes that using a zero dividend
rate in the valuation of the stock options granted on August 8, 2005 and October
5, 2005 is appropriate.
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
6
expense over the vesting period of the awards, pro forma net income and net
income per share would have been as follows (unaudited):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
2005 2004 2005 2004
----------------------- -----------------------
Net income, as reported ............. $ 4,815 $ 4,221 $ 15,684 $ 11,318
Add: Option expense, net of tax ..... 66 67 196 196
Deduct: Stock-based compensation
expense determined under the fair
value based method, net of related
tax effects ......................... (1,700) (346) (2,806) (710)
---------- ---------- ---------- ----------
Pro forma net income ................ $ 3,181 $ 3,942 $ 13,074 $ 10,804
========== ========== ========== ==========
Net income per share:
Basic, as reported ............... $ 0.36 $ 0.33 $ 1.19 $ 0.88
========== ========== ========== ==========
Basic, pro forma ................. $ 0.24 $ 0.30 $ 0.99 $ 0.84
========== ========== ========== ==========
Diluted, as reported ............. $ 0.35 $ 0.32 $ 1.15 $ 0.86
========== ========== ========== ==========
Diluted, pro forma ............... $ 0.23 $ 0.30 $ 0.96 $ 0.82
========== ========== ========== ==========
4. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
(SFAS 123R) which is a revision of SFAS 123. Statement 123R supersedes APB 25
and amends Statement of Financial Accounting Standards No. 95, "Statement of
Cash Flows" (SFAS 95). SFAS 123R requires all share-based payments to employees
and non-employee directors acting in their role as members of the Board of
Directors, including grants of stock options, to be recognized in the income
statement based on their fair values and the pro forma disclosure alternative is
no longer allowable under SFAS 123R. Subsequently, in April 2005, the Securities
and Exchange Commission (SEC) extended the effective date for required
implementation of SFAS 123R as described above to the first annual reporting
period beginning after June 15, 2005, which for the Company will commence April
1, 2006. The Company has not completed the process of evaluating the impact that
will result from adopting SFAS 123R and is therefore unable to disclose the
impact that adoption will have on the Company's financial position and results
of operations.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No.
20, Accounting Changes, and Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements" (SFAS 154). SFAS 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle. SFAS
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company does not expect that
adoption of SFAS 154 will have a material effect on its consolidated financial
position, consolidated results of operations, or liquidity.
5. Composition of Certain Financial Statement Captions
Accounts receivable include amounts related to maintenance and services which
were billed but not yet rendered as of the end of the period. Undelivered
maintenance and services are included on the consolidated balance sheet as part
of the deferred revenue balance.
DECEMBER 31, MARCH 31,
2005 2005
------------ ------------
(Unaudited)
Accounts receivable, excluding undelivered maintenance
and services ......................................... $ 23,816 $ 22,162
Undelivered maintenance and services billed in advance,
included in deferred revenue ......................... 16,406 13,037
------------ ------------
Accounts receivable, gross ............................ 40,222 35,199
Reserve for bad debts ................................. (2,361) (1,837)
------------ ------------
Accounts receivable, net .............................. $ 37,861 $ 33,362
============ ============
7
Inventories are summarized as follows:
DECEMBER 31, MARCH 31,
2005 2005
------------ ------------
(Unaudited)
Computer systems and components, net of reserve for
obsolescence of $266 and $146, respectively .......... 647 $ 891
Miscellaneous parts and supplies ...................... 23 69
------------ ------------
$ 670 $ 960
============ ============
Other current liabilities are summarized as follows:
DECEMBER 31, MARCH 31,
2005 2005
------------ ------------
(Unaudited)
Customer deposits ..................................... $ 706 $ 527
Sales tax payable ..................................... 644 833
Commission payable .................................... 666 625
Professional services ................................. 177 417
Payroll tax payable ................................... 220 --
Deferred rent ......................................... 285 198
Accrued EDI expenses .................................. -- 419
Other accrued expenses ................................ 691 1,002
------------ ------------
$ 3,389 $ 4,021
============ ============
Short and long-term deferred revenue are summarized as follows:
DECEMBER 31, MARCH 31,
2005 2005
------------ ------------
(Unaudited)
Maintenance ........................................... $ 5,881 $ 4,639
Implementation services ............................... 20,705 17,471
Delivered VAR software, undelivered software and other. 7,530 3,367
------------ ------------
$ 34,116 $ 25,477
============ ============
6. Intangible Assets - Goodwill
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (SFAS 142), the Company does not amortize
goodwill as the goodwill has been determined to have indefinite useful life. The
balance of goodwill is related to the Company's NextGen Healthcare Information
Systems Division (NextGen or Division), which was acquired by virtue of two
acquisitions completed in May of 1996 and 1997, respectively. In accordance with
SFAS 142, the Company has compared the fair value of the NextGen Division with
the carrying amount of assets associated with the Division and determined that
none of the goodwill recorded as of June 30, 2005 (the annual assessment date)
was impaired. The fair value of NextGen 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.
7. Intangible Assets - Capitalized Software Development Costs
The Company had the following amounts related to capitalized software
development:
DECEMBER 31, MARCH 31,
2005 2005
------------ ------------
(Unaudited)
Gross carrying amount ............................... $ 15,628 $ 13,287
Accumulated amortization ............................ (10,748) (8,953)
------------ ------------
Capitalized software costs, net ..................... $ 4,880 $ 4,334
============ ============
Aggregate amortization expense during the nine and
twelve month periods ended, respectively ............. $ 1,795 $ 1,952
============ ============
8
Activity related to net capitalized software costs for the nine month period
ended December 31, 2005 is as follows:
Beginning of period................................................... $ 4,334
Capitalized costs..................................................... 2,341
Amortization expense.................................................. (1,795)
------------
End of the period..................................................... $ 4,880
============
The following table represents the remaining estimated amortization of
intangible assets with determinable lives as of December 31, 2005:
For the year ended March 31,
2006.................................................................. $ 664
2007.................................................................. 2,354
2008.................................................................. 1,480
2009.................................................................. 382
------------
Total................................................................. $ 4,880
============
8. Income Taxes
The provision for income taxes for the nine months ended December 31, 2005 was
$9,774 as compared to $7,193 for the year ago period. The effective tax rates
for the nine months ended December 31, 2005 and 2004 were 38.4% and 38.9%,
respectively. The provision for income taxes for the nine months ended December
31, 2005 and 2004 differ from the combined statutory rates primarily due to the
impact of varying state income tax rates and research and development tax
credits. The effective rate for the nine months ended December 31, 2005
decreased slightly from the prior year due to the impact of research and
development tax credits and the domestic manufacturer's deduction, which is
effective for the year ending March 31, 2006.
9. Net Income Per Share
The following table reconciles the weighted average shares outstanding for basic
and diluted net income per share for the periods indicated. Basic net income per
share is based upon the weighted average number of common shares outstanding.
Diluted net income per share is based on the assumption that the Company's
outstanding options are included in the calculation of diluted earnings per
share, except when their effect would be anti-dilutive. Dilution is computed by
applying the treasury stock method. Under this method, options are assumed to be
exercised at the beginning of the period (or at the time of issuance, if later),
and as if funds obtained thereby were used to purchase common stock at the
average market price during the period (unaudited).
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income ....................... $ 4,815 $ 4,221 $ 15,684 $ 11,318
Basic net income per common share:
Weighted average of common
shares outstanding ............ 13,245 12,952 13,169 12,800
---------- ---------- ---------- ----------
Basic net income per common share $ 0.36 $ 0.33 $ 1.19 $ 0.88
========== ========== ========== ==========
Net income ....................... $ 4,815 $ 4,221 $ 15,684 $ 11,318
Diluted net income per common
share:
Weighted average of common
shares outstanding ............. 13,245 12,952 13,169 12,800
Effect of potentially
dilutive securities (options) .. 441 330 455 334
---------- ---------- ---------- ----------
Weighted average of common
shares outstanding-diluted ..... 13,686 13,282 13,624 13,134
---------- ---------- ---------- ----------
Diluted net income per common
share ........................... $ 0.35 $ 0.32 $ 1.15 $ 0.86
========== ========== ========== ==========
9
10. Operating Segment Information
The Company has prepared operating segment information in accordance with
Statement of Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131) to report components that are
evaluated regularly by the Company's chief operating decision maker, or decision
making group in deciding how to allocate resources and in assessing performance.
The Company's reportable operating segments include its NextGen Healthcare
Information Systems Division and the QSI Division.
The disaggregated financial results of the segments reflect allocation of
certain functional expense categories consistent with the basis and manner in
which Company management internally disaggregates financial information for the
purpose of assisting in making internal operating decisions. Certain corporate
overhead costs are not allocated to the individual segments by management. The
Company evaluates performance based on stand-alone segment revenue and operating
income performance. 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 and nine month periods ended December 31,
2005 and 2004 is as follows (unaudited):
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenue:
QSI Division ................. $ 3,867 $ 3,742 $ 11,718 $ 11,678
NextGen Division ............. 22,885 18,346 72,004 51,757
---------- ---------- ---------- ----------
Consolidated revenue ........... $ 26,752 $ 22,088 $ 83,722 $ 63,435
========== ========== ========== ==========
Operating income:
QSI Division ................. $ 951 $ 1,037 $ 2,971 $ 3,436
NextGen Division ............. 7,904 6,727 26,460 17,986
Unallocated corporate expenses (1,730) (1,318) (5,368) (3,464)
---------- ---------- ---------- ----------
Consolidated operating income .. $ 7,125 $ 6,446 $ 24,063 $ 17,958
========== ========== ========== ==========
11. Concentration of Credit Risk
The Company had cash deposits at U.S. banks and financial institutions which
exceeded federally insured limits at December 31, 2005. The Company is exposed
to credit loss for amounts in excess of insured limits in the event of
non-performance by the institutions; however, the Company does not anticipate
non-performance by these institutions.
12. Guarantees
Software license agreements in both our QSI and NextGen divisions include a
performance guarantee that its software products will substantially operate as
described in the applicable program documentation for a period of 365 days after
delivery. To date, the Company has not incurred any significant costs associated
with these warranties and does not expect to incur significant warranty costs in
the future. Therefore, no accrual has been made for potential costs associated
with these warranties.
The Company has historically offered short-term rights of return of less than 20
days in certain of its sales arrangements. Based on its historical experience
with similar types of sales transactions bearing these short-term rights of
return, the Company has not recorded any accrual for returns in its financial
statements.
The Company's standard sales agreements in the NextGen division contain an
indemnification provision pursuant to which it shall indemnify, hold harmless,
and agree to reimburse the indemnified party for losses suffered or incurred by
the indemnified party in connection with any United States patent, any copyright
or other intellectual property infringement claim by any third party with
respect to its software. The QSI division arrangements
10
occasionally utilize this type of language as well. As the Company has not
incurred any significant costs to defend lawsuits or settle claims related to
these indemnification agreements, the Company believes that its estimated
exposure on these agreements is currently minimal. Accordingly, the Company has
no liabilities recorded for these indemnification obligations.
From time to time, the Company offers future purchase discounts on its products
and services as part of its sales arrangements. Discounts which are incremental
to the range of discounts reflected in the pricing of the other elements of the
arrangement, which are incremental to the range of discounts typically given in
comparable transactions, and which are significant are treated as an additional
element of the contract to be deferred. Amounts deferred related to future
purchase options are not recognized until either the customer exercises the
discount offer or the offer expires.
The Company has entered into marketing assistance agreements with existing users
of the Company's products which provide the opportunity for those users to earn
commissions if and only if they host specific site visits upon our request for
prospective customers which directly result in a purchase of our software by the
visiting prospects. Amounts earned by existing users under this program are
treated as a selling expense in the period in which commissionable software has
been recognized as revenue.
13. Commitments and Contingencies
Litigation. After the close of business on October 26, 2005, the Company learned
that a lawsuit has been filed against the Company and six of its eight directors
by Ahmed Hussein, a director and significant shareholder of the Company. The
complaint names the Company and all individual directors, except for directors
Ibrahim Fawzy and Ahmed Hussein.
Filed in the Superior Court for Orange County, California, the complaint alleges
that in connection with the Company's 2005 Annual Shareholders' Meeting, the
certified results from the independent inspector of election included certain
proxies that should not have been included in the final vote tabulation. The
independent inspector of election has certified the election of the Company's
eight directors (as previously announced) after hearing Mr. Hussein's claim
concerning this matter. Specifically, Mr. Hussein seeks (i) a determination that
the election of directors at the Annual Meeting is invalid, (ii) a determination
that the votes of the disputed shares were improper and in violation of
applicable regulations, (iii) an order requiring that the election of directors
at the Annual Meeting be retabulated without including the disputed shares in
the count, (iv) an order requiring the election of directors with the
retabulated votes in a manner so as to provide Mr. Hussein with the greatest
number of directors possible, and (v) costs.
A hearing was held before the California Superior Court on February 2, 2006. A
further hearing is scheduled for March 7, 2006 at which time the court has
informed the parties that a ruling is expected.
The Company believes that Mr. Hussein's claims lack merit and that the results
certified by the independent inspector of elections are conclusive of this
matter. The Company intends to defend itself and the directors named in Mr.
Hussein's complaint vigorously.
14. Subsequent Events
On January 26, 2006, the Board of Directors approved a one-time cash dividend of
$1.75 per share payable on its outstanding shares of common stock. The cash
dividend record date is February 24, 2006 and is expected to be distributed to
shareholders on or about March 16, 2006.
On January 26, 2006, the Board of Directors approved a 2-for-1 stock split with
respect to its outstanding shares of common stock. The stock split record date
is March 3, 2006. The share and per share data presented and disclosed on the
December 31, 2005 Consolidated Financial Statements and the Condensed Notes to
the Consolidated Financial Statements have been adjusted for the stock split.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Except for the historical information contained herein, the matters discussed in
this quarterly report 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 "Risk Factors" as set forth herein,
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
its entirety by, the Consolidated Financial Statements and related notes thereto
included elsewhere in this report. Historical results of operations, percentage
profit 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 but not limited to those related to revenue
recognition, uncollectible accounts receivable, intangible assets and software
development cost 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
software development costs are among the most critical accounting policies that
impact our consolidated financial statements. We believe that our significant
accounting policies, as described in Note 3 of our Condensed Notes to
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. We currently recognize revenue pursuant to SOP 97-2, as
amended by SOP 98-9. We generate revenue from the sale of licensing rights to
use our software products sold directly to end-users and value-added resellers
(VARs). We also generate revenue from sales of hardware and third party
software, and implementation, training, software customization, EDI,
post-contract support ("maintenance") and other services performed for customers
who license our products.
A typical system contract contains multiple elements 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 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
(using a rolling average of stand alone transactions) or the price established
by management having the relevant authority to do so, for an element not yet
sold separately. VSOE calculations are updated and reviewed at the end of each
quarter.
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 relative 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 used. Under the residual
method, the Company defers revenue related to the undelivered elements in a
system sale based on VSOE of fair value of each of the undelivered elements, and
allocates the remainder of the contract price net of all discounts to revenue
recognized from the delivered elements. Undelivered elements
12
of a system sale may include implementation and training services, hardware and
third party software, maintenance, future purchase discounts, or other services.
If VSOE of fair value of any undelivered element does not exist, all revenue is
deferred until VSOE of fair value of the undelivered element is established or
the element has been delivered.
We bill 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.
Provided the fees are fixed and determinable and collection is considered
probable, revenue from licensing rights and sales of hardware and third party
software is generally recognized upon shipment and transfer of title. Revenue
from implementation and training services is recognized as the corresponding
services are performed. Maintenance revenue is recognized ratably over the
contractual maintenance period.
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 Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1).
Pursuant to SOP 81-1, the Company uses the percentage of completion method
provided all of the following conditions exist:
o contract includes provisions that clearly specify the enforceable rights
regarding goods or services to be provided and received by the parties,
the consideration to be exchanged, and the manner and terms of settlement;
o the customer can be expected to satisfy its obligations under the
contract;
o the Company can be expected to perform it's contractual obligations; and
o reliable estimates of progress towards completion can be made.
We measure completion using labor input hours. Costs of providing services,
including services accounted for in accordance with SOP 81-1, are expensed as
incurred.
If a situation occurs in which a contract is so short term that the financial
statements would not vary materially from using the percentage-of-completion
method or in which we are unable to make reliable estimates of progress of
completion of the contract, the completed contract method is utilized.
From time to time, we offer future purchase discounts on our products and
services as part of our sales arrangements. Pursuant to AICPA TPA 5100.51,
discounts which are incremental to the range of discounts reflected in the
pricing of the other elements of the arrangement, which are incremental to the
range of discounts typically given in comparable transactions, and which are
significant, are treated as an additional element of the contract to be
deferred. Amounts deferred related to future purchase options are not recognized
until either the customer exercises the discount offer or the offer expires.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. We perform 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.
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 with the completion
of a working model of the enhancement or product, any additional development
costs are capitalized in accordance with the Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed" (SFAS 86). Such capitalized costs are amortized on
a straight line basis over the estimated economic life of the related product,
which is generally three years. We perform an annual review of the
recoverability of such
13
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.
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 certain aspects of 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 the medical and dental
markets through our two divisions.
The two Divisions operate largely as stand-alone operations with each Division
maintaining its 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 our 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 for 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 already 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.
_______________________
(1) UNIX is a registered trademark of the AT&T Corporation.
14
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)), Realtime
Transaction Server Server (NextGen(rts)), Electronic Data Interchange, System
Interfaces, a Patient-centric Web Portal solution (NextMD(4).com), and a
handheld product (NextGen(pda)). NextGen also markets a version of NextGen(emr)
with reduced capabilities (NextGen Express). NextGen products utilize Microsoft
Windows technology and can operate in a client-server environment as well as via
private intranet, the Internet, or within an ASP environment.
We continue to pursue product enhancement initiatives within each Division. The
majority of such expenditures are currently targeted to the NextGen Division
product line and client base.
Inclusive of divisional EDI revenue, the NextGen Division accounted for
approximately 85.5% of our revenue for the third quarter of fiscal 2006 compared
to 83.1% in the third quarter of fiscal 2005. The QSI Division accounted for
14.5% and 16.9% of revenue in the third quarter of fiscal 2006 and 2005,
respectively. The NextGen Division's year over year revenue grew at 24.7% and
31.0% in the third quarter of fiscal 2006 and 2005, respectively, while the QSI
Division's year over year revenue increased by 3.3% and declined by 10.9% in the
third quarter of fiscal 2006 and 2005, respectively.
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.
Risk Factors
The risk factors described below reflect material changes from risk factors as
previously included in our Exchange Act reports. However, additional risks and
uncertainties may also impair our business operations including but not limited
to those outlined in our prior SEC filings. If any of these or other 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 evolving competition. The markets for healthcare information systems are
intensely competitive and there has been significant merger and acquisition
activity among a number of our competitors in recent months. Transaction induced
pressures, or other related factors may result in price erosion or other
negative market dynamics that could have a material adverse effect on our
business, results of operations, financial condition and price of our stock.
We face risks related to litigation advanced by a director and shareholder of
the Company. After the close of business on October 26, 2005, we learned that a
lawsuit has been filed against us and six of our eight directors (those elected
by the shareholders, but not nominated by Mr. Hussein). The complaint alleges
that in connection with our 2005 Annual Shareholders' Meeting, the certified
results from the independent inspector of election included certain proxies that
should not have been included in the final vote tabulation. The independent
inspector of election certified the election of the eight directors
_______________________
(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 Healthcare Information
Systems, Inc.
(4) NextMD is a registered trademark of NextGen Healthcare Information
Systems, Inc.
15
presently serving on the Board after hearing Mr. Hussein's claim concerning this
matter. Mr. Hussein continues to pursue his claim in California State Superior
Court. Moreover, following a ruling by the Superior Court, it is possible that
such litigation may be continued by one or more parties by appealing such
ruling. As a result of such litigation, the Company's operating results and
share price may be negatively impacted due to the negative publicity, additional
expenses incurred, management distraction, and/or other factors. In addition,
litigation of this nature may negatively impact our ability to attract and
retain qualified board members. It is also possible that Mr. Hussein will launch
further proxy contests in opposition to the Company's board nominees at one or
more future shareholder meetings with potential negative effects similar to
those discussed above.
Our future policy concerning the payment of dividends is uncertain. While we
paid a one-time cash dividend in March 2005 and have announced an additional
dividend for March 2006, there can be no assurance that we will pay another
dividend in the future. Unfulfilled expectations to the contrary could have a
material negative impact upon the price of our stock.
Our future policy concerning stock split is uncertain. While we announced a 2:1
split of our stock in February 2005 and a second 2:1 stock split has been
announced with an effective date of March 3, 2006, there can be no assurance
that another stock split will occur in the future. Unfulfilled expectations to
the contrary could have a material negative impact upon the price of our stock.
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 quarterly software revenue may fluctuate significantly. Sales of software
licenses may fluctuate significantly from quarter to quarter based upon the size
or timing of orders received from large purchasers.
Results of Operations
Overview of results
o We have experienced significant growth in our total revenue as a result of
growth in our NextGen Division. Consolidated revenue grew 32.0% in the
nine months ended December 31, 2005 versus 2004 and 21.6% in the nine
months ended December 31, 2004 versus 2003.
o Consolidated income from operations grew 34.0% in the nine months ended
December 31, 2005 versus 2004 and 54.6% in the nine months ended December
31, 2004 versus 2003. This performance was driven principally by the
results in our NextGen Division.
o We have benefited and hope to continue to benefit from the increased
demands on healthcare providers for greater efficiency and lower costs, as
well as increased adoption rates for electronic medical records and other
technology in the healthcare arena.
o During the quarter ended December 31, 2005, we had our first significant
sale of licenses to Siemens Medical Solutions. This transaction was for $4
million and was included in deferred revenue as of December 31, 2005.
16
NextGen Division
o Our NextGen Division has experienced significant growth in revenue and
operating income. Divisional revenue grew 39.1% in the nine months ended
December 31, 2005 versus 2004 and 30.4% in the nine months ended December
31, 2004 versus 2003 while divisional operating income (excluding
unallocated corporate expenses) grew 47.1% in the nine months ended
December 31, 2005 versus 2004 and 63.6% in the nine months ended December
31, 2004 versus 2003.
o During the nine months ended December 31, 2005, we added staffing
resources to departments including sales, support, implementation, and
software development and intend to continue to do so during the remainder
of fiscal year 2006.
o Our goals include continuing to further enhance our existing products,
developing new products for targeted markets, continuing to add new
customers, selling additional software and services to existing customers
and expanding penetration of connectivity services to new and existing
customers.
QSI Division
o Our QSI Division revenue remained relatively consistent in the nine months
ended December 31, 2005 versus 2004 and declined 6.2% in the nine months
ended December 31, 2004 versus 2003. The Division experienced a 13.5%
decrease in operating income (excluding unallocated corporate expenses) in
the nine months ended December 31, 2005 versus 2004.
o Our goals for the QSI Division include maximizing revenue and profit
performance given the constraints present in this Division's target
market.
The following table sets forth for the periods indicated, the percentage of
revenues represented by each item in our Consolidated Statements of Income.
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues:
Software, hardware and supplies .... 40.5% 44.3% 44.8% 44.0%
Implementation and training services 9.8 8.5 9.7 10.1
----------- ----------- ----------- -----------
System sales ......................... 50.3 52.8 54.5 54.1
Maintenance and other services ..... 37.3 34.8 34.1 33.9
Electronic data interchange services 12.4 12.4 11.4 12.0
----------- ----------- ----------- -----------
Maintenance, EDI and other services .. 49.7 47.2 45.5 45.9
----------- ----------- ----------- -----------
Total revenue ..................... 100.0 100.0 100.0 100.0
----------- ----------- ----------- -----------
Cost of revenue:
Software, hardware and supplies .... 6.2 6.3 7.2 8.6
Implementation and training services 7.4 7.1 6.9 7.1
----------- ----------- ----------- -----------
Total cost of system sales ........... 13.6 13.4 14.1 15.7
Maintenance and other services ..... 13.2 12.8 12.7 13.8
Electronic data interchange services 8.3 7.8 7.6 7.6
----------- ----------- ----------- -----------
Total cost of maintenance, EDI and
other services ....................... 21.5 20.6 20.3 21.4
----------- ----------- ----------- -----------
Total cost of revenue ............. 35.1 34.0 34.4 37.1
----------- ----------- ----------- -----------
Gross profit ...................... 64.9 66.0 65.6 62.9
----------- ----------- ----------- -----------
Selling, general and administrative 30.0 29.1 29.8 26.5
Research and development costs .... 8.2 7.7 7.1 8.1
----------- ----------- ----------- -----------
Income from operations ............ 26.7 29.2 28.7 28.3
----------- ----------- ----------- -----------
Interest income ...................... 2.2 1.2 1.7 0.9
----------- ----------- ----------- -----------
Income before provision for income
taxes ................................ 28.9 30.4 30.4 29.2
Provision for income taxes ........... 10.9 11.3 11.6 11.4
----------- ----------- ----------- -----------
Net income ........................ 18.0% 19.1% 18.7%** 17.8%
=========== =========== =========== ===========
** does not add due to rounding
17
For the Three-Month Periods December 31, 2005 versus 2004
Net Income. The Company's net income for the three months ended December 31,
2005 was $4.8 million or $0.36 per share on a basic and $0.35 per share on a
fully diluted basis. In comparison, we earned $4.2 million or $0.33 per share on
a basic and $0.32 per share on a fully diluted basis for the three months ended
December 31, 2004. The increase in net income for the three months ended
December 31, 2005 was achieved primarily through a 21.1% increase in
consolidated revenue, driven by a 24.7% increase in NextGen Division revenue
which accounted for 85.5% of consolidated revenue.
Revenue. Revenue for the three months ended December 31, 2005 increased 21.1% to
$26.8 million from $22.1 million for the three months ended December 31, 2004.
NextGen Division revenue increased 24.7% from approximately $18.3 million to
approximately $22.9 million in the period, while QSI Division revenue increased
by 3.3% during the period.
We report revenue in two major categories, "Systems sales" and "Maintenance, EDI
and other services". Revenue in the systems sales category includes software
license fees, hardware, third party software, supplies and implementation and
training services related to the purchase of the Company's software systems. The
majority of the revenue in the system sales category is related to the sale of
software. Revenue in the Maintenance, EDI and other category includes
maintenance, EDI, and other revenue. Maintenance and EDI revenue are the
principal sources of revenue in this category.
System Sales. Company-wide sales of systems for the three months ended December
31, 2005, increased 15.3% to $13.5 million from $11.7 million in the prior year
quarter.
Our increase in revenue from sales of systems was principally the result of a
13.2% increase in category revenue at our NextGen Division. Divisional sales in
this category grew from $11.3 million during the quarter ended December 31, 2004
to $12.8 million during the quarter ended December 31, 2005. This increase was
driven primarily by higher sales of NextGen(emr) and NextGen(epm) software to
both new and existing clients, as well as delivery of related implementation
services, offset by a decline in Company-wide sales of related hardware, third
party software, and supplies.
The following table breaks down our reported system sales into software,
hardware, third party software, supplies, and implementation and training
services components by Division:
----------------------------------------------------------
Hardware,
Third Party Implementation
Software and and Training Total
Software Supplies Services System Sales
----------- ------------ -------------- ------------
Three months ended
DECEMBER 31, 2005
QSI Division ......... $ 216 $ 391 $ 67 $ 674
NextGen Division ..... 9,696 532 2,548 12,776
----------- ------------ -------------- ------------
Consolidated ......... $ 9,912 $ 923 $ 2,615 $ 13,450
=========== ============ ============== ============
Three months ended
DECEMBER 31, 2004
QSI Division ......... $ 167 $ 132 $ 89 $ 388
NextGen Division ..... 8,660 822 1,800 11,282
----------- ------------ -------------- ------------
Consolidated ......... $ 8,827 $ 954 $ 1,889 $ 11,670
=========== ============ ============== ============
NextGen Division software revenue increased 12.0% between the three months ended
December 31, 2004 and the three months ended December 31, 2005. During the
quarter ended December 31, 2005, a $4 million sale of licenses to a VAR that was
closed and paid for in full during the quarter was not recognized based on
application of applicable revenue recognition guidelines. Our VAR revenue may
fluctuate significantly from quarter to quarter which could have a material
effect on our operations.
18
During the three months ended December 31, 2005, 4.2% of NextGen's system sales
revenue was represented by hardware and third party software compared to 7.3% in
the same prior year period. We have noted that the last several quarter's
results have included a relatively lower amount of hardware and third party
software compared to prior periods. However, this decrease was not and is not
the result of any change in emphasis on our part. The number of customers who
purchase hardware and third party software and the dollar amount of hardware and
third party software revenue fluctuates each quarter depending on the needs of
customers. The inclusion of hardware and third party software in the Division's
sales arrangements is typically at the request of the customer and is not a
priority focus for us.
Implementation and training revenue at the NextGen Division increased 41.6% in
the three months ended December 31, 2005 compared to the three months ended
December 31, 2004. The year over year growth in implementation and training
revenue is the result of increases in the amount of implementation and training
services rendered to our customers. The amount of implementation and training
services revenue and the corresponding rate of growth compared to a prior period
in any given quarter is dependant on several factors including timing of
customer implementations, the availability of qualified staff, and the mix of
services being rendered. The number of implementation and training staff
increased during the three months ended December 31, 2005 versus 2004 in order
to accommodate the increased amount of implementation services sold in
conjunction with increased software sales. In order to achieve continued
increased revenue in this area, additional staffing increases and additional
training facilities are anticipated, though actual future increases in revenue
and staff will depend upon the availability of qualified staff, business mix and
conditions, and our ability to retain current staff members.
The NextGen Division's growth has come in part from investments in sales and
marketing activities including hiring additional sales representatives, trade
show attendance, and advertising expenditures. We have also benefited from
winning numerous industry awards for the NextGen Division's flagship
NextGen(emr) and NextGen(epm) software products in fiscal years 2005 and 2004,
as well as in prior years, and the apparent increasing acceptance of electronic
medical records technology in the healthcare industry.
For the QSI Division, total system sales increased 73.7% to $0.7 million in the
three months ended December 31, 2005 compared to $0.4 million in the three
months ended December 31, 2004 primarily due to an increase in sales of
hardware, third party software and supplies. We do not presently foresee any
material changes in the business environment for the Division with respect to
the constrained environment that has been in place for the past several years.
Maintenance, EDI and Other Services. For the three months ended December 31,
2005, Company-wide revenue from maintenance and other services grew 27.7% to
$13.3 million from $10.4 million in the same period in the prior year. The
increase in this category resulted from an increase in both EDI and maintenance
and other revenue from the NextGen Division's client base offsetting slight
decreases in the QSI Division's aggregate revenue in these areas. Total NextGen
Division maintenance revenue for the three months ended December 31, 2005 grew
23.7% to $6.0 million from $4.9 million in the same year ago period, while EDI
revenue grew 44.9% to $2.2 million compared to $1.5 million during the same
prior year period. QSI Division maintenance revenue declined 6.3% in the same
period while QSI divisional EDI revenue declined by 8.3% between the same
periods.
The following table details revenue included in the Maintenance, EDI and other
category for the three month periods ended December 31, 2005 and 2004:
----------------------------------------------------------
Maintenance EDI Other Total
----------- ------------ -------------- ------------
Three months ended
DECEMBER 31, 2005
QSI Division ......... $ 1,729 $ 1,130 $ 334 $ 3,193
NextGen Division ..... 6,004 2,180 1,925 10,109
----------- ------------ -------------- ------------
Consolidated ......... $ 7,733 $ 3,310 $ 2,259 $ 13,302
=========== ============ ============== ============
Three months ended
DECEMBER 31, 2004
QSI Division ......... $ 1,845 $ 1,232 $ 277 $ 3,354
NextGen Division ..... 4,852 1,505 707 7,064
----------- ------------ -------------- ------------
Consolidated ......... $ 6,697 $ 2,737 $ 984 $ 10,418
=========== ============ ============== ============
19
The growth in maintenance revenue for the NextGen Division has come from new
customers that have been added each quarter as well as our relative success in
retaining existing maintenance customers. NextGen's EDI revenue growth has come
from new customers and from further penetration of the Division's existing
customer base. We intend to continue to promote maintenance and EDI services to
both new and existing customers.
The following table provides the number of billing sites which were receiving
maintenance services as of the last business day of the quarters ended December
31, 2005 and 2004 respectively, as well as the number of billing sites receiving
EDI services during the last month of each respective period at each Division of
the Company. The table presents summary information only and includes billing
entities added and removed for any reason. Note also that a single client may
include one or multiple billing sites, and changes in billing protocols for
certain clients can cause period to period changes in the number of billing
sites.
--------------------------------------------------------------------------------
NextGen QSI Consolidated
------------------------ ------------------------ ------------------------
Maintenance EDI Maintenance EDI Maintenance EDI
--------------------------------------------------------------------------------
DECEMBER 31,
2004 ........ 504 373 301 225 805 598
Billing sites
added ....... 287 220 6 15 293 235
Billing sites
removed ..... (8) (63) (27) (50) (35) (113)
----------- --------- ----------- --------- ----------- ---------
DECEMBER 31,
2005 ........ 783 530 280 190 1,063 720
=========== ========= =========== ========= =========== =========
Cost of Revenue. Cost of revenue for the three months ended December 31, 2005
increased 25.1% to $9.4 million from $7.5 million in the quarter ended December
31, 2004, while the cost of revenue as a percentage of net revenue increased to
35.1% from 34.0% due to the fact that the rate of growth in cost of revenue grew
slightly faster than the aggregate revenue growth rate for the Company.
The following table details the individual components of cost of revenue and
gross profit as a percentage of total revenue for our Company and our two
Divisions:
---------------------------------------------
Hardware, Payroll
Third and Total
Party related Cost of Gross
Software Benefits Other Revenue Profit
--------- -------- -------- -------- --------
Three months ended
DECEMBER 31, 2005
QSI Division ..... 10.4% 19.3% 20.4% 50.1% 49.9%
NextGen Division . 3.1 13.4 16.1 32.6 67.4
--------- -------- -------- -------- --------
Consolidated ..... 4.1% 14.3% 16.7% 35.1% 64.9%
========= ======== ======== ======== ========
Three months ended
DECEMBER 31, 2004
QSI Division ..... 5.0% 17.8% 25.7% 48.5% 51.5%
NextGen Division . 4.5 12.3 14.3 31.1 68.9
--------- -------- -------- -------- --------
Consolidated ..... 4.6% 13.2% 16.2% 34.0% 66.0%
========= ======== ======== ======== ========
During the three months ended December 31, 2005, hardware and third party
software constituted a smaller portion of consolidated revenue compared to the
same year ago period driven principally by the composition of NextGen Division
revenue. We have noted that the last several quarter's results have included a
relatively lower amount of hardware and third party software compared with prior
periods. However, this reduction was not the result of any change in emphasis on
our part. The number of customers who purchase hardware and third party software
and the dollar amount of hardware and third party software purchased fluctuates
each quarter depending on the needs of the customers and is not a priority focus
for us.
Our payroll and benefits expense associated with delivering our products and
services increased to 14.3% of consolidated revenue in the three months ended
December 31, 2005 compared to 13.2% during the three months ended December 31,
2004. The absolute level of consolidated payroll and benefit expenses grew from
$2.9 million in the three months ended
20
December 31, 2004 to $3.8 million in the three months ended December 31, 2005,
an increase of 31% or $0.9 million. This increase was due primarily to additions
to related headcount, payroll and benefits expense associated with delivering
products and services in the NextGen Division where such expenses increased to
$3.1 million in three months ended December 31, 2005 from $2.2 million in the
three months ended December 31, 2004. Payroll and benefits expense associated
with delivering products and services in the QSI Division during the three
months ended December 31, 2005 and 2004 remained relatively unchanged at
approximately $0.7 million.
We anticipate continued additions to headcount in the NextGen Division in areas
related to delivering products and services in future periods but due to the
uncertainties in the timing of our sales arrangements, our sales mix, the
acquisition and training of qualified personnel, and other issues, we cannot
accurately predict if related headcount expense as a percentage of revenue will
increase or decrease in the future.
We do not currently intend to make any significant additions to related
headcount at the QSI Division.
"Other", which consists of outside service costs, amortization of software
development costs and other costs, increased slightly on a consolidated basis to
16.7% of revenue during the three months ended December 31, 2005 compared to
16.2% a year ago.
Should the NextGen Division continue to represent an increasing share of our
revenue and should the NextGen Division continue to carry higher gross profit
than the QSI Division, our consolidated gross profit percentages should increase
to more closely match those of the NextGen Division.
As a result of the foregoing events and activities, the gross profit percentage
for the Company and our two operating divisions slightly decreased for the three
month period ended December 31, 2005 versus the prior year period.
The following table details revenue and cost of revenue on a consolidated and
divisional basis for the three month periods ended December 31, 2005 and 2004:
----------------------------------------------
Three months ended Three months ended
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2005 % 2004 %
--------- -------- --------- --------
QSI Division
Revenue ............ $ 3,867 100.0% $ 3,742 100.0%
Cost of revenue .... 1,939 50.1 1,815 48.5
--------- -------- --------- --------
Gross profit ....... $ 1,928 49.9% $ 1,927 51.5%
========= ======== ========= ========
NextGen Division
Revenue ............ $ 22,885 100.0% $ 18,346 100.0%
Cost of revenue .... 7,464 32.6 5,700 31.1
--------- -------- --------- --------
Gross profit ....... $ 15,421 67.4% $ 12,646 68.9%
========= ======== ========= ========
Consolidated
Revenue ............ $ 26,752 100.0% $ 22,088 100.0%
Cost of revenue .... 9,403 35.1 7,515 34.0
--------- -------- --------- --------
Gross profit ....... $ 17,349 64.9% $ 14,573 66.0%
========= ======== ========= ========
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 2005 increased
24.9% to $8.0 million as compared to $6.4 million for the three months ended
December 31, 2004. The increase in the amount of such expenses resulted
primarily from a $0.5 million increase in compensation expense in the NextGen
Division, a net $0.7 million increase in other selling, general and
administrative expenses in the NextGen Division and a $0.4 million increase in
corporate related expenses. Approximately half of the increase in year over year
corporate related expense was related to an increase in compensation expense.
Selling, general and administrative expenses as a percentage of revenue
increased slightly from 29.1% in the three months ended December 31, 2004 to
30.0% in the three months ended December 31, 2005 due to the fact that the rate
of growth in selling, general and administrative expense grew faster than the
aggregate revenue growth rate for the Company.
We anticipate increased expenditures for trade shows, advertising and the
employment of additional sales and administrative staff at the NextGen Division.
We also anticipate
21
future increases in corporate expenditures being made in a wide range of areas.
While we expect selling, general and administrative expenses to increase on an
absolute basis, we cannot accurately predict the impact these additional
expenditures will have on selling, general, and administrative expenses as a
percentage of revenue.
Research and Development Costs. Research and development costs for the three
months ended December 31, 2005 and 2004 were $2.2 million and $1.7 million,
respectively. The increases 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 increased to 8.2% from 7.7%
during the three months ended December 31, 2005. Research and development
expenses are expected to continue at or above current dollar levels.
Interest Income. Interest income for the three months ended December 31, 2005
increased to approximately $0.6 million compared with $0.3 million in the three
months ended December 31, 2004. Interest income in the three months ended
December 31, 2005 increased primarily due to the effect of an increase in short
term interest rates versus the prior year quarter as well as comparatively
higher amounts of funds available for investment during the three months ended
December 31, 2005.
Our investment policy is determined by our Board of Directors. We currently
maintain our cash in very liquid short term assets including money market funds
and short term U.S. Treasuries with maturities of less than 90 days. Our Board
of Directors may consider alternate uses for our cash including, but not limited
to payment of a special dividend similar to one time dividends declared and paid
in March 2005 and to be paid in March 2006, initiation of a regular dividend,
initiation of a stock buy-back program, an expansion of our investment policy to
include investments with maturities of greater than 90 days, or other items.
Additionally, it is possible that we will utilize some or all of our cash to
fund an acquisition or other similar business activity. Any or all of these
programs could significantly impact our investment income in future periods.
Provision for Income Taxes. The provision for income taxes for the three months
ended December 31, 2005 was approximately $2.9 million as compared to
approximately $2.5 million for the year ago period. The effective tax rates for
the three months ended December 31, 2005 and 2004 were 37.6% and 37.1%,
respectively. The provision for income taxes for the three months ended December
31, 2005 and 2004 differ from the combined statutory rates primarily due to the
impact of varying state income tax rates, research and development tax credits,
and the newly-enacted domestic manufacturer's deduction under Internal Revenue
Code Section 199. During the quarter ended December 31, 2004, the provision for
income taxes was reduced by $0.2 million of research and development credits
that were not recognized in their respective prior periods. These credits were
principally from credits in which the statute of limitations has expired.
Research and Development Tax Credits/Domestic Manufacturer's Deduction. For the
three months ended December 31, 2005 and 2004, we have estimated research and
development tax credits of $138,000 and $100,000, respectively. We expect to
claim these credits on our respective tax returns. Research and development
credits taken by the Company involve certain assumptions and judgments regarding
qualification of expenses under the relevant tax codes.
For the three months ended December 31, 2005, we have estimated a deduction of
$123,000 for the newly-enacted domestic manufacturer's deduction. The Company
expects to capture this benefit on our tax returns.
For the Nine-Month Periods December 31, 2005 versus 2004
Net Income. The Company's net income for the nine months ended December 31, 2005
was $15.7 million or $1.19 per share on a basic and $1.15 per share on a fully
diluted basis. In comparison, we earned $11.3 million or $0.88 per share on a
basic and $0.86 per share on a fully diluted basis in the nine months ended
December 31, 2004. The increase in net income for the nine months ended December
31, 2005, was achieved primarily through the following:
o a 32.0% increase in consolidated revenue driven by a 39.1% increase in
NextGen Division revenue which accounted for 86.0% of consolidated
revenue; and
o increase in the consolidated gross profit percentage which increased to
65.6% in the nine months ended December 31, 2005 versus 62.9% in the same
period last year.
22
Revenue. Revenue for the nine months ended December 31, 2005 increased 32.0% to
$83.7 million from $63.4 million for the nine months ended December 31, 2004.
NextGen Division revenue increased 39.1% from $51.8 million during the nine
month ended December 31, 2004 to $72.0 million during the nine month ended
December 31, 2005, while QSI Division revenue remained relatively consistent
during the same period.
We report revenue in two major categories, "Systems sales" and "Maintenance, EDI
and other services". Revenue in the systems sales category includes software
license fees, hardware, third party software, supplies and implementation and
training services related to purchase of the Company's software systems. The
majority of the revenue in the system sales category is related to the sale of
software. Revenue in the Maintenance, EDI and other category includes
maintenance, EDI, and other revenue. Maintenance and EDI revenue are the
principal sources of revenue in this category.
System Sales. Company-wide sales of systems for the nine months ended December
31, 2005 increased 32.8% to $45.6 million from $34.3 million in the same prior
year period.
Our increase in revenue from sales of systems was principally the result of a
33.6% increase in category revenue at our NextGen Division. Divisional systems
sales grew from $32.8 million to $43.9 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 delivery of related implementation and training
services, partially offset by decline in Company-wide sale of hardware, third
party software, and supplies.
Category revenue in the QSI Division increased by 15.1% between the nine months
ended December 31, 2004 and the nine months ended December 31, 2005. The primary
reason for the increase was an increase in sales of hardware, third party
software and supplies.
The following table breaks down our reported systems sales into software,
hardware and third party software and supplies, and implementation and training
services components by Division:
---------------------------------------------------
Hardware,
Third Party Implementation Total
Software and and Training System
Software Supplies Services Sales
-------- ------------ -------------- --------
Nine months ended
DECEMBER 31, 2005
QSI Division ......... $ 517 $ 829 $ 389 $ 1,735
NextGen Division ..... 33,156 2,967 7,747 43,870
-------- ------------ -------------- --------
Consolidated ......... $ 33,673 $ 3,796 $ 8,136 $ 45,605
======== ============ ============== ========
Nine months ended
DECEMBER 31, 2004
QSI Division ......... $ 686 $ 576 $ 246 $ 1,508
NextGen Division ..... 22,821 3,808 6,209 32,838
-------- ------------ -------------- --------
Consolidated ......... $ 23,507 $ 4,384 $ 6,455 $ 34,346
======== ============ ============== ========
NextGen Division software revenue increased 45.3% between the nine months ended
December 31, 2005 and the nine months ended December 31, 2004. The Division's
software revenue accounted for 75.6% of divisional systems sales revenue during
the nine months ending December 31, 2005, an increase from 69.5% in the nine
months ended December 31, 2004. This increase was not the result of any new
trend or change in emphasis on our part relative to software sales. Software
license revenue continues to be an area of primary emphasis for the NextGen
division and management was pleased with the Division's performance in this
area.
During the nine months ended December 31, 2005, 6.8% of NextGen's systems sales
revenue was represented by hardware and third party software compared to 11.6%
in the same prior year period. We have noted that the last several quarter's
results have included a relatively lower amount of hardware and third party
software compared to prior periods. However, this decrease was not and is not
the result of any change in emphasis on our part. The number of customers who
purchase hardware and third party software and the dollar amount of hardware and
third party software revenue fluctuates each quarter depending on the needs of
customers. The inclusion of hardware and third party software in the division's
sales arrangements is typically at the request of the customer and is not a
priority focus for us.
23
Implementation and training revenue at the NextGen Division increased 24.8% from
the nine months ended December 31, 2004 compared to the nine months ended
December 31, 2005. The growth in implementation and training revenue is the
result of increases in the amount of implementation and training services
rendered to our customers. The number of implementation and training staff
increased during the course of the nine months ended December 31, 2005 versus
2004 in order to accommodate the increased amount of implementation services
sold in conjunction with increased software sales. In order to achieve continued
increased revenue in this area, additional staffing increases and additional
training facilities are anticipated, though actual future increases will depend
upon the availability of qualified staff, business conditions, and our ability
to retain current staff members.
The NextGen Division's growth has come in part from investments in sales and
marketing activities including hiring additional sales representatives, trade
show attendance, and advertising expenditures. We have also benefited from
winning numerous industry awards for the NextGen Division's flagship
NextGen(emr) and NextGen(epm) software products in fiscal years 2005 and 2004,
as well as in prior years, and the apparent increasing acceptance of electronic
medical records technology in the healthcare industry.
Maintenance, EDI and Other Services. For the nine months ended December 31,
2005, company-wide revenue from maintenance and other services grew 31.0% to
$38.1 million from $29.1 million during the same period last year. The increase
in this category resulted principally from an increase in both EDI and
maintenance and other revenue from the NextGen Division's client base. Total
NextGen Division maintenance revenue for the nine months ended December 31, 2005
grew 33.5% to $17.2 million from $12.9 million in the period a year ago, while
EDI revenue grew 55.8% to $6.1 million compared to $3.9 million during the same
period. QSI Division maintenance revenue declined 5.0% from $5.5 million to $5.2
million in the same period while QSI Divisional EDI revenue declined by 5.9%
from $3.7 million to $3.5 million during such period.
The following table details revenue included in Maintenance, EDI and other for
the nine month periods ended December 31, 2005 and 2004:
-----------------------------------------------
Maintenance EDI Other Total
----------- --------- --------- ---------
Nine months ended
DECEMBER 31, 2005
QSI Division ......... $ 5,246 $ 3,470 $ 1,266 $ 9,982
NextGen Division ..... 17,157 6,116 4,862 28,135
----------- --------- --------- ---------
Consolidated ......... $ 22,403 $ 9,586 $ 6,128 $ 38,117
=========== ========= ========= =========
Nine months ended
DECEMBER 31, 2004
QSI Division ......... $ 5,523 $ 3,687 $ 959 $ 10,169
NextGen Division ..... 12,852 3,925 2,143 18,920
----------- --------- --------- ---------
Consolidated ......... $ 18,375 $ 7,612 $ 3,102 $ 29,089
=========== ========= ========= =========
The growth in overall maintenance revenue has come from new customers that have
been added each quarter, additional software purchases by existing customers, as
well as our relative success in retaining existing maintenance customers.
NextGen EDI revenue growth has come from new customers and from further
penetration of the Division's existing customer base. We intend to continue to
promote maintenance and EDI services to both new and existing customers.
The following table provides the number of billing sites which were receiving
maintenance services as of the last business day of the quarters ended December
31, 2005 and 2004 respectively, as well as the number of billing sites receiving
EDI services during the last month of each respective period at each division of
the Company. The table presents summary information only and includes billing
entities added and removed for any reason. Note also that a single client may
include one or multiple billing sites, and changes in billing protocols for
certain clients can cause period to period changes in the number of billing
sites.
24
--------------------------------------------------------------------------
NextGen QSI Consolidated
---------------------- ---------------------- ----------------------
Maintenance EDI Maintenance EDI Maintenance EDI
---------------------------------------------------------------------------
DECEMBER 31, 2004 ........... 504 373 301 225 805 598
Billing sites added ......... 287 220 6 15 293 235
Billing sites removed ....... (8) (63) (27) (50) (35) (113)
---------- ------- ----------- ------- ----------- -------
DECEMBER 31, 2005 ........... 783 530 280 190 1,063 720
========== ======= =========== ======= =========== =======
Cost of Revenue. The cost of revenue for the nine months ended December 31, 2005
increased 22.1% to $28.8 million from $23.6 million, while the cost of revenue
as a percentage of net revenue decreased to 34.4% from 37.1% during the same
period a year ago.
The decrease in our consolidated cost of revenue as a percentage of revenue
between the nine months ended December 31, 2005 and the nine months ended
December 31, 2004 is attributable to four main factors:
o a reduction in the level of third party hardware and software as a
percentage of revenue in the NextGen Division;
o a reduction in the relative level of employee compensation expense
included in cost of sales as a percentage of revenue in the NextGen
Division as a result of increased leverage achieved with expanded revenue;
o an increase in the NextGen Division's share of consolidated revenue from
81.6% in the nine months ended December 31, 2004 to 86.0% in the nine
months ended December 31, 2005. The NextGen Division's gross profit margin
has been and continues to be higher than the gross profit margin for the
QSI Division; and
o a decrease in the cost of revenue as a percentage of revenue in the
NextGen Division causing a corresponding increase in gross profit margin.
The following table details the individual components of cost of revenue and
gross profit as a percentage of total revenue for our Company and our two
Divisions:
------------------------------------------ ------
Hardware, Payroll
Third and Total
Party related Cost of Gross
Software Benefits Other Revenue Profit
--------- -------- ----- ------- ------
Nine months ended
DECEMBER 31, 2005
QSI Division ......... 9.4% 18.9% 20.8% 49.1% 50.9%
NextGen Division ..... 4.9 11.9 15.2 32.0 68.0
--------- -------- ----- ------- ------
Consolidated ......... 5.5% 12.9% 16.0% 34.4% 65.6%
========= ======== ===== ======= ======
Nine months ended
DECEMBER 31, 2004
QSI Division ......... 6.9% 17.4% 25.0% 49.3% 50.7%
NextGen Division ..... 6.8 13.1 14.5 34.4 65.6
--------- -------- ----- ------- ------
Consolidated ......... 6.8% 15.0% 15.3% 37.1% 62.9%
========= ======== ===== ======= ======
During the nine months ended December 31, 2005, the cost of hardware and third
party software constituted 5.5% of consolidated revenue compared to 6.8% in the
same year ago period. We have noted that the last several quarter's results have
included a relatively lower amount of hardware and third party software compared
to prior periods. However this year over year reduction was and is not the
result of any change in emphasis on our part. The number of customers who
purchase hardware and third party software and the dollar amount of hardware and
third party software purchased fluctuates each quarter depending on the needs of
the customers and is not a priority focus for us.
Our payroll and benefits expense associated with delivering our products and
services decreased to 12.9% of consolidated revenue in the nine months ended
December 31, 2005 compared to 15.0% in the nine months ended December 31, 2004.
The absolute level of consolidated payroll and benefit expenses grew from $8.8
million in the nine months ended December 31, 2004 to $10.8 million in December
31, 2005, an increase of 23%. This increase was due primarily to additions to
headcount, payroll and benefits expense associated with delivering products and
services in the NextGen Division. These divisional expenses increased to $8.6
million in the nine months ended December 31, 2005 compared to $6.8 million in
the nine months ended December 31, 2004, an increase of 26%.
25
The Division's payroll and benefits expense associated with delivering products
and services as a percentage of divisional revenue in the nine months ended
December 31, 2005 decreased to 11.9% compared to 13.1% in the prior year period.
Headcount expense as a percentage of revenue for the nine month period ended
December 31, 2005 at the QSI Division increased compared to the prior year at
18.9% versus 17.4%, in the prior year period.
We anticipate continued additions to headcount in the NextGen Division in areas
related to delivering products and services in future periods but due to the
uncertainties in the timing of our sales arrangements, our sales mix, the
acquisition and training of qualified personnel, and other issues, we cannot
accurately predict if related headcount expense as a percentage of revenue will
increase or decrease in the future.
We do not currently intend to make any significant additions to related
headcount at the QSI Division.
"Other", which consists of outside service costs, amortization of software
development costs and other costs, increased slightly to 16.0% of revenue from
15.3% in the year ago period.
Should the NextGen Division continue to represent an increasing share of our
revenue and should NextGen continue to show higher gross profit percentages
compared to the QSI Division, our gross profit percentages should increase to
more closely match those of the NextGen Division.
As a result of the foregoing events and activities, our gross profit percentage
for the Company and our two operating Divisions increased for the nine month
period ended December 31, 2005 versus the prior year period.
The following table details revenue and cost of revenue on a consolidated and
divisional basis for the nine month periods ended December 31, 2005 and 2004:
Nine months ended Nine months ended
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
2005 % 2004 %
--------- --------- --------- ---------
QSI Division
Revenue .............. $ 11,718 100.0% $ 11,678 100.0%
Cost of revenue ...... 5,756 49.1 5,756 49.3
--------- --------- --------- ---------
Gross profit ......... $ 5,962 50.9% $ 5,922 50.7%
========= ========= ========= =========
NextGen Division
Revenue .............. $ 72,004 100.0% $ 51,757 100.0%
Cost of revenue ...... 23,009 32.0 17,798 34.4
--------- --------- --------- ---------
Gross profit ......... $ 48,995 68.0% $ 33,959 65.6%
========= ========= ========= =========
Consolidated
Revenue .............. $ 83,722 100.0% $ 63,435 100.0%
Cost of revenue ...... 28,765 34.4 23,554 37.1
--------- --------- --------- ---------
Gross profit ......... $ 54,957 65.6% $ 39,881 62.9%
========= ========= ========= =========
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended December 31, 2005 increased
48.7% to $25.0 million as compared to $16.8 million for the nine months ended
December 31, 2004. The increase in the amount of such expenses resulted
primarily from increases of $2.0 million in salaries and related benefits in the
NextGen division, $1.3 million in commission expenses in the NextGen Division,
$1.1 million in travel expenses in the NextGen division, $1.8 million in other
general selling, general and administrative expenses in the NextGen Division and
$2.0 million in increased corporate related expenses. Approximately $0.7 million
of the increase in year over year corporate related expenses was salaries and
related benefits and $0.5 million was related to expenses associated with the
contested director election which occurred in conjunction with the 2005 Annual
Shareholders' Meeting. Selling, general and administrative expenses as a
percentage of revenue increased from 26.5% in the nine months ended December 31,
2004 to 29.8% in the nine months ended December 31, 2005 due to selling,
general, administrative expenses growing at a faster rate than revenue.
We anticipate increased expenditures for trade shows, advertising and the
employment of additional sales and administrative staff at the NextGen Division.
We also anticipate future increases in corporate expenditures being made in
areas including but not limited
26
to staffing and professional services. While we expect selling, general and
administrative expenses to increase on an absolute basis, we cannot accurately
predict the impact these additional expenditures will have on selling, general,
and administrative expenses as a percentage of revenue.
Research and Development Costs. Research and development costs for the nine
months ended December 31, 2005 and 2004 were $5.9 million and $5.1 million,
respectively. The increases 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 7.1% from 8.1% due
in part, to the fact that revenue growth exceeded the increase in research and
development spending. Research and development expenses are expected to continue
at or above current dollar levels.
Interest Income. Interest income for the nine months ended December 31, 2005
increased to $1.4 million compared with $0.6 million in the nine months ended
December 31, 2004. Interest income in the nine months ended December 31, 2005
increased primarily due to the effect of an increase in short term interest
rates versus the prior year period as well as comparatively higher amounts of
funds available for investment during the nine months ended December 31, 2005.
Our investment policy is determined by our Board of Directors. We currently
maintain our cash in very liquid short term assets including money market funds
and short term U.S. Treasuries with maturities of less than 90 days. Our Board
of Directors continues to review alternate uses for our cash including, but not
limited to payment of a special dividend similar to one time dividends declared
and paid in March 2005 and to be paid in March 2006, initiation of a regular
dividend, initiation of a stock buy back program, an expansion of our investment
policy to include investments with maturities of greater than 90 days, or other
items. Additionally, it is possible that we will utilize some or all of our cash
to fund an acquisition or other similar business activity. Any or all of these
programs could significantly impact our investment income in future periods.
Provision for Income Taxes. The provision for income taxes for the nine months
ended December 31, 2005 was approximately $9.8 million as compared to $7.2
million for the year ago period. The effective tax rates for the nine months
ended December 31, 2005 and 2004 were 38.4% and 38.9%, respectively. The
provision for income taxes for the nine months ended December 31, 2005 and 2004
differ from the combined statutory rates primarily due to the impact of varying
state income tax rates, research and development tax credits, and the
newly-created domestic manufacturer's deduction under Internal Revenue Code
Section 199, which is effective for the tax year ended after December 31, 2004.
The effective rate for the nine months ended December 31, 2005 decreased
slightly from the prior year primarily due to the impact of research and
development tax credits and the domestic manufacturer's deduction.
Research and Development Tax Credits/Domestic Manufacturer's Deduction. For the
nine months ended December 31, 2005 and 2004, we have estimated research and
development tax credits of $0.4 million and $0.3 million, respectively. The
Company expects to claim these credits on our tax returns. Research and
development credits taken by the Company involve certain assumptions and
judgments regarding qualification of expenses under the relevant tax codes.
For the nine months ended December 31, 2005, we have estimated a deduction of
$0.4 million for the newly-enacted domestic manufacturer's deduction. The
Company expects to capture this benefit on our tax returns.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for
each of the nine months ended December 31, 2005 and 2004:
27
Nine months ended
DECEMBER 31,
----------------------------
2005 2004
- ------------------------------------------------------------------------------
Cash and cash equivalents ........................ $ 75,228 $ 66,432
Net increase in cash and cash equivalents
during the nine month period ..................... $ 24,071 $ 15,037
Net income during the nine month period .......... $ 15,684 $ 11,318
Net cash provided by operations during the nine
month period ..................................... $ 25,310 $ 16,179
Number of days of sales outstanding at start of
the period ...................................... 119 99
Number of days of sales outstanding at the end
of the period ................................... 129 115
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 nine month
period ended December 31, 2005 and 2004: (000's)
2005 2004
-------- ---------
Net Income 15,684 11,318
Non-cash expenses 4,226 3,125
Tax Benefit from Stock Options 3,535 2,067
Change in deferred revenue 8,639 6,439
Change in accounts receivable (5,501) (8,228)
Change in other assets & liabilities (1,273) 1,458
-------- ---------
Net Cash Provided by Operating Activities 25,310 16,179
======== =========
Net Income
As referenced in the above table, net income makes up the majority of our cash
generated from operations for the nine month period ended December 31, 2005 and
2004. 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 $1.1 million between the nine
month periods ended December 31, 2005 versus 2004. Approximately $0.4 million of
the increase was related to amortization of our increased investment in software
development related to our NextGen division in both periods.
Tax Benefits from Stock Options
The quantity of stock options exercised by employees grew in the nine month
period ending December 31, 2005 over 2004 levels resulting in an increase of
approximately $1.5 million dollars of tax benefit in the period ending December
31, 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 $8.6 million in
the nine month period ending December 31, 2005 versus $6.4 million in the year
ago period. A $4 million sale of licenses to a VAR that was closed and paid for
in full during the quarter contributed to the increase in deferred revenue
during the nine month period ended December 31, 2005.
Accounts Receivable
Accounts receivable grew by approximately $5.5 million and $8.2 million in the
nine month periods ending December 31, 2005 and 2004, respectively. The increase
in accounts receivable in both periods is due to the following factors:
28
o NextGen division revenue grew 39.1% and 30.4% in the nine month periods
ended December 31, 2005 and 2004, respectively;
o The NextGen Division constituted a larger percentage of our receivables at
December 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 which typically have shorter payment terms
than systems sales related revenue which historically have accounted for a
major portion of NextGen division sales; and
o 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 $3.4
million and $6.7 million in the nine month periods ended December 31 2005
and 2004, respectively.
The turnover of accounts receivable measured in terms of days sales outstanding
(DSO) increased from 99 days to 115 days during the nine month period ended
December 31, 2004 primarily due to the above mentioned factors. During the nine
month period ended December 31, 2005, DSO's increased from 119 to 129 days
primarily due to the above mentioned factors.
If amounts included in both accounts receivable and deferred revenue were
netted, the Company's turnover of accounts received expressed as days sales
outstanding would be 73 days as of December 31, 2005 and 72 days as of March 31,
2005. Provided turnover of accounts receivable, deferred revenue, and
profitability remain consistent with the nine months ended December 31, 2005, we
anticipate being able to continue to generate cash from operations during fiscal
2006 primarily from the net income of the Company.
Cash and cash equivalents increased by $24.1 million between March 31, 2005 and
December 31, 2005 primarily as a result of cash provided by operating
activities. Cash and cash equivalents increased approximately $15.0 million
during the nine months ended December 31, 2004, also primarily as a result of
cash generated by operating activities.
Net cash used in investing activities for the nine months ended December 31,
2005 and 2004 was $3.9 million and $2.9 million, respectively. Net cash used in
investing activities for the nine months ended December 31, 2005 and 2004
consisted of additions to equipment and improvements and capitalized software.
During the nine months ended December 31, 2005, we received proceeds of $2.7
million from the exercise of stock options and recorded a reduction in income
tax liability of $3.5 million related to tax deductions received from employee
stock option exercises. The benefit was recorded as additional paid in capital.
At December 31, 2005, we had cash and cash equivalents of $75.2 million. We
intend to expend some of these funds for the development of products
complementary to our existing product line as well as new versions of certain of
our products. These developments are intended to take advantage of more powerful
technologies and to increase the integration of our products. We have no
additional significant current capital commitments.
On January 26, 2006, the Board of Directors approved a one-time cash dividend of
$1.75 per share payable on its outstanding shares of common stock. The cash
dividend record date is February 24, 2006 and is expected to be distributed to
shareholders on or about March 16, 2006.
Management believes that its cash and cash equivalents on hand at December 31,
2005, together with cash flows from operations, if any, will be sufficient to
meet its working capital and capital expenditure requirements in the ordinary
course of business for the balance of fiscal 2006.
Contractual Obligations
The following table summarizes our significant contractual obligations at
December 31, 2005, and the effect that such obligations are expected to have on
our liquidity and cash in future periods:
29
- -------------------------------- --------------------------------------------
Less
Contractual Obligations than a 1-3 3-5 Beyond
Total year years years 5 years
- -------------------------------- ------- ------ ------ ------ -------
Non-cancelable lease obligations $ 7,846 $ 425 $3,650 $3,436 $ 335
======= ====== ====== ====== =======
Item 3. 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 4. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) conducted an evaluation
of the design and operation of our "disclosure controls and procedures" (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act")). 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 December 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.
During the quarter ended December 31, 2005, no significant changes have occurred
in our "internal controls over financial reporting" (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or are
reasonably likely to materially affect, our financial reporting function.
However, we are performing ongoing evaluations of our internal processes in
order to find opportunities to further enhance our internal controls system.
30
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
After the close of business on October 26, 2005, the Company learned that a
lawsuit has been filed against the Company and six of its eight directors by
Ahmed Hussein, a director and significant shareholder of the Company. The
complaint names the Company and all individual directors except for directors
Ibrahim Fawzy and Ahmed Hussein.
Filed in the Superior Court for Orange County, California, the complaint alleges
that in connection with the Company's 2005 Annual Shareholders' Meeting, the
certified results from the independent inspector of election included certain
proxies that should not have been included in the final vote tabulation. The
independent inspector of election has certified the election of the Company's
eight directors (as previously announced) after hearing Mr. Hussein's claim
concerning this matter. Specifically, Mr. Hussein seeks (i) a determination that
the election of directors at the Annual Meeting is invalid, (ii) a determination
that the votes of the disputed shares were improper and in violation of
applicable regulations, (iii) an order requiring that the election of directors
at the Annual Meeting be retabulated without including the disputed shares in
the count, (iv) an order requiring the election of directors with the
retabulated votes in a manner so as to provide Mr. Hussein with the greatest
number of directors possible, and (v) costs.
A hearing was held before the California Superior Court on February 2, 2006. A
further hearing is scheduled for March 7, 2006 at which time the court has
informed the parties that a ruling is expected.
The Company believes that Mr. Hussein's claims lack merit and that the results
certified by the independent inspector of elections are conclusive of this
matter. The Company intends to defend itself and the directors named in Mr.
Hussein's complaint vigorously.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
Previously reported on Form 8-K filed October 6, 2005.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibits:
31.1 Certifications 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
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we have
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
QUALITY SYSTEMS, INC.
Date: February 9, 2006 By: /s/ Louis Silverman
------------------------------------------
Louis Silverman
Chief Executive Officer
Date: February 9, 2006 By: /s/ Paul Holt
-----------------------------------
Paul Holt
Chief Financial Officer; Principal Accounting
Officer
32