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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2005
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-13801
Quality Systems, Inc.
(Exact name of Registrant as specified in its charter)
California 95-2888568
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18191 Von Karman Avenue, Irvine, California 92603
(Address of principal executive offices, including zip code)
(949) 255-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per Share
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 30, 2004: 200,543,000 (based on the closing sales
price of the Registrant's Common Stock as reported in the NASDAQ National Market
System on that date, $50.51 per share).*
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 3, 2005: $415,011,000 (based on the closing sales
price of the Registrant's Common Stock as reported in the NASDAQ National Market
System on that date, $51.30 per share).*
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 13,115,360
- -------------------------------------- ----------------------------------------
(Class) (Outstanding at June 8, 2005)
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III, Items 10, 11, 12, 13 and 14, of the
Form 10-K is incorporated by reference from Registrant's Definitive Proxy
Statement for its 2005 annual meeting which is to be filed with the Commission
within 120 days of its fiscal year ended on March 31, 2005.
* For purposes of this report, in addition to those shareholders which
fall within the definition of "affiliates" under Rule 405 of the Securities Act
of 1933, as amended, holders of ten percent or more of the Registrant's Common
Stock are deemed to be affiliates for purposes of this Report.
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CAUTIONARY STATEMENT
Statements made in this report, the Annual Report to Shareholders in which this
report is made a part, other reports and proxy statements filed with the
Securities and Exchange Commission, communications to shareholders, press
releases and oral statements made by our representatives that are not historical
in nature, or that state our or management's intentions, hopes, beliefs,
expectations or predictions of the future, may constitute "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"). Forward-looking statements can often
be identified by the use of forward-looking terminology, such as "could,"
"should," "will," "will be," "will lead," "will assist," "intended," "continue,"
"believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," or
"estimate" or variations thereof or similar expressions. Forward-looking
statements are not guarantees of future performance or results. They involve
risks, uncertainties and assumptions. It is important to note that any such
performance and actual results, financial condition or business, could differ
materially from those expressed in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below as well as those discussed elsewhere in reports filed with
the Securities and Exchange Commission. Other unforeseen factors not identified
herein could also have such an effect. We undertake no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in future operating results, financial
condition or business over time.
PART I
ITEM 1. BUSINESS
General
Except for the historical information contained herein, the matters discussed in
this Annual Report on Form 10-K, including discussions of the Registrant's
product development plans, business strategies and market factors influencing
the Registrant's results, are forward-looking statements that involve certain
risks and uncertainties. Actual results may differ from those anticipated by the
Registrant as a result of various factors, both foreseen and unforeseen,
including, but not limited to, the Registrant's ability to continue to develop
new products and increase systems sales in markets characterized by rapid
technological evolution, consolidation within the Registrant's target
marketplace and among the Registrant's competitors, and competition from larger,
better capitalized competitors. Many other economic, competitive, governmental
and technological factors could impact the Registrant's ability to achieve our
goals. Interested persons are urged to review the risks described under "Item 1.
Business. Risk Factors" and in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as in the Registrant's
other public disclosures and filings with the Securities and Exchange
Commission.
3
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
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 our "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
______________________________
(1) UNIX is a registered trademark of the AT&T Corporation.
4
more sporadically by client practices. We typically compete to displace
incumbent vendors for claims and statements accounts, and attempt to increase
usage of other elements in our EDI/connectivity product line. In general, EDI
services are only sold to those accounts utilizing software from one of our
Divisions.
The QSI Division's practice management software suite utilizes a UNIX operating
system. Its Clinical Product Suite (CPS) utilizes a Windows NT(2) operating
system and can be fully integrated with the practice management software from
each Division. CPS incorporates a wide range of clinical tools including, but
not limited to, periodontal charting and digital imaging of X-ray and inter-oral
camera images as part of the electronic patient record. The Division develops,
markets, and manages our EDI/connectivity applications. The QSInet Application
Service Provider (ASP/Internet) offering is also developed and marketed by the
Division.
Our NextGen Division develops and sells proprietary electronic medical records
software and practice management systems under the NextGen(R)(3) product name.
Major product categories of the NextGen suite include Electronic Medical Records
(NextGen(emr)), Enterprise Practice Management (NextGen(epm)), Enterprise
Appointment Scheduling (NextGen(eas)), Enterprise Master Patient Index
(NextGen(epi)), NextGen Image Control System (NextGen(ics)), Managed Care Server
(NextGen(mcs)), Electronic Data Interchange, System Interfaces, Internet
Operability (NextGen(web)), a Patient-centric and Provider-centric Web Portal
solution (NextMD(4).com), and a handheld product (NextGen(pda)). During the year
ended March 31, 2005, the NextGen Division introduced NextGen Express, a version
of NextGen(emr) designed for small practices. NextGen products utilize Microsoft
Windows technology and can operate in a client-server environment as well as via
private intranet, the Internet, or in an ASP environment.
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 82.7% of our revenue for fiscal 2005 compared to 76.8% in fiscal
2004. Inclusive of divisional EDI revenue ,the QSI Division accounted for 17.3%
and 23.2% of revenue in fiscal 2005 and 2004, respectively. The NextGen
Division's year over year revenue grew at 35.2% and 45.8% in fiscal 2005 and
2004, respectively, while the QSI Division's year over year revenue declined by
6.8% and 5.3% in fiscal 2005 and 2004, 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.
Industry Background
To compete in the continually changing healthcare environment, providers are
increasingly using technology to help maximize the efficiency of their business
practices, to assist in enhancing patient care, and to maintain the privacy of
patient information.
As the reimbursement environment continues to evolve, more healthcare providers
enter into contracts, often with multiple entities, which define the terms under
which care is administered and paid for. The diversity of payor organizations,
as well as additional government regulation and changes in
______________________________
(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.
5
reimbursement models, have greatly increased the complexity of pricing, billing,
reimbursement, and records management for medical and dental practices. To
operate effectively, healthcare provider organizations must efficiently manage
patient care and other information and workflow processes which increasingly
extend across multiple locations and business entities.
In response, healthcare provider organizations have placed increasing demands on
their information systems. Initially, these information systems automated
financial and administrative functions. As it became necessary to manage patient
flow processes, the need arose to integrate "back-office" data with such
clinical information as patient test results and office visits. The Company
believes information systems must facilitate management of patient information
incorporating administrative, financial and clinical information from multiple
entities. In addition, large healthcare organizations increasingly require
information systems that can deliver high performance in environments with
multiple concurrent computer users.
Many existing healthcare information systems were designed for limited
administrative tasks such as billing and scheduling and can neither accommodate
multiple computing environments nor operate effectively across multiple
locations and entities. We believe that practices that leverage technology to
more efficiently handle patient clinical data as well as administrative,
financial and other practice management data, will be best able to enhance
patient flow, pursue cost efficiencies, and improve quality of care. As
healthcare organizations transition to new computer platforms and newer
technologies, we believe such organizations will be migrating toward the
implementation of enterprise-wide, patient-centric computing systems embedded
with automated clinical patient records.
Company Strategy
The Company's strategy is, at present, to focus on it's core software business.
Among the key elements central to this strategy are:
o Continued development and enhancement of select software solutions
in target markets;
o Continued investments in our infrastructure including but not
limited to product development, sales, marketing, implementation,
and support;
o Continued efforts to make infrastructure investments within an
overall context of maintaining reasonable expense discipline; and
o Addition of new customers through maintaining and expanding sales,
marketing and product development activities.
While these are the key elements of our current strategy, there can be no
guarantees that our strategy will not change, or that we will succeed in
achieving these goals individually or collectively.
Products
In response to the growing need for more comprehensive, cost-effective
healthcare information solutions for physician and dental practices, our systems
provide our clients with the ability to redesign patient care and other workflow
processes while improving productivity through facilitation of managed access to
patient information. Utilizing our proprietary software in combination with
third party hardware and software solutions, our products enable the integration
of a variety of administrative and clinical information operations. Leveraging
more than 30 years of experience in the healthcare information services
industry, we believe that we continue to add value by providing our clients with
sophisticated, full-featured software systems along with comprehensive systems
implementation, maintenance and support services. Any single transaction may or
may not include software, hardware or services.
Practice Management Systems. Our products consist primarily of proprietary
healthcare software applications together with third party hardware and other
non-industry specific software. The systems range in capacity from one to
thousands of users, allowing us to address the needs of both small and large
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organizations. The systems are modular in design and may be expanded to
accommodate changing client requirements.
The QSI Division's character-based practice management system is available in
both dental and medical versions and primarily uses the IBM RS6000(5) central
processing unit and IBM'S AIX(6) version of the UNIX operating system as a
platform for our application software enabling a wide range of flexible and
functional systems. The hardware components, as well as the requisite operating
system licenses, are purchased from manufacturers or distributors of those
components. We configure and test the hardware components and incorporate our
software and other third party packages into completed systems tailored to
accommodate particular client requirements. We continually evaluate third party
hardware components with a view toward utilizing hardware that is functional,
reliable and cost-effective.
NextGen(epm) is the NextGen division's practice management offering.
NextGen(epm) has been developed using a graphical user interface (GUI)
client-server platform for compatibility with Windows 2000, Windows NT and
Windows XP operating systems and relational databases that are ANSI
SQL-compliant. NextGen(epm) is scalable and includes a master patient index,
enterprise-wide appointment scheduling with referral tracking, clinical support,
and centralized or decentralized patient financial management based on either a
managed care or fee-for-service model. The system's three-tiered architecture
allows work to be performed on the database server, the application server and
the client workstation.
We also offer practice management solutions for both dental and medical
practices through the Internet. These products are marketed under the QSINet and
NextGen(web) trade names, respectively.
Clinical Systems. Our dental charting software system, the Clinical
Product Suite (CPS), is a comprehensive solution designed specifically for the
dental group practice environment. CPS integrates the dental practice management
product with a computer-based clinical information system that incorporates a
wide range of clinical tools, including:
o Electronic charting of dental procedures, treatment plans and
existing conditions;
o Periodontal charting via light-pen, voice-activation, or keyboard
entry for full periodontal examinations and PSR scoring;
o Digital imaging of X-ray and intra-oral camera images;
o Computer-based patient education modules, viewable chair-side to
enhance case presentation;
o Full access to patient information, treatment plans, and insurance
plans via a fully integrated interface with our dental practice
management product; and
o Document and image scanning for digital storage and linkage to the
electronic patient record.
The result is a comprehensive clinical information management system that helps
practices save time, reduce costs, improve case presentation, and enhance the
delivery of dental services and quality of care. Clinical information is managed
and maintained electronically thus forming an electronic patient record that
allows for the implementation of the "chartless" office.
CPS incorporates Windows-based client-server technology consisting of one or
more file servers together with any combination of one or more desktop, laptop,
or pen-based PC workstations. The file server(s) used in connection with CPS
utilize(s) a Windows NT or Windows 2000 or Windows XP operating system and the
hardware is typically a Pentium(7)-based single or multi-processor platform.
Based on the
______________________________
(5) RS6000 is a registered trademark of International Business Machines
Corporation.
(6) AIX is a registered trademark of International Business Machines
Corporation.
(7) Pentium is a registered trademark of Intel Corporation.
7
server configuration chosen, CPS is scalable from one to hundreds of
workstations. A typical configuration may also include redundant disk storage,
magnetic tape units, intra- and extra-oral cameras, digital X-ray components,
digital scanners, conventional and flat screen displays, and printers. The
hardware components, including the requisite operating system licenses, are
purchased from third party manufacturers or distributors either directly by the
customer or by us for resale to the customer.
NextGen provides clinical software applications that are complementary to, and
are integrated with, our medical practice management offerings and interface
with many of the other leading practice management software systems on the
market. The applications incorporated into our practice management solutions and
others such as scheduling, eligibility, billing and claims processing are
augmented by clinical information captured by NextGen(emr), including services
rendered and diagnoses used for billing purposes. We believe that we currently
provide a comprehensive information management solution for the medical
marketplace.
NextGen(emr) was developed with client-server architecture and a GUI and
utilizes Microsoft Windows 2000, Windows NT or Windows XP on each workstation
and either Windows 2000, Windows NT, Windows XP or UNIX on the database server.
NextGen(emr) maintains data using industry standard relational database engines
such as Microsoft SQL Server(8) or Oracle(9). The system is scalable from one to
hundreds of workstations.
NextGen(emr) stores and maintains clinical data including:
o Data captured using user-customized input "templates";
o Scanned or electronically acquired images, including X-rays and
photographs;
o Data electronically acquired through interfaces with clinical
instruments or external systems;
o Other records, documents or notes, including electronically captured
handwriting and annotations; and
o Digital voice recordings.
NextGen(emr) also offers a workflow module, prescription management, automatic
document and letter generation, patient education, referral tracking, interfaces
to billing and lab systems, physician alerts and reminders, and powerful
reporting and data analysis tools.
NextGen(pda), the Pocket-PC-based suite of solutions, allows mobile health
professionals to utilize many of NextGen's functions using a palm-sized device.
Connectivity Services. The Company makes available electronic data
interchange ("EDI") capabilities and connectivity services to our customers. The
EDI/connectivity capabilities encompass direct interfaces between our products
and external third party systems, as well as transaction-based services.
Services include:
o Electronic claims submission through our relationships with a number
of payors and national claims clearinghouses;
o Electronic patient statement processing, appointment reminder cards
and calls, recall cards, patient letters, and other correspondence;
o Electronic insurance eligibility verification; and
o Electronic posting of remittances from insurance carriers into the
accounts receivable application.
_______________________________
(8) Microsoft and SQL Server is a registered trademark of Microsoft
Corporation.
(9) Oracle is a registered trademark of Oracle Corporation.
8
Internet Applications. Our NextGen Division maintains an Internet-based
consumer health portal, NextMD.com. NextMD.com is a vertical portal for the
healthcare industry, linking patients with their physicians, insurers,
laboratories, and online pharmacies, while providing a centralized source of
health-oriented information for both consumers and medical professionals.
Patients whose physicians are linked to the portal are able to request
appointments, send appointment changes or cancellations, receive test results
on-line, request prescription refills, view and/or pay their statements, and
communicate with their physicians, all in a secure, on-line environment. Our
NextGen suite of information systems are or can be linked to NextMD.com,
integrating a number of these features with physicians' existing systems.
Our QSI Division also provides a web-based application called QSINet which
allows clients to access information from their practice management system via
the Internet. This application also enables providers to offer their patients
convenient services such as on-line appointment scheduling and electronic bill
payment through the client's website, and posts this data directly to the
client's existing practice management system.
Sales and Marketing
We sell and market our products nationwide primarily through a direct sales
force. The efforts of the direct sales force are augmented by a small number of
reseller relationships established by us. Software license sales to resellers
represented less than 10% of total revenue for the years ended March 31, 2005
and 2004.
Our direct sales force typically makes presentations to potential clients by
demonstrating the system and our capabilities on the prospective client's
premises. Sales efforts aimed at smaller practices are primarily performed
remotely via telephone or internet based presentations. Our sales and marketing
employees identify prospective clients through a variety of means, including
referrals from existing clients, industry consultants, contacts at professional
society meetings, trade shows and seminars, trade journal advertising, direct
mail advertising, and telemarketing.
Our sales cycle can vary significantly and typically ranges from three to twelve
months from initial contact to contract execution. Software licenses are
normally delivered to a customer almost immediately upon receipt of an order.
Implementation and training services are normally rendered based on a mutually
agreed upon timetable. As part of the fees paid by our clients, we receive
up-front licensing fees. Clients have the option to purchase maintenance
services which, if purchased, are invoiced on a monthly or quarterly basis.
Several clients have purchased our practice management software and, in turn,
are providing either time-share or billing services to single and group practice
practitioners. Under the time-share or billing service agreements, the client
provides the use of our software for a fee to one or more practitioners.
Although we typically do not receive a fee directly from the distributor's
customers, implementation of such arrangements has, from time to time, resulted
in the purchase of additional software capacity by the distributor, as well as
new software purchases made by the distributor's customers should such customers
decide to perform the practice management functions in-house.
We continue to concentrate our direct sales and marketing efforts on medical and
dental practices, networks of such practices including MSO's and PHO's,
professional schools, community health centers and other ambulatory care
settings.
MSO's, PHO's and similar networks to which we have sold systems provide use of
our software to those group and single physician practices associated with the
organization or hospital on either a service basis or by directing us to
contract with those practices for the sale of stand-alone systems.
We have also entered into marketing assistance agreements with certain of our
clients pursuant to which the clients allow us to demonstrate to potential
clients the use of systems on the existing clients' premises.
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From time to time we assist prospective clients in identifying third party
sources for financing the purchase of our systems. The financing is typically
obtained by the client directly from institutional lenders and typically takes
the form of a loan from the institution secured by the system to be purchased or
a leasing arrangement. We do not guarantee the financing nor retain any
continuing interest in the transaction.
We have numerous clients and do not believe that the loss of any single client
would have a material adverse effect on us. No client accounted for ten percent
or more of net revenue during the fiscal years ended March 31, 2005, 2004, or
2003.
Customer Service and Support
We believe our success is attributable in part to our customer service and
support departments. We offer support to our clients seven days a week, 24 hours
a day.
Our client support staff is comprised of specialists who are knowledgeable in
the areas of software and hardware as well as in the day-to-day operations of a
practice. System support activities range from correcting minor procedural
problems in the client's system to performing complex database reconstructions
or software updates.
We utilize automated online support systems which assist clients in resolving
minor problems and facilitate automated electronic retrieval of problems and
symptoms following a client's call to the automated support system.
Additionally, our online support systems maintain call records, available at
both the client's facility and our offices.
We offer our clients support services for most system components, including
hardware and software, for a fixed monthly or quarterly fee. Customers also
receive access to future unspecified versions of the software, on a when-and-if
available basis, as part of support services. We also subcontract, in certain
instances, with third party vendors to perform specific hardware maintenance
tasks.
Implementation and Training
We offer full service implementation and training services. When a client signs
a contract for the purchase of a system that includes implementation and
training services, a client manager/implementation specialist trained in medical
and/or dental group practice procedures is assigned to assist the client in the
installation of the system and the training of appropriate practice staff.
Implementation services include loading the software, training customer
personnel, data conversion, running test data, and assisting in the development
and documentation of procedures. Implementation and training services are
provided by our employees as well as certified third parties and certain
resellers.
Training may include a combination of computer assisted instruction (CAI) for
certain of our products, remote training techniques and training classes
conducted at the client's or our office(s). CAI consists of workbooks, computer
interaction and self-paced instruction. CAI is also offered to clients, for an
additional charge, after the initial training program is completed for the
purpose of training new and additional employees. Remote training allows a
trainer at our offices to train one or more people at a client site via
telephone and computer connection, thus allowing an interactive and
client-specific mode of training without the expense and time required for
travel. In addition, our on-line "help" and other documentation features
facilitate client training as well as ongoing support.
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Competition
The markets for healthcare information systems are intensely competitive. The
industry is highly fragmented and includes numerous competitors, none of which
we believe dominates these markets. The electronic patient records and
connectivity markets, in particular, are subject to rapid changes in technology,
and we expect that competition in these market segments will increase as new
competitors enter the market. We believe our principal competitive advantages
are the features and capabilities of our products and services, our high level
of customer support, and our extensive experience in the industry.
Production Enhancement and Development
The healthcare information management and computer software and hardware
industries are characterized by rapid technological change requiring us to
engage in continuing investments to update, enhance, and improve our systems.
During fiscal years 2005, 2004, and 2003, we expended approximately $9.6
million, $8.7 million, and $6.7 million, respectively, on research and
development activities, including capitalized software amounts of $2.7 million,
$2.6 million, and $1.7 million, respectively. In addition, a portion of our
product enhancements have resulted from software development work performed
under contracts with our clients.
Employees
As of May 27, 2005, we employed 418 persons, of which 409 were full-time
employees. We believe that our future success depends in part upon recruiting
and retaining qualified sales, marketing and technical personnel as well as
other employees.
Risks Relating to our Business
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations will likely suffer. Any of these or
other factors could harm our business and future results of operations and may
cause you to lose all or part of your investment.
We face significant competition. The markets for healthcare information systems
are intensely competitive and we face significant competition from a number of
different sources. Several of our competitors have significantly greater name
recognition as well as substantially greater financial, technical, product
development and marketing resources than we do.
We compete in all of our markets with other major healthcare related companies,
information management companies, systems integrators, and other software
developers. Competitive pressures and other factors, such as new product
introductions by ourselves or our competitors, may result in price or market
share erosion that could have a material adverse effect on our business, results
of operations and financial condition. Also, there can be no assurance that our
applications will achieve broad market acceptance or will successfully compete
with other available software products.
Our inability to make initial sales of our systems to newly formed groups and/or
healthcare providers that are replacing or substantially modifying their
healthcare information systems could have a material adverse effect on our
business, results of operations and financial condition. If new systems sales do
not materialize, our near term and longer term revenue will be negatively
affected.
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Our quarterly operating results have historically fluctuated and may do so in
the future. Our revenue has fluctuated in the past, and may fluctuate in the
future from quarter to quarter and period to period, as a result of a number of
factors including, without limitation:
o the size and timing of orders from clients;
o the specific mix of software, hardware, and services in client orders;
o the length of sales cycles and installation processes;
o the ability of our clients to obtain financing for the purchase of our
products;
o changes in pricing policies or price reductions by us or our competitors;
o the timing of new product announcements and product introductions by us or
our competitors;
o changes in revenue recognition or other accounting guidelines employed by
us and/or established by the Financial Accounting Standards Board or other
rule-making bodies;
o the availability and cost of system components;
o the financial stability of clients;
o market acceptance of new products, applications and product enhancements;
o our ability to develop, introduce and market new products, applications
and product enhancements;
o our success in expanding our sales and marketing programs;
o deferrals of client orders in anticipation of new products, applications,
product enhancements, or public/private sector initiatives;
o execution of or changes to our strategy;
o personnel changes; and
o general market/economic factors.
Our software products are generally shipped as orders are received and
accordingly, we have historically operated with a minimal backlog of license
fees. As a result, revenue in any quarter is dependent on orders booked and
shipped in that quarter and is not predictable with any degree of certainty.
Furthermore, our systems can be relatively large and expensive and individual
systems sales can represent a significant portion of our revenue and profits for
a quarter such that the loss or deferral of even one such sale can have a
significant adverse impact on our quarterly revenue and profitability.
Clients often defer systems purchases until our quarter end, so quarterly
results generally cannot be predicted and frequently are not known until the
quarter has concluded.
Our sales are dependent upon clients' initial decisions to replace or
substantially modify their existing information systems, and subsequently a
decision as to which products and services to purchase. These are major
decisions for healthcare providers, and accordingly, the sales cycle for our
systems can vary significantly and typically ranges from three to twelve months
from initial contact to contract execution/shipment.
Because a significant percentage of our expenses are relatively fixed, a
variation in the timing of systems sales, implementations, and installations can
cause significant variations in operating results from quarter to quarter. As a
result, we believe that interim period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, our historical operating results are
not necessarily indicative of future performance for any particular period.
We currently recognize revenue pursuant to SOP 97-2, as modified by SOP 98-9 and
SAB 104. SAB 104 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements.
12
There can be no assurance that application and subsequent interpretations of
these pronouncements will not further modify our revenue recognition policies,
or that such modifications would not have a material adverse effect on the
operating results reported in any particular quarter or year.
Due to all of the foregoing factors, it is possible that our operating results
may be below the expectations of public market analysts and investors. In such
event, the price of our common stock would likely be materially adversely
affected.
The price of our shares and the trading volume of our shares have been volatile
historically and may continue to be volatile. Volatility may be caused by a
number of factors including but not limited to:
o actual or anticipated quarterly variations in operating results;
o rumors about our performance, software solutions, or merger and
acquisition activity;
o changes in expectations of future financial performance or changes in
estimates of securities analysts;
o governmental regulatory action;
o health care reform measures;
o client relationship developments;
o purchases or sales of company stock;
o changes occurring in the markets in general; and
o other factors, many of which are beyond our control.
Furthermore, the stock market in general, and the market for software,
healthcare and high technology companies in particular, has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of our common stock, regardless of actual operating
performance.
Two of our directors are significant shareholders, which makes it possible for
them to have significant influence over the outcome of all matters submitted to
our shareholders for approval and which influence may be alleged to conflict
with our interests and the interests of our other shareholders. Two of our
directors and principal shareholders beneficially owned an aggregate of
approximately 38% of the outstanding shares of our common stock at March 31,
2005. The Company's Bylaws permit its shareholders to cumulate their votes, the
effect of which is to provide shareholders with sufficiently large
concentrations of Company shares the opportunity to assure themselves one or
more seats on the Company's Board. The amounts required to assure a Board
position can vary based upon the number of shares outstanding, the number of
shares voting, the number of directors to be elected and the number of shares
held by the shareholder exercising cumulative voting rights. In the event that
cumulative voting is invoked, it is likely that the two of our directors holding
an aggregate of approximately 38% of the outstanding shares of our common stock
at March 31, 2005 will each have sufficient votes to assure themselves of one or
more seats on our Board. With or without cumulative voting, these shareholders
will have significant influence over the outcome of all matters submitted to our
shareholders for approval, including the election of our directors and other
corporate actions. In addition, such influence by one or both of these
affiliates could have the effect of discouraging others from attempting to
purchase us, take us over, and/or reducing the market price offered for our
common stock in such an event.
We are dependent on our principal products and our new product development. We
currently derive substantially all of our net revenue from sales of our
healthcare information systems and related services. We believe that a primary
factor in the market acceptance of our systems has been our ability to meet the
needs of users of healthcare information systems. Our future financial
performance will depend in large part on our ability to continue to meet the
increasingly sophisticated needs of our clients through the timely development
and successful introduction and implementation of new and enhanced versions of
our systems and other complementary products. We have historically expended a
significant percentage of
13
our net revenue on product development and believe that significant continuing
product development efforts will be required to sustain our growth. Continued
investment in our sales staff and our client implementation and support staffs
will also be required to support future growth.
There can be no assurance that we will be successful in our product development
efforts, that the market will continue to accept our existing products, or that
new products or product enhancements will be developed and implemented in a
timely manner, meet the requirements of healthcare providers, or achieve market
acceptance. If new products or product enhancements do not achieve market
acceptance, our business, results of operations and financial condition could be
materially adversely affected. At certain times in the past, we have also
experienced delays in purchases of our products by clients anticipating our
launch of new products. There can be no assurance that material order deferrals
in anticipation of new product introductions from ourselves or other entities
will not occur.
If the emerging technologies and platforms of Microsoft and others upon which we
build our products do not gain broad market acceptance, or if we fail to develop
and introduce in a timely manner new products and services compatible with such
emerging technologies, we may not be able to compete effectively and our ability
to generate revenue will suffer. Our software products are built and depend upon
several underlying and evolving relational database management system platforms
such as those developed by Microsoft. To date, the standards and technologies
upon which we have chosen to develop our products have proven to have gained
industry acceptance. However, the market for our software products is subject to
ongoing rapid technological developments, quickly evolving industry standards
and rapid changes in customer requirements, and there may be existing or future
technologies and platforms that achieve industry standard status, which are not
compatible with our products.
We face the possibility of subscription pricing. We currently derive
substantially all of our revenue from traditional software license, maintenance
and service fees, as well as the resale of computer hardware. Today, customers
pay an initial license fee for the use of our products, in addition to a
periodic maintenance fee. If the marketplace demands subscription pricing, we
may be forced to adjust our sales, marketing and pricing strategies accordingly,
by offering a higher percentage of our products and services through these
means. Shifting to a significantly greater degree of subscription pricing could
materially adversely impact our financial condition, cash flows and quarterly
and annual revenue and results of operations, as our revenue would initially
decrease substantially. There can be no assurance that the marketplace will not
increasingly embrace subscription pricing.
The industry in which we operate is subject to significant technological change.
The software market generally is characterized by rapid technological change,
changing customer needs, frequent new product introductions, and evolving
industry standards. The introduction of products incorporating new technologies
and the emergence of new industry standards could render our existing products
obsolete and unmarketable. There can be no assurance that we will be successful
in developing and marketing new products that respond to technological changes
or evolving industry standards. New product development depends upon significant
research and development expenditures which depend ultimately upon sales growth.
Any material weakness in revenue or research funding could impair our ability to
respond to technological advances or opportunities in the marketplace and to
remain competitive. If we are unable, for technological or other reasons, to
develop and introduce new products in a timely manner in response to changing
market conditions or customer requirements, our business, results of operations
and financial condition may be materially adversely affected.
In response to increasing market demand, we are currently developing new
generations of certain of our software products. There can be no assurance that
we will successfully develop these new software products or that these products
will operate successfully, or that any such development, even if successful,
14
will be completed concurrently with or prior to introduction of competing
products. Any such failure or delay could adversely affect our competitive
position or could make our current products obsolete.
We face the possibility of claims based upon our web site. We could be subject
to third party claims based on the nature and content of information supplied on
our Web site by us or third parties, including content providers or users. We
could also be subject to liability for content that may be accessible through
our Web site or third party Web sites linked from our Web site or through
content and information that may be posted by users in chat rooms, bulletin
boards or on Web sites created by professionals using our applications. Even if
these claims do not result in liability to us, investigating and defending
against these claims could be expensive and time consuming and could divert
management's attention away from our operations.
We face the possibility of claims from activities of strategic partners. We rely
on third parties to provide services that impact our business. For example, we
use national clearinghouses in the processing of some insurance claims and we
outsource some of our hardware maintenance services and the printing and
delivery of patient statements for our customers. We also have relationships
with certain third parties where these third parties serve as sales channels
through which we generate a portion of our revenue. Due to these third-party
relationships, we could be subject to claims as a result of the activities,
products, or services of these third-party service providers even though we were
not directly involved in the circumstances leading to those claims. Even if
these claims do not result in liability to us, defending and investigating these
claims could be expensive and time-consuming, divert personnel and other
resources from our business and result in adverse publicity that could harm our
business.
We may engage in future acquisitions, which may be expensive and time consuming
and from which we may not realize anticipated benefits. We may acquire
additional businesses, technologies and products if we determine that these
additional businesses, technologies and products are likely to serve our
strategic goals. We currently have no commitments or agreements with respect to
any acquisitions. The specific risks we may encounter in these types of
transactions include but are not limited to the following:
o potentially dilutive issuances of our securities, the incurrence of debt
and contingent liabilities and amortization expenses related to intangible
assets, which could adversely affect our results of operations and
financial conditions;
o use of cash as acquisition currency may adversely impact interest or
investment income , thereby potentially negatively affecting our earnings
and /or earnings per share
o difficulty in effectively integrating any acquired technologies or
software products into our current products and technologies;
o difficulty in predicting and responding to issues related to product
transition such as development, distribution and customer support;
o the possible adverse impact of such acquisitions on existing relationships
with third party partners and suppliers of technologies and services;
o the possibility that staff or customers of the acquired company might not
accept new ownership and may transition to different technologies or
attempt to renegotiate contract terms or relationships, including
maintenance or support agreements;
o the possibility that the due diligence process in any such acquisition may
not completely identify material issues associated with product quality,
product architecture, product development, intellectual property issues,
key personnel issues or legal and financial contingencies; and
o difficulty in integrating acquired operations due to geographical
distance, and language and cultural differences;
o The possibility that acquired assets become impaired, requiring the
Company to take a charge to earnings which could be significant.
15
A failure to successfully integrate acquired businesses or technology for any of
these reasons could have a material adverse effect on the Company's results of
operations.
We face the risks and uncertainties that are associated with litigation against
us. We face the risks associated with litigation concerning the operation of our
business. The uncertainty associated with substantial unresolved litigation may
have an adverse impact on our business. In particular, such litigation could
impair our relationships with existing customers and our ability to obtain new
customers. Defending such litigation may result in a diversion of management's
time and attention away from business operations, which could have a material
adverse effect on our business, results of operations and financial condition.
Such litigation may also have the effect of discouraging potential acquirers
from bidding for us or reducing the consideration such acquirers would otherwise
be willing to pay in connection with an acquisition.
There can be no assurance that such litigation will not result in liability in
excess of our insurance coverage, that our insurance will cover such claims or
that appropriate insurance will continue to be available to us in the future at
commercially reasonable rates.
We rely heavily on our proprietary technology. We are heavily dependent on the
maintenance and protection of our intellectual property and we rely largely on
license agreements, confidentiality procedures, and employee nondisclosure
agreements to protect our intellectual property. Our software is not patented
and existing copyright laws offer only limited practical protection.
There can be no assurance that the legal protections and precautions we take
will be adequate to prevent misappropriation of our technology or that
competitors will not independently develop technologies equivalent or superior
to ours. Further, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States and
are often not enforced as vigorously as those in the United States.
We do not believe that our operations or products infringe on the intellectual
property rights of others. However, there can be no assurance that others will
not assert infringement or trade secret claims against us with respect to our
current or future products or that any such assertion will not require us to
enter into a license agreement or royalty arrangement or other financial
arrangement with the party asserting the claim. Responding to and defending any
such claims may distract the attention of Company management and have a material
adverse effect on our business, results of operations and financial condition.
In addition, claims may be brought against third parties from which we purchase
software, and such claims could adversely affect our ability to access third
party software for our systems.
We are dependent on our license rights from third parties. We depend upon
licenses for some of the technology used in our products from third-party
vendors. Most of these licenses can be renewed only by mutual consent and may be
terminated if we breach the terms of the license and fail to cure the breach
within a specified period of time. We may not be able to continue using the
technology made available to us under these licenses on commercially reasonable
terms or at all. As a result, we may have to discontinue, delay or reduce
product shipments until we can obtain equivalent technology. Most of our
third-party licenses are non-exclusive. Our competitors may obtain the right to
use any of the technology covered by these licenses and use the technology to
compete directly with us. In addition, if our vendors choose to discontinue
support of the licensed technology in the future or are unsuccessful in their
continued research and development efforts, we may not be able to modify or
adapt our own products.
We face the possibility of damages resulting from internal and external security
breaches, and viruses. In the course of our business operations, we compile and
transmit confidential information, including
16
patient health information, in our processing centers and other facilities. A
breach of security in any of these facilities could damage our reputation and
result in damages being assessed against us. In addition, the other systems with
which we may interface, such as the Internet and related systems may be
vulnerable to security breaches, viruses, programming errors, or similar
disruptive problems. The effect of these security breaches and related issues
could disrupt our ability to perform certain key business functions and could
potentially reduce demand for our services. Accordingly, we have expended
significant resources toward establishing and enhancing the security of our
related infrastructures, although no assurance can be given that they will be
entirely free from potential breach. Maintaining and enhancing our
infrastructure security may require us to expend significant capital in the
future.
The success of our strategy to offer our EDI services and Internet solutions
depends on the confidence of our customers in our ability to securely transmit
confidential information. Our EDI services and Internet solutions rely on
encryption, authentication and other security technology licensed from third
parties to achieve secure transmission of confidential information. We may not
be able to stop unauthorized attempts to gain access to or disrupt the
transmission of communications by our customers. Anyone who is able to
circumvent our security measures could misappropriate confidential user
information or interrupt us, or our customers', operations. In addition, our EDI
and Internet solutions may be vulnerable to viruses, physical or electronic
break-ins, and similar disruptions.
Any failure to provide secure infrastructure and/or electronic communication
services could result in a lack of trust by our customers causing them to seek
out other vendors, and/or, damage our reputation in the market making it
difficult to obtain new customers.
We are subject to the development and maintenance of the Internet infrastructure
which is not within our control. We deliver Internet-based services and,
accordingly, we are dependent on the maintenance of the Internet by third
parties. The Internet infrastructure may be unable to support the demands placed
on it and our performance may decrease if the Internet continues to experience
it's historic trend of expanding usage. As a result of damage to portions of its
infrastructure, the Internet has experienced a variety of performance problems
which may continue into the foreseeable future. Such Internet related problems
may diminish Internet usage and availability of the Internet to us for
transmittal of our Internet-based services. In addition, difficulties, outages,
and delays by Internet service providers, online service providers and other web
site operators may obstruct or diminish access to our Web site by our customers
resulting in a loss of potential or existing users of our services.
Our failure to manage growth could harm us. We have in the past experienced
periods of growth which have placed, and may continue to place, a significant
strain on our non-cash resources. We also anticipate expanding our overall
software development, marketing, sales, client management and training capacity.
In the event we are unable to identify, hire, train and retain qualified
individuals in such capacities within a reasonable timeframe, such failure could
have a material adverse effect on us. In addition, our ability to manage future
increases, if any, in the scope of our operations or personnel will depend on
significant expansion of our research and development, marketing and sales,
management, and administrative and financial capabilities. The failure of our
management to effectively manage expansion in our business could have a material
adverse effect on our business, results of operations and financial condition.
Our operations are dependent upon our key personnel. If such personnel were to
leave unexpectedly, we may not be able to execute our business plan. Our future
performance depends in significant part upon the continued service of our key
technical and senior management personnel, many of whom have been with us for a
significant period of time. These personnel have acquired specialized knowledge
and skills with respect to our business. We maintain key man life insurance on
only one of our employees. Because we have a relatively small number of
employees when compared to other leading companies in
17
our industry, our dependence on maintaining our relationships with key employees
is particularly significant. We are also dependent on our ability to attract
high quality personnel, particularly in the areas of sales and applications
development.
The industry in which we operate is characterized by a high level of employee
mobility and aggressive recruiting of skilled personnel. There can be no
assurance that our current employees will continue to work for us. Loss of
services of key employees could have a material adverse effect on our business,
results of operations and financial condition. Furthermore, we may need to grant
additional equity incentives to key employees and provide other forms of
incentive compensation to attract and retain such key personnel. Failure to
provide such types of incentive compensation could jeopardize our recruitment
and retention capabilities.
Our products may be subject to product liability legal claims. Certain of our
products provide applications that relate to patient clinical information. Any
failure by our products to provide accurate and timely information could result
in claims against us. In addition, a court or government agency may take the
position that our delivery of health information directly, including through
licensed practitioners, or delivery of information by a third party site that a
consumer accesses through our web sites, exposes us to assertions of
malpractice, other personal injury liability, or other liability for wrongful
delivery/handling of healthcare services or erroneous health information. We
maintain insurance to protect against claims associated with the use of our
products as well as liability limitation language in our end-user license
agreements, but there can be no assurance that our insurance coverage or
contractual language would adequately cover any claim asserted against us. A
successful claim brought against us in excess of or outside of our insurance
coverage could have a material adverse effect on our business, results of
operations and financial condition. Even unsuccessful claims could result in our
expenditure of funds for litigation and management time and resources.
Certain healthcare professionals who use our Internet-based products will
directly enter health information about their patients including information
that constitutes a record under applicable law that we may store on our computer
systems. Numerous federal and state laws and regulations, the common law, and
contractual obligations, govern collection, dissemination, use and
confidentiality of patient-identifiable health information, including:
o state and federal privacy and confidentiality laws;
o our contracts with customers and partners;
o state laws regulating healthcare professionals;
o Medicaid laws;
o the Health Insurance Portability and Accountability Act of 1996 (HIPAA)
and related rules proposed by the Health Care Financing Administration;
and
o Health Care Financing Administration standards for Internet transmission
of health data.
The U.S. Congress has finalized the Health Insurance Portability and
Accountability Act of 1996 that established elements including, but not limited
to, new federal privacy and security standards for the use and protection of
Protected Health Information. Any failure by us or by our personnel or partners
to comply with applicable requirements may result in a material liability to us.
Although we have systems and policies in place for safeguarding Protected Health
Information from unauthorized disclosure, these systems and policies may not
preclude claims against us for alleged violations of applicable requirements.
Also, third party sites and/or links that consumers may access through our web
sites may not maintain adequate systems to safeguard this information, or may
circumvent systems and policies we have put in place. In addition, future laws
or changes in current laws may necessitate costly adaptations to our policies,
procedures, or systems.
18
There can be no assurance that we will not be subject to product liability
claims, that such claims will not result in liability in excess of our insurance
coverage, that our insurance will cover such claims or that appropriate
insurance will continue to be available to us in the future at commercially
reasonable rates. Such product liability claims could have a material adverse
affect on our business, results of operations and financial condition.
We are subject to the effect of payor and provider conduct which we cannot
control. We offer certain electronic claims submission products and services as
part of our product line. While we have implemented certain product features
designed to maximize the accuracy and completeness of claims submissions, these
features may not be sufficient to prevent inaccurate claims data from being
submitted to payors. Should inaccurate claims data be submitted to payors, we
may be subject to liability claims.
Electronic data transmission services are offered by certain payors to
healthcare providers that establish a direct link between the provider and
payor. This process reduces revenue to third party EDI service providers such as
us. Accordingly, we are unable to insure that we will continue to generate
revenue at or in excess of prior levels for such services. A significant
increase in the utilization of direct links between healthcare providers and
payers could have a material adverse effect on our transaction volume and
financial results. In addition, we cannot provide assurance that we will be able
to maintain our exiting links to payors or develop new connections on terms that
are economically satisfactory to us, if at all.
There is significant uncertainty in the healthcare industry in which we operate
and we are subject to the possibility of changing government regulation. The
healthcare industry is subject to changing political, economic and regulatory
influences that may affect the procurement processes and operation of healthcare
facilities. During the past several years, the healthcare industry has been
subject to an increase in governmental regulation of, among other things,
reimbursement rates and certain capital expenditures.
In the past, various legislators have announced that they intend to examine
proposals to reform certain aspects of the U.S. healthcare system including
proposals which may change governmental involvement in healthcare and
reimbursement rates, and otherwise alter the operating environment for us and
our clients. Healthcare providers may react to these proposals, and the
uncertainty surrounding such proposals, by curtailing or deferring investments,
including those for our systems and related services. Cost-containment measures
instituted by healthcare providers as a result of regulatory reform or otherwise
could result in a reduction in the allocation of capital funds. Such a reduction
could have an adverse effect on our ability to sell our systems and related
services. On the other hand, changes in the regulatory environment have
increased and may continue to increase the needs of healthcare organizations for
cost-effective data management and thereby enhance the overall market for
healthcare management information systems. We cannot predict what impact, if
any, such proposals or healthcare reforms might have on our business, financial
condition and results of operations.
The HIPAA regulations, as adopted by the Department of Health and Human
Services, established, among other things:
o a national standard for electronic transactions and code sets to be used
in those transactions involving certain common health care transactions;
o privacy regulations to protect the privacy of plan participants and
patients' medical records; and
o security regulations designed to establish security controls and measures
to protect the privacy and confidentiality of personal identifiable health
information when it is electronically stored, maintained or transmitted
(even if only internally transmitted within a medical practice).
As these regulations mature and become better defined, we anticipate that these
regulations will continue to directly affect certain of our products and
services, but we cannot fully predict the impact at this time.
19
We have taken steps to modify our products, services and internal practices as
necessary to facilitate our and our client's compliance with the final
regulations, but there can be no assurance that we will be able to do so in a
timely or complete manner. Achieving compliance with these regulations could be
costly and distract management's attention and other resources, and any
noncompliance by us could result in civil and criminal penalties.
In addition, development of related federal and state regulations and policies
regarding the confidentiality of health information or other matters may or may
not supercede HIPAA and have the potential to positively or negatively affect
our business.
In addition, our software may potentially be subject to regulation by the U.S.
Food and Drug Administration (the FDA) as a medical device. Such regulation
could require the registration of the applicable manufacturing facility and
software and hardware products, application of detailed record-keeping and
manufacturing standards, and FDA approval or clearance prior to marketing. An
approval or clearance requirement could create delays in marketing, and the FDA
could require supplemental filings or object to certain of these applications,
the result of which could have a material adverse effect on our business,
financial condition and results of operations.
We may be subject to other e-commerce regulations. We may be subject to
additional federal and state statutes and regulations in connection with
offering services and products via the Internet. On an increasingly frequent
basis, federal and state legislators are proposing laws and regulations that
apply to Internet commerce and communications. Areas being affected by these
regulations include user privacy, pricing, content, taxation, copyright
protection, distribution, and quality of products and services. To the extent
that our products and services are subject to these laws and regulations, the
sale of our products and services could be harmed.
We are subject to changes in and interpretations of financial accounting matters
that govern the measurement of our performance. Based on our reading and
interpretations of relevant guidance, principles or concepts issued by, among
other authorities, the American Institute of Certified Public Accountants, the
Financial Accounting Standards Board, and the United States Securities and
Exchange Commission, Management believes our current sales and licensing
contract terms and business arrangements have been properly reported. However,
there continue to be issued interpretations and guidance for applying the
relevant standards to a wide range of sales and licensing contract terms and
business arrangements that are prevalent in the software industry. Future
interpretations or changes by the regulators of existing accounting standards or
changes in our business practices could result in future changes in our revenue
recognition and/or other accounting policies and practices that could have a
material adverse effect on our business, financial condition, cash flows,
revenue and results of operations.
Our per share price may be adversely effected if weaknesses in our internal
controls are identified by ourselves or our independent auditors. Any weaknesses
identified in our internal controls as part of the evaluation being undertaken
by us and our independent public accountants pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 could have an adverse effect on the price at which
our stock trades. In the process of evaluating and documenting our controls
pursuant to Section 404 of the Sarbanes-Oxley Act. we have identified various
deficiencies which we are in the course of remediating. Management does not
believe that any of these identified deficiencies constitute a material weakness
in our internal controls.
No evaluation process can provide complete assurance that our internal controls
will detect and correct all failures within the Company to disclose material
information otherwise required to be reported. The effectiveness of our controls
and procedures could also be limited by simple errors or faulty judgments. In
addition, if we continue to expand, the challenges involved in implementing
appropriate controls will increase and may require that we evolve some or all of
our internal control processes.
20
It is also possible that the overall scope of Section 404 of the Sarbanes Oxley
Act of 2002 may be revised in the future, thereby causing our auditors and
ourselves to review, revise or reevaluate our internal control processes which
may result in the expenditure of additional human and financial resources.
Our earnings will be affected beginning fiscal year 2007 when we begin
recognizing employee stock option expense, pursuant to recently issued
accounting standards. Stock options have from time to time been an important
component of the compensation packages for many of our mid- and senior-level
employees. We currently do not deduct the expense of employee stock option
grants from our income. However, beginning with the quarter ended June 30, 2006
and beyond, we will begin recognizing employee stock option expense for
remaining unvested stock options and any future stock option grants, resulting
in additional pre-tax compensation expense. Option expensing could have a
negative impact upon the price of our stock.
Continuing worldwide political and economic uncertainties may adversely impact
our revenue and profitability. In the last three years, worldwide economic
conditions have experienced a downturn due to numerous factors including but not
limited to concerns about inflation and deflation, decreased consumer
confidence, the lingering effects of international conflicts, and terrorist and
military activities. These conditions make it extremely difficult for our
customers, our vendors and ourselves to accurately forecast and plan future
business activities, and they could cause constrained spending on our products
and services, and/or delay and lengthen sales cycles.
Our future policy concerning the payment of dividends is uncertain. While we
paid a one-time cash dividend in March 2005, we have not historically paid
dividends, cash or otherwise, and there can be no assurance that we will pay
another dividend in the future. Unfulfilled expectation to the contrary could
have a material negative impact upon the price of our stock.
ITEM 2. PROPERTIES
Our principal administrative, accounting and QSI Division operations are located
in Irvine, California, under a lease that commenced May 15, 2002, and expired in
April 30, 2005. In April 2005, we renewed our lease through May 31, 2008. We
lease approximately 12,000 square feet of space at this location. In August
2002, we executed a new lease for the principal office of our NextGen Division.
This lease includes approximately 32,000 square feet of space in Horsham,
Pennsylvania, and expires on January 31, 2010. In the year ended March 31, 2005,
we added approximately 14,000 of additional space in Horsham, Pennsylvania under
new lease which expires on January 31, 2010. In addition, we lease approximately
6,000 square feet of space in Santa Ana, California, to house our assembly and
warehouse operations. We have approximately 12,000 square feet of space in
Atlanta, Georgia under a lease which expires in February, 2006. We also have an
aggregate of approximately 4,000 square feet of space in Massachusetts,
Minnesota, New Jersey, Texas, Utah, Wisconsin, and Washington to house
additional sales, training, development and service operations. These leases,
excluding options, have expiration dates ranging from month-to-month to March
2010. The Company's growth will require it to lease additional space. We believe
that suitable additional or substitute space is available, if needed, at
commercially reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in various claims and legal
proceedings. While the ultimate resolution of these matters, has yet to be
determined, we do not believe that their outcome will have a material adverse
effect on our financial position, results of operations or liquidity.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal year 2005.
Executive Officers of the Company
Our executive officers as of May 31, 2005 were as follows:
Name Age Position
- ---- --- -----------------------------------------------------------
Louis E. Silverman............... 46 President, Chief Executive Officer
Patrick B. Cline................. 44 President, NextGen Healthcare Information Systems Division
Greg Flynn....................... 47 Executive Vice President and General Manger of QSI Division
Paul A. Holt..................... 39 Secretary, Chief Financial Officer
Our executive officers are elected by, and serve at the discretion of, the Board
of Directors. Additional information regarding our executive officers is set
forth below.
Louis E. Silverman was appointed President and Chief Executive Officer of the
company on July 31, 2000. Mr. Silverman was previously Chief Operations Officer
of CorVel Corp., a publicly traded national managed care services and technology
firm with headquarters in Irvine, California. Mr. Silverman holds a Master of
Business Administration degree from Harvard Graduate School of Business
Administration and a Bachelor of Arts degree from Amherst College.
Patrick B. Cline currently serves as President of our NextGen Healthcare
Information Systems Division. He served as our interim Chief Executive Officer
for the April - July 2000 period. Mr. Cline was a co-founder of Clinitec and has
served as its President since its inception in January 1994 and throughout its
transition to NextGen Healthcare Information Systems. Prior to co-founding
Clinitec, Mr. Cline served, from July 1987 to January 1994, as Vice President of
Sales and Marketing with Script Systems, a subsidiary of InfoMed, a healthcare
information systems company. From January 1994 to May 1994, after the founding
of Clinitec, Mr. Cline continued to serve, on a part time basis, as Script
Systems' Vice President of Sales and Marketing. Mr. Cline has held senior
positions in the healthcare information systems industry since 1981.
Greg Flynn has served as the QSI Division's General Manager since April 2000 and
as Executive Vice President since August 1998 after serving as Vice President of
Sales and Marketing from January 1996 to August 1998. Between June 1992 and
January 1996, Mr. Flynn served as Vice President Administration. In these
capacities, Mr. Flynn has been responsible for numerous functions related to our
ongoing management and sales. Previously, Mr. Flynn served as our Vice
President, Corporate Communications. Mr. Flynn joined us in January 1982. He
holds a B.A. degree in English from the University of California, Santa Barbara.
Paul A. Holt was appointed Chief Financial Officer in November 2000. Mr. Holt
has served as our Controller from January 2000 to May 2000 and was appointed
interim Chief Financial Officer in May 2000. Prior to joining us, Mr. Holt was
the Controller of Sierra Alloys Co., Inc., a titanium metal manufacturing
company from August 1999 to December 1999. From May 1997 to July 1999, he was
Controller of Refrigeration Supplies Distributor, a wholesale distributor and
manufacturer of refrigeration supplies and heating controls. From March 1995 to
April 1997 he was Assistant Controller of Refrigeration Supplies Distributor.
Mr. Holt is a Certified Public Accountant and holds an M.B.A. from the
University of Southern California and a B.A. in Economics from the University of
California, Irvin
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the NASDAQ National Market under the symbol
"QSII". The following table sets forth for the quarters indicated the high and
low sales prices as reported by NASDAQ. The quotations reflect inter-dealer
prices, without retail markup, markdown, or commissions, and may not necessarily
represent actual transactions.
Quarter Ended High Low
------------- ------- -------
June 30, 2003 ......................... $ 18.23 $ 11.25
September 30, 2003 .................... 23.43 12.58
December 31, 2003 ..................... 24.88 19.91
March 31, 2004 ........................ 30.80 19.50
June 30, 2004 ......................... 25.75 19.75
September 30, 2004 .................... 27.75 20.77
December 31, 2004 ..................... 32.49 24.05
March 31, 2005 ........................ $ 48.90 $ 27.90
At May 31, 2005, there were approximately 130 holders of record of our Common
Stock. We estimate the number of beneficial holders of our Common Stock to be in
excess of 6,000.
On February 2, 2005, the Company announced that its Board of Directors had
declared a 2-for-1 stock split with respect to our outstanding shares of common
stock for shareholders of record on March 4, 2005. The stock began trading post
split on March 28, 2005. All share prices in the foregoing table have been
retroactively adjusted to reflect such stock split.
On March 16, 2005, we paid a one time dividend on shares of our Common Stock
equal to $1.50 per share. ($3.00 pre-split) The record date for the dividend was
February 24, 2005. Payment of future dividends, if any, will be at the
discretion of our Board of Directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
We did not make any unregistered sales of our common stock during the fourth
quarter of 2005.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to our Consolidated
Statements of Income data for each of the five years in the period ended March
31 and the Consolidated Balance Sheet data as of the end of each such fiscal
year are derived from our audited financial statements. The following
information should be read in conjunction with our Consolidated Financial
Statements and the related notes thereto and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations." included
elsewhere herein.
Consolidated Financial Data
(In Thousands, Except Per Share Data) Year Ended March 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Statement of Income Data:
Revenue...................................... $ 88,961 $ 70,934 $ 54,769 $ 44,422 $ 39,936
Cost of revenue.............................. 32,669 28,673 23,755 19,253 17,283
-------- -------- -------- -------- --------
Gross profit................................. 56,292 42,261 31,014 25,169 22,653
Selling, general and administrative expenses. 24,776 19,482 15,293 13,068 13,585
Research and development costs............... 6,903 6,139 5,062 4,243 4,081
-------- -------- -------- -------- --------
Income from operations....................... 24,613 16,640 10,659 7,858 4,987
Investment income............................ 876 386 434 643 1,032
-------- -------- -------- -------- --------
Income before provision for income taxes..... 25,489 17,026 11,093 8,501 6,019
Provision for income taxes................... 9,380 6,626 4,058 3,233 2,510
-------- -------- -------- -------- --------
Net income................................... $ 16,109 $ 10,400 $ 7,035 $ 5,268 $ 3,509
======== ======== ======== ======== ========
Basic net income per share................... $ 1.25 $ 0.84 $ 0.57 $ 0.44 $ 0.29
Diluted net income per share................. $ 1.22 $ 0.80 $ 0.55 $ 0.42 $ 0.28
Basic weighted average shares outstanding.... 12,872 12,436 12,254 12,050 12,260
Diluted weighted average shares outstanding.. 13,203 12,966 12,778 12,480 12,406
Balance Sheet Data (at end of period):
Cash and cash equivalents and short-term
investments.................................. $ 51,157 $ 51,395 $ 36,443 $ 25,698 $ 18,729
Working capital.............................. 55,111 53,415 38,717 30,799 24,196
Total assets................................. 99,442 86,678 67,602 52,143 44,883
Total liabilities............................ 36,711 25,673 20,069 12,093 10,996
Total shareholders' equity................... $ 62,731 $ 61,005 $ 47,533 $ 40,050 $ 33,887
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Except for the historical information contained herein, the matters discussed in
this Annual Report on Form 10-K, including discussions of our product
development plans, business strategies and market factors influencing our
results, may include forward-looking statements that involve certain risks and
uncertainties. Actual results may differ from those anticipated by us as a
result of various factors, both foreseen and unforeseen, including, but not
limited to, our ability to continue to develop new products and increase systems
sales in markets characterized by rapid technological evolution, consolidation,
and competition from larger, better capitalized competitors. Many other
economic, competitive, governmental and technological factors could impact our
ability to achieve our goals, and interested persons are urged to review the
risks described in "Item 1. Business. Risk Factors" as set forth above, as well
as in our other public disclosures and filings with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with, and is qualified in
our entirety by, the Consolidated Financial Statements and related notes thereto
included elsewhere in this Report. Historical results of operations, percentage
margin fluctuations and any trends that may be inferred from the discussion
below are not necessarily indicative of the operating results for any future
period.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosures of contingent assets and
liabilities. On an on-going basis, we evaluate estimates, including those
related to revenue recognition, uncollectible accounts receivable, and
intangible assets, for reasonableness. We base our estimates on historical
experience and on various other assumptions that management believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe revenue recognition, the allowance for doubtful accounts, goodwill
impairment, capitalized software costs and research and development tax credits
are among the most critical accounting policies that impact our consolidated
financial statements. We believe that significant accounting policies, as
described in Note 2 of our Consolidated Financial Statements, "Summary of
Significant Accounting Policies", should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Revenue Recognition. Our revenue is primarily generated from the sale of
software licenses, services, hardware, maintenance fees, and EDI services. We
currently recognize revenue pursuant to Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2), as modified by Statement of Position
No. 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect
of Certain Transactions" (SOP 98-9), Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101) and Staff Accounting Bulletin No.
104, "Revenue Recognition" (SAB 104). SAB 101 summarizes the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 104 modifies certain guidance provided in SAB 101.
Inherent in the revenue recognition process are significant management estimates
and judgments, which influence the timing and amount of revenue recognition.
25
In accordance with the governing revenue recognition guidelines, if the
arrangement between vendor and purchaser does not require significant
production, modification, or customization of software, revenue should be
recognized when all of the following criteria are met:
o persuasive evidence of an arrangement exists;
o delivery has occurred;
o the vendor's fee is fixed or determinable; and
o collectibility is probable.
In accordance with generally accepted accounting principles in the United States
of America, the recognition of software license revenue is based on our
assessment that the above criteria have been met. In general, the first two
criteria are met with a signed contract and evidence that we have shipped our
software to the customer. We determine that our fee is fixed and determinable
based on the contract terms, which specify payment terms tied to specific dates
and not to any future deliverables. Probability of collection is based on a
credit review of customers. The timing or amount of revenue recognition may
differ if different assessments of the above listed criteria had been made at
the time transactions were recorded in revenue.
SOP 97-2, as amended, generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. Our determination of the fair value of
each element in multi-element arrangements is based on vendor-specific objective
evidence (VSOE). We limit our assessment of VSOE for each element to either the
price charged when the same element is sold separately or the price established
by management having the relevant authority to do so, for an element not yet
sold separately. Management determines the price of individual elements sold
separately using a rolling average of stand alone transactions. VSOE
calculations are reviewed on a quarterly basis.
If evidence of fair value of all undelivered elements exists but evidence of
fair value does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred at VSOE and the remaining portion of the
arrangement fee is recognized as revenue, net of all discounts.
Contract accounting is applied where services include significant software
modification, development or customization. In such instances, the arrangement
fee is accounted for in accordance with Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1), whereby the revenue is recognized, generally using the
percentage-of-completion method measured on labor input hours. The complexity of
the estimation process and judgment related to the assumptions, risks and
uncertainties inherent with the application of the percentage-of-completion
method of accounting affect the amounts of revenue reported in its consolidated
financial statements.
Valuation Allowances. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
We perform ongoing credit evaluations of our customers and maintain reserves for
estimated credit losses. Reserves for potential credit losses are determined by
establishing both specific and general reserves. Specific reserves are based on
management's estimate of the probability of collection for certain troubled
accounts. General reserves are established based on our historical experience of
bad debt expense and the aging of our accounts receivable balances net of
deferred revenue and specifically reserved accounts. If the financial condition
of our customers were to deteriorate resulting in an impairment of their ability
to make payments, additional allowances would be required.
Goodwill Impairment. Our long-lived assets include goodwill of $1.8 million as
of March 31, 2005 and 2004, respectively. We follow Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142).
The statement applies to the amortization of goodwill and other
26
intangible assets. We no longer amortize amounts related to goodwill. The
balance of goodwill is related to our NextGen Division. Under SFAS 142, we are
required to perform an annual assessment of the implied fair value of goodwill
and intangible assets with indefinite lives for impairment. We have compared the
fair value of the NextGen Division with the carrying amount of assets associated
with the Division and determined that none of the goodwill recorded as of June
30, 2004 (the date of our last annual impairment test) was impaired. The fair
value of the NextGen Division was determined using a reasonable estimate of
future cash flows of the Division and a risk adjusted discount rate to compute a
net present value of future cash flows. There have been no changes that would
lead us to believe there is any impairment of the goodwill since the date of the
last annual impairment test through March 31, 2005.
The process of evaluating goodwill for impairment involves the determination of
the fair value of our business segments. Inherent in such fair value
determinations are certain judgments and estimates, including the interpretation
of current economic indicators and market valuations, and assumptions about our
strategic plans with regard to operations. To the extent additional information
arises or our strategies change, it is possible that our conclusion regarding
goodwill impairment could change and result in a material effect on our
financial position or results of operations.
Software Development Costs. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
development costs are capitalized in accordance with the Statement of Financial
Accounting Standards 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, of three years. We perform an annual review of the
recoverability of such capitalized software costs. At the time a determination
is made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, any remaining capitalized
amounts are written off.
Research and Development Tax Credits. During the year ended March 31, 2003, the
Company filed amended federal and state tax returns for the fiscal years ended
March 31, 1998 through 2001, to take advantage of tax credits related to our
research and development activities. In addition, the Company claimed research
and development credit on its tax returns for the years ended March 31, 2004,
2003 and 2002. The provision for income taxes for the year ended March 31, 2004
and 2003 accounted for a portion of the aggregate tax credits accumulated
through the end of each period due to the uncertainly concerning the ultimate
amount of tax to be credited. As of March 31, 2004, the Company had a balance of
$0.5 million in credits which had not been recognized. In the quarter ended
March 31, 2005, the state of California completed an audit of the Company's tax
returns and did not materially change credits related to research and
development. Based on the results of that audit as well the expiration of the
statue of limitations on certain amended returns, the provision for income taxes
for the year ended March 31, 2005 was reduced by the $0.5 million in tax credits
which had not been recognized as of March 31 2004.
Management's treatment of research and development tax credits represented a
significant estimate which affected the effective income tax rates for the
Company in the years ending March 31, 2005 and 2004. Research and development
credits taken by the Company involve certain assumptions and judgments regarding
qualification of expenses under the relevant tax codes. While the Company has
received all of federal refunds claimed, none of the credits have been audited
by the Internal Revenue Service.
27
Overview of Company results
o We have experienced significant growth in our total revenue as a result of
revenue growth in our NextGen Healthcare Information Services Division.
Our total Company revenue grew 25.4% on a consolidated basis during the
twelve months ended March 31, 2005 versus 2004 and 29.5% in the twelve
months ended March 31, 2004 versus 2003.
o Consolidated income from operations grew 47.9% in the twelve months ended
March 31, 2005 versus 2004 and 56.1% in the twelve months ended March 31,
2004 versus 2003. This performance was driven in large part 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 of technology in the healthcare arena.
NextGen Division
o Our NextGen Division has experienced significant growth in revenue and
operating income. Divisional revenue grew 35.2% in the twelve months ended
March 31, 2005 versus 2004 and 45.8% in the twelve months ended March 31,
2004 versus 2003 while divisional operating income (excluding unallocated
corporate expenses) grew 64.1% in the twelve months end March 31, 2005 and
77.4% in the twelve months ended March 31, 2004.
o During the twelve months ended March 31, 2005, we added staffing resources
to departments including sales, marketing, support, implementation,
software development, and administration and intend to continue to do so
in 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 experienced a revenue decline of 6.8% in the twelve
months ended March 31, 2005 versus 2004 and 5.3% in the twelve months
ended March 31, 2004 versus 2003. The Division experienced a 14.7%
decrease in operating income (excluding unallocated corporate expenses) in
the twelve months ended March 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.
28
The following table sets forth for the periods indicated the percentage of net
revenue represented by each item in our Consolidated Statements of Operations.
Year Ended March 31,
2005 2004 2003
--------- --------- ---------
Revenue:
System sales............................................ 54.5% 55.7% 53.3%
Maintenance, EDI, and other services.................... 45.5 44.3 46.7
--------- --------- ---------
Total revenue........................................... 100.0 100.0 100.0
Cost of revenue......................................... 36.7 40.4 43.4
--------- --------- ---------
Gross profit............................................ 63.3 59.6 56.6
Selling, general and administrative expenses............ 27.9 27.4 27.9
Research and development costs.......................... 7.8 8.7 9.2
--------- --------- ---------
Income from operations.................................. 27.7 23.5 19.5
Investment income....................................... 1.0 0.5 0.8
--------- --------- ---------
Income before provision for income taxes................ 28.7 24.0 20.3
Provision for income taxes.............................. 10.5 9.3 7.5
--------- --------- ---------
Net income.............................................. 18.1% 14.7% 12.8%
Comparison of the Years Ended March 31, 2005 and March 31, 2004
For the year ended March 31, 2005, our net income was $16.1 million or $1.25 per
share on a basic and $1.22 per share on a fully diluted basis. In comparison, we
earned $10.4 million or $0.84 per share on a basic and $0.80 on a fully diluted
basis in the year ended March 31, 2004. The increase in net income for the year
ended March 31, 2005, was achieved primarily through the following:
o a 25.4% increase in revenue;
o an increase in our gross profit margin from 59.6% to 63.3%.
Revenue. Revenue for the year ended March 31, 2005 increased 25.4% to $89.0
million from $70.9 million for the year ended March 31, 2004. NextGen Division
revenue increased 35.2% from $54.4 million to approximately $73.6 million in the
period, while QSI Division revenue declined by 6.8% during the period from
approximately $16.5 million to $15.4 million.
We divide revenue into two categories, "System sales" and "Maintenance, EDI, and
other services". Revenue in the system sales category includes software license
fees, third party hardware and software, and implementation and training
services related to purchase of the Company's software systems. Revenue in the
maintenance and other services category includes maintenance, EDI, and other
revenue. Maintenance and EDI revenue are the principle sources of revenue in
this category.
System Sales. Company-wide sales of systems for the twelve months ended March
31, 2005 increased 22.8% to $48.5 million from $39.5 million in the prior year.
Our increase in revenue from sales of systems was principally the result of a
24.8% increase in category revenue at our NextGen Division whose sales in this
category grew from $37.3 million during the year ended March 31, 2004 to $46.6
million during the year ended March 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 an increase in the delivery of related
implementation services offset by a decline in the sale of related hardware,
third party software and supplies.
Systems sales revenue in the QSI Division declined 11.1% to approximately $1.9
million in the year ended March 31, 2005 from $2.2 million in the year ended
March 31, 2004.
29
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
------------- ------------- -------------- -------------
Twelve months ended
March 31, 2005
QSI Division............ $ 889 $ 744 $ 306 $ 1,939
NextGen Division........ 33,230 4,811 8,548 46,589
------------- ------------- -------------- -------------
Consolidated............ $ 34,119 $ 5,555 $ 8,854 $ 48,528
============= ============= ============== =============
Twelve months ended
March 31, 2004
QSI Division............ $ 807 $ 1,029 $ 345 $ 2,181
NextGen Division........ 24,657 6,139 6,548 37,344
------------- ------------- -------------- -------------
Consolidated............ $ 25,464 $ 7,168 $ 6,893 $ 39,525
============= ============= ============== =============
NextGen Division software revenue increased 34.8% between the twelve months
ended March 31, 2004 and the twelve months ended March 31, 2005. The Division's
software revenue accounted for 71.3% of divisional system sales revenue during
the twelve months ended March 31, 2005, an increase from 66.0% in the prior year
period. The increase in software's share of systems sales was not the result of
any new trend or change in emphasis on our part relative to software sales.
Software license revenue growth 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 twelve months ended March 31, 2005, 10.3% of NextGen's system sales
revenue was represented by hardware and third party software compared to 16.4%
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 year periods. However, this decrease 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 revenue fluctuates each year 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 30.5% in
the twelve months ended March 31, 2005 compared to the twelve months ended March
31, 2004. Implementation and training revenue at the NextGen Division increased
its share of divisional system sales revenue to 18.3% in the twelve months ended
March 31, 2005 from 17.5% in the twelve months ended March 31, 2004. 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 amount of
implementation and training services revenue and the corresponding rate of
growth compared to a prior period in any given year 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 twelve months ended March
31, 2005 versus March 31, 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 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.
30
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 NextGenemr
and NextGenepm 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 decreased 11.1% in the twelve months
ended March 31, 2005 compared to the twelve months ended March 31, 2004. 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. QSI systems sales during the fiscal year ended March 31,
2005 were impacted by year over year declines in hardware and implementation and
training services.
Maintenance, EDI, and other. Company-wide revenue from maintenance, EDI, and
other services grew 28.7% to $40.4 million from $31.4 million. The increase in
this category resulted principally from an increase in maintenance and EDI
revenue generated from the NextGen Division's client base. Total NextGen
Division maintenance revenue for the year ended March 31, 2005 grew 55.7% to
$17.9 million from $11.5 million in the year ago period, while EDI revenue grew
86