QUALITY
SYSTEMS INC (QSII)
Quarterly Report (SEC form 10-Q)
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations.
Except for the historical information
contained herein, the matters discussed
in this Quarterly Report on Form 10-Q,
including discussions of the Company's
product development plans, business strategies
and market factors influencing the Company's
results, are forward-looking statements
that involve certain risks and uncertainties.
Actual results may differ from those anticipated
by the Company as a result of various
factors, both foreseen and unforeseen,
including, but not limited to, the Company's
ability to continue to develop new products
and increase systems sales in markets
characterized by rapid technological evolution,
consolidation within the Company's target
marketplace and among the Company's competitors,
and competition from larger, better capitalized
competitors. Many other economic, competitive,
governmental and technological factors
could impact the Company's ability to
achieve its goals. Interested persons
are urged to review the risks described
below, as well as in the Company's other
public disclosures and filings with the
Securities and Exchange Commission.
Company
Overview
Quality Systems, Inc., through its NextGen
Healthcare Information Systems, Inc. (NextGen(3))
and QSI (QSI) divisions (collectively,
the "Company"), develops and
markets healthcare information systems
that automate medical and dental group
practices, physician hospital organizations
("PHOs"), management service
organizations ("MSOs"), ambulatory
care centers, community health centers,
and medical and dental schools. In response
to the growing need for more comprehensive,
cost-effective information solutions for
medical and dental practices, the Company's
systems allow clients the opportunity
to redesign office workflow processes,
improve productivity, reduce information
processing and administrative costs, and
utilize electronic medical records to
store and access patient information.
The Company's proprietary software systems
cover a number of important practice elements
including, but not limited to, general
patient information, electronic patient
records, appointment scheduling, billing,
insurance claims submission and processing,
eligibility verification, managed care
plan implementation, referral management,
treatment outcome studies, treatment planning,
drug formularies, dental charting, and
letter generation. Several of the Company's
software systems may be operated remotely
using thin client connectivity or a standard
web browser. In addition to providing
fully integrated software solutions to
its clients, the Company offers comprehensive
hardware and software installation services,
maintenance and support services, and
system training services.
The
Company currently has a base of approximately
850 clients, with each client generally
including between one and 500 physicians
or dentists. The Company believes that
as healthcare providers are increasingly
required to reduce costs and maintain
the quality of healthcare, the Company
will be able to capitalize on its strategy
of providing fully integrated information
systems and superior client service.
The Company, a California corporation
formed in 1974, was founded with an early
focus on providing information systems
and services for dental group practices.
In the mid-1980's, the Company capitalized
on the increasing focus on medical cost
containment and further expanded its information
processing systems to serve the medical
market. Today, the Company has dedicated
products serving both the medical and
dental markets.
(3) The Company's NextGen Division, formerly
known as "MicroMed Healthcare Information
Systems" or "MicroMed Division",
changed its name in fiscal 2002.
The Company's QSI Division develops and
markets dental practice management and
medical practice management software suites
utilizing a UNIX(4) operating system.
Its Clinical Product Suite ("CPS")
utilizes a Windows NT(5) operating system
and can be fully integrated with the Company's
dental practice management applications.
CPS incorporates a wide range of clinical
tools including, but not limited to, periodontal
charting and digital imaging of X-ray
and inter-oral camera images as part of
an electronic patient record. In addition,
the QSI Division develops and markets
the Company's QUIC and NextGen edi product
suite which incorporates a variety of
products that enhance the connectivity
between provider and payor, and provider
and patient. The QSINet Application Service
Provider ("ASP")/Internet product
offering is also developed and marketed
in this Division. QSINet enables providers
to extend patient appointment scheduling,
electronic bill payment, and other functions
to patients via the Internet.
The Company's NextGen Healthcare Information
Systems, Inc. Division develops and sells
proprietary electronic medical records
software and practice management systems
under the NextGen(R) product name. Major
product categories of the NextGen suite
include Electronic Medical Records (NextGen(emr)),
Enterprise Practice Management (NextGen(epm)),
Enterprise Appointment Scheduling (NextGen(eas)),
Enterprise Master Patient Index (NextGen(epi)),
Managed Care, Electronic Data Interchange,
System Interfaces, Internet Operability
(NextGen(web)), a patient-centric and
provider-centric Web portal solution (NextMD.com(6)),
and a handheld product (NextGen(pda)).
The Company's enterprise practice management
and electronic medical records software
packages can run via private intranet
or via the Internet in an ASP environment.
Enhancements to these products continued
during the quarter.
Risk
Factors
Competition. The markets for healthcare
information systems are intensely competitive,
and the Company faces significant competition
from a number of different sources. Several
of the Company's competitors have significantly
greater name recognition as well as substantially
greater financial, technical, product
development and marketing resources than
the Company.
The Company competes in all of its markets
with other major healthcare related companies,
information management companies, systems
integrators, and other software developers.
Competitive pressures and other factors,
such as new product introductions by the
Company or its competitors, may result
in price or market share erosion that
could have a material adverse effect on
the Company's business, results of operations
and financial condition. Also, there can
be no assurance that the Company's applications
will achieve broad market acceptance or
will successfully compete with other competing
software products.
The Company's inability to make initial
sales of its systems to either newly formed
groups and/or healthcare providers that
are replacing or substantially modifying
their healthcare information systems could
have a material adverse effect on the
Company's business, results of operations
and financial condition. If new systems
sales do not materialize, the Company's
maintenance revenues can be expected to
decrease over time due to the combined
effects of potential attrition of existing
clients and a shortfall in new client
additions.
Fluctuation in Quarterly Operating Results.
The Company's revenues and operating results
have fluctuated in the past, and may fluctuate
in the future from quarter to quarter
and period to period, as a result of a
number of factors including, without limitation:
the size and timing of orders from clients;
the length of sales cycles and installation
processes; the ability of the Company's
clients to obtain financing for the purchase
of the Company's products; changes in
pricing policies or price reductions by
the Company or its competitors; the timing
of new product announcements and product
introductions by the Company or its competitors;
the availability and cost of system components;
the financial stability of
(4) UNIX is a registered trademark of
AT&T Corporation.
(5) Microsoft Windows, Windows NT, Windows
95, Windows 98, and Windows 2000 are registered
trademarks of Microsoft Corporation.
(6) NextMD.com is a trademark of NextGen
Healthcare Information Systems, Inc. major
clients; market acceptance of new products,
applications and product enhancements;
the Company's ability to develop, introduce
and market new products, applications
and product enhancements and to control
costs; the Company's success in expanding
its sales and marketing programs; deferrals
of client orders in anticipation of new
products, applications or product enhancements;
changes in Company strategy; personnel
changes; and general governmental and
economic factors.
The Company's products are generally shipped
as orders are received and accordingly,
the Company has historically operated
with minimal backlog. As a result, sales
in any quarter are dependent on orders
booked and shipped in that quarter and
are not predictable with any degree of
certainty. Further, the Company's systems
can be relatively large and expensive
and individual systems sales can represent
a significant portion of the Company's
revenues for a quarter such that the loss
or deferral of even one such sale can
have a significant adverse impact on the
Company's quarterly profitability.
Clients often defer systems purchases
until the Company's quarter end, so quarterly
results generally cannot be predicted
and frequently are not known until the
quarter has concluded.
The Company's sales are dependent upon
a client's initial decision to replace,
or substantially modify its existing information
system, and subsequently a decision as
to which products and services to purchase.
These are major decisions for healthcare
providers, and accordingly, the sales
cycle for the Company's systems can vary
significantly and typically ranges from
three to twelve months from initial contact
to contract execution/shipment.
Because a significant percentage of the
Company's expenses are relatively fixed,
a variation in the timing of systems sales
and installations can cause significant
variations in operating results from quarter
to quarter. As a result, the Company believes
that interim period-to-period comparisons
of its results of operations are not necessarily
meaningful and should not be relied upon
as indications of future performance.
Further, the Company's historical operating
results are not necessarily indicative
of future performance for any particular
period.
The Company recognizes revenue pursuant
to Statement of Position ("SOP")
No. 97-2, "Software Revenue Recognition"
("SOP 97-2"). Additionally,
in December 1999, the Securities and Exchange
Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements"
("SAB 101"). SAB 101 summarizes
the staff's views in applying generally
accepted accounting principles to revenue
recognition in financial statements. SAB
101 became effective for the Company in
the third quarter of fiscal 2001.
There can be no assurance that the application
and subsequent interpretation of these
pronouncements will not further modify
the Company's revenue recognition policies,
or that such modifications would not have
a material adverse effect on the operating
results reported in any particular quarter.
There can be no assurance that the Company
will not be required to adopt changes
in its licensing or services practices
to conform to SOP 97-2 or SAB 101, or
that such changes, if adopted, would not
result in delays or cancellations of potential
sales of the Company's products.
Due to all of the foregoing factors, it
is possible that in some future quarter(s)
the Company's operating results may be
below the expectations of public market
analysts and investors. In such event,
the price of the Company's Common Stock
would likely be materially adversely affected.
Dependence on Principal Product and New
Product Development. The Company currently
derives substantially all of its net revenues
from sales of its healthcare information
systems and related services. The Company
believes that a primary factor in the
market acceptance of its systems has been
its ability to meet the needs of users
of healthcare information systems. The
Company's future financial performance
will depend in large part on the Company's
ability to continue to meet the increasingly
sophisticated needs of its clients through
the timely development, successful introduction
and implementation of new and enhanced
versions of its systems and other complementary
products. The Company has historically
expended a significant percentage of its
net revenues on product development and
believes that significant continuing product
development efforts will be required to
sustain the Company's growth.
There can be no assurance that the Company
will be successful in its product development
efforts, that the market will continue
to accept the Company's existing products,
or that new products or product enhancements
will be developed and implemented in a
timely manner, meet the requirements of
healthcare providers, or achieve market
acceptance. If new products or product
enhancements do not achieve market acceptance,
the Company's business, results of operations
and financial condition could be materially
adversely affected. At certain times in
the past, the Company has also experienced
delays in purchases of its products by
clients anticipating the launch of new
products by the Company. There can be
no assurance that material order deferrals
in anticipation of new product introductions
will not occur.
Technological Change. The software market
generally is characterized by rapid technological
change, changing customer needs, frequent
new product introductions, and evolving
industry standards. The introduction of
products incorporating new technologies
and the emergence of new industry standards
could render the Company's existing products
obsolete and unmarketable. There can be
no assurance that the Company will be
successful in developing and marketing
new products that respond to technological
changes or evolving industry standards.
New product development depends upon significant
research and development expenditures
which depend ultimately upon sales growth.
Any material weakness in revenues or research
funding could impair the Company's ability
to respond to technological advances in
the marketplace and to remain competitive.
If the Company is unable, for technological
or other reasons, to develop and introduce
new products in a timely manner in response
to changing market conditions or customer
requirements, the Company's business,
results of operations and financial condition
may be materially adversely affected.
In response to increasing market demand,
the Company is currently developing new
generations of certain of its software
products. There can be no assurance that
the Company will successfully develop
these new software products or that these
products will operate successfully, or
that any such development, even if successful,
will be completed concurrently with or
prior to introduction of competing products.
Any such failure or delay could adversely
affect the Company's competitive position
and/or could make the Company's current
products obsolete.
Litigation. The Company faces one private
Federal securities litigation action (see
"Part II - Other Information, Item
1. Legal Proceedings."). At this
time it is not reasonably possible to
estimate the damage, or the range of damages,
if any, that the Company might incur in
connection with these actions. However,
the uncertainty associated with substantial
unresolved litigation may have an adverse
impact on the Company's business. In particular,
such litigation could impair the Company's
relationships with existing customers
and its ability to obtain new customers.
Defending such litigation may result in
a diversion of management's time and attention
away from business operations, which could
have a material adverse effect on the
Company's business, results of operations
and financial condition. Such litigation
may also have the effect of discouraging
potential acquirers from bidding for the
Company or reducing the consideration
such acquirers would otherwise be willing
to pay in connection with an acquisition.
There can be no assurance that such litigation
will not result in liability in excess
of the Company's insurance coverage, that
the Company's insurance will cover such
claims or that appropriate insurance will
continue to be available to the Company
in the future at commercially reasonable
rates.
Proprietary Technology. The Company is
heavily dependent on the maintenance and
protection of its intellectual property
and relies largely on license agreements,
confidentiality procedures, and employee
nondisclosure agreements to protect its
intellectual property. The Company's software
is not patented and the Company believes
that existing copyright laws offer only
limited practical protection.
There can be no assurance that the legal
protections and precautions taken by the
Company will be adequate to prevent misappropriation
of the Company's technology or that competitors
will not independently develop technologies
equivalent or superior to the Company's.
Further, the laws of some foreign countries
do not protect the Company's proprietary
rights to as great an extent as do the
laws of the United States and are often
not enforced as vigorously as those in
the United States.
The Company does not believe that its
operations or products infringe on the
intellectual property rights of others.
However, there can be no assurance that
others will not assert infringement or
trade secret claims against the Company
with respect to its current or future
products or that any such assertion will
not require the Company to enter into
a license agreement or royalty arrangement
with the party asserting the claim. As
competing healthcare information systems
increase in complexity and overall capabilities
and the functionality of these systems
further overlaps, providers of such systems
may become increasingly subject to infringement
claims. Responding to and defending any
such claims may distract the attention
of Company management and have a material
adverse effect on the Company's business,
results of operations and financial condition.
In addition, claims may be brought against
third parties from which the Company purchases
software, and such claims could adversely
affect the Company's ability to access
third party software for its systems.
Ability to Manage Growth. The Company
has in the past experienced periods of
growth which have placed, and may continue
to place, a significant strain on the
Company's non-cash resources. The Company
also anticipates expanding its overall
software development, marketing, sales,
support, and customer service and training
capacity. In the event the Company is
unable to identify, hire, train and retain
qualified individuals in such capacities
within a reasonable timeframe, such failure
could have a material adverse effect on
the Company. In addition, the Company's
ability to manage future increases, if
any, in the scope of its operations or
personnel will depend on significant expansion
of its research and development, marketing
and sales, management, and administrative
and financial capabilities. The failure
of the Company's management to effectively
manage expansion in its business could
have a material adverse effect on the
Company's business, results of operations
and financial condition.
Dependence Upon Key Personnel. The Company's
future performance also depends in significant
part upon the continued service of its
key technical and senior management personnel,
many of whom have been with the Company
for a significant period of time. The
Company does not maintain key man life
insurance on any of its employees. Because
the Company has a relatively small number
of employees when compared to other leading
companies in the same industry, its dependence
on retaining its employees is particularly
significant. The Company is also dependent
on its ability to attract high quality
personnel, particularly in the areas of
sales and applications development.
The
industry in which the Company operates
is characterized by a high level of employee
mobility and aggressive recruiting of
skilled personnel. There can be no assurance
that the Company's current employees will
continue to work for the Company.
The
loss of the services of key employees
could have a material adverse effect on
the Company's business, results of operations
and financial condition. Furthermore,
the Company may need to grant additional
stock options to key employees and provide
other forms of incentive compensation
to attract and retain such key personnel.
Product
Liability. Certain of the Company's products
provide applications that relate to patient
clinical information. Any failure by the
Company's products to provide accurate
and timely information could result in
claims against the Company. In addition,
a court or government agency may take
the position that the Company's delivery
of health information directly, including
through licensed practitioners, or delivery
of information by a third party site that
a consumer accesses through the Company's
web sites, exposes the Company to malpractice
or other personal injury liability for
wrongful delivery of healthcare services
or erroneous health information. The Company
maintains insurance to protect against
claims associated with the use of its
products and services, but there can be
no assurance that its insurance coverage
would adequately cover any claim asserted
against the Company. A successful claim
brought against the Company in excess
of its insurance coverage could have a
material adverse effect on the Company's
business, results of operations and financial
condition. Even unsuccessful claims could
result in the Company's expenditure of
funds in litigation and management time
and resources.
There
can be no assurance that the Company will
not be subject to product liability claims,
that such claims will not result in liability
in excess of its insurance coverage, that
the Company's insurance will cover such
claims or that appropriate insurance will
continue to be available to the Company
in the future at commercially reasonable
rates. Such claims could have a material
adverse affect on the Company's business,
results of operations and financial condition.
Uncertainty
in Healthcare Industry; Government Regulation.
The healthcare industry is subject to
changing political, economic and regulatory
influences, which have been increasing
over the past several years. This increase
has the potential to heighten governmental
involvement in healthcare, lower reimbursement
rates and otherwise change the operating
environment for the Company's clients.
Healthcare
providers may react to current proposals
as well as the uncertainty surrounding
future proposals by curtailing or deferring
investments, including investments in
the kinds of systems and services offered
by the Company. Additionally, cost-containment
measures instituted by healthcare providers
and payors as a result of regulatory reform
or otherwise could result in a reduction
in the availability of capital funds,
and such a reduction could have an adverse
effect on the Company's ability to sell
its systems and related services. Conversely,
changes in the regulatory environment
can serve to increase the needs of healthcare
organizations for cost-effective data
management and thereby enhance the overall
market for healthcare management information
systems. The Company cannot predict what
impact, if any, such proposals or healthcare
reforms might have on the Company's business,
financial condition and results of operations.
Numerous federal and state laws and regulations,
the common law, and certain contractual
obligations govern collection, dissemination,
use and confidentiality of protected health
information (which includes individually
identifiable health information) , including
but not limited to:
-
State privacy and confidentiality laws;
- The
Company's contracts with customers and
partners;
- State
laws regulating healthcare professionals;
- Medicaid
laws; and Requirements of the Health
Insurance Portability and Accountability
Act (HIPAA) of 1996 (note: while a number
of HIPAA elements have been finalized,
portions of the legislation remain to
be finalized, and there exists no definitive
timeline as to when these pending items
will be resolved).
Any
failure by the Company or by its personnel
or partners to comply with applicable
elements of these or other requirements
may result in a material liability to
the Company.
Although the Company has systems in place
for safeguarding applicable patient health
information from unauthorized disclosure
which the company believes are adequate,
these systems may not preclude claims
against the Company for violation of applicable
law or other requirements. Other third
party sites or links that consumers access
through the Company's web sites also may
not maintain systems to safeguard this
protected health information, or may circumvent
systems the Company put in place to protect
the protected health information from
disclosure. In addition, future laws or
changes in current laws may necessitate
costly adaptations to the Company's systems.
HIPAA mandates the satisfaction of national
standards when electronically transmitting
certain patient healthcare information,
and prescribes administrative, operational,
and security measures to protect the confidentiality
of patient's protected health information.
These proposed and finalized regulations
establish new federal standards for the
security and privacy of health information.
The Company anticipates that these regulations
may directly affect the Company's products
and services, but the Company cannot fully
predict the impact at this time. While
HIPAA compliance requires the client to
implement technological and non-technological
solutions, the Company's intention is
to assist in providing tools and technologies
that facilitate client compliance with
the final regulations, but there can be
no assurance that the Company will be
able to do so in a timely manner. Achieving
compliance with applicable regulations
could be costly and distract management's
attention and other resources from the
Company's historical business, and any
noncompliance by the Company could result
in civil and criminal penalties. In addition,
development of related Federal and state
regulations and policies on confidentiality
of health information could negatively
affect the Company's business.
In addition, the Company's software may
be subject to regulation by the U.S. Food
and Drug Administration (the "FDA")
as a medical device. Such regulation could
require the registration of the applicable
manufacturing facility and software and
hardware products, application of detailed
record-keeping and manufacturing standards,
and FDA approval or clearance prior to
marketing. An approval or clearance requirement
could create delays in marketing, and
the FDA could require supplemental filings
or object to certain of these applications,
the result of which could have a material
adverse effect on the Company's business,
financial condition and results of operations.
Critical
Accounting Policies
The discussion and analysis of
the Company's financial condition and
results of operations is based upon the
Company's consolidated financial statements,
which have been prepared in accordance
with accounting principles generally accepted
in the United States of America. The preparation
of these financial statements requires
management to make estimates and judgments
that affect the reported amounts of assets,
liabilities, revenues and expenses, and
related disclosures of contingent assets
and liabilities. On an on-going basis,
management evaluates estimates, including
those related to revenue recognition,
uncollectible accounts receivables, and
intangible assets, for reasonableness.
Management bases its estimates on historical
experience and on various other assumptions
that management believes to be reasonable
under the circumstances, the results of
which form the basis for making judgments
about the carrying values of assets and
liabilities that are not readily apparent
from other sources. Actual results may
differ from these estimates under different
assumptions or conditions.
The
Company believes revenue recognition,
the allowance for doubtful accounts, and
goodwill impairment are among the most
critical accounting policies that impact
its consolidated financial statements.
Revenue
Recognition. The Company's revenues are
primarily generated from the sale of software
licenses, maintenance fees, and electronic
data interchange services. Revenue recognition
is governed by Statement of Position 97-2,
"Software Revenue Recognition"
("SOP 97-2"). Per SOP 97-2,
if the arrangement does not require significant
production, modification, or customization
of software, revenue should be recognized
when all of the following criteria are
met:
- persuasive
evidence of an arrangement exists;
-
delivery has occurred;
-
the vendor's fee is fixed or determinable;
and
-
collectibility is probable.
In
accordance with generally accepted accounting
principles in the United States of America,
the recognition of software license revenues
is based on management's assessment that
the above criteria have been met. In general,
the first two criteria are met with a
signed contract and evidence that the
Company has shipped its software to the
customer. In those cases where undelivered
elements of a system sale exists, the
Company defers revenue related to the
undelivered element based on vendor specific
objective evidence of each element's fair
value. Discounts for individual elements
are aggregated, and the total discount
is allocated back to the individual elements
in its proportion of fair value to the
total contract fair value. The Company
determines that the fee is fixed or determinable
based on the contract terms, which specify
payment terms tied to dates and not to
any future deliverables. Probability of
collection is based on a credit review
of new customers. The timing or amount
of revenue recognition may have been different
if different assessments of the above
criteria had been made at the time transactions
were recorded in revenue.
Valuation Allowances. The Company maintains
allowances for doubtful accounts for estimated
losses resulting from the inability of
customers to make required payments. The
valuation allowance is composed of both
specific and general allowances. Management
reviews customer accounts to determine
specific valuation allowances for individual
accounts and also sets general valuation
allowances based on the aging of customer
accounts. If the financial condition of
customers were to deteriorate, resulting
in an impairment of their ability to make
payments, additional allowances may be
required.
Goodwill Impairment. The Company's long-lived
assets include goodwill of $1.8 million
as of December 31, 2002 and 2001, respectively.
The Company adopted SFAS No. 142 "Goodwill
and Other Intangible Assets" ("SFAS
142") effective April 1, 2001. The
statement applies to the amortization
of goodwill and other intangible assets.
The Company has ceased amortizing amounts
related to goodwill effective April 1,
2001. The balance of goodwill is related
to the Company's NextGen Division. The
Company has compared the fair value of
the NextGen Division with the carrying
amount of assets associated with the Division
and determined that none of the goodwill
recorded as of June 30, 2002 was impaired.
The fair value of the NextGen Division
was determined using a reasonable estimate
of future cash flows of the Division and
a risk adjusted discount rate to compute
a net present value of future cash flows.
The
process of evaluating goodwill for impairment
involves the determination of the fair
value of the relevant Company business
segments. Inherent in such fair value
determinations are certain judgments and
estimates, including the interpretation
of current economic indicators and market
valuations, and assumptions about the
Company's strategic plans with regard
to operations. To the extent additional
information arises or the strategies of
the Company change, it is possible that
the Company's conclusion regarding goodwill
impairment could change and result in
a material effect on its financial position
or results of operations.
Results
of Operations
The following table sets forth
for the periods indicated, the percentage
of net revenues represented by each item
in the Company's Consolidated Statements
of Income.
| |
 |
|
| |
Three
Months Ended
December 31,
(unaudited) |
Year
Ended
December 31,
(unaudited) |
| Numbers
by 1000's |
| ---------------- |
| 2002 |
2001 |
| ------ |
------ |
|
| ---------------- |
| 2002 |
2001 |
| ------ |
------ |
|
|
Net
Revenues:
Sales of computer systems, upgrades
and supplies Maintenance and other
services |
| 53.2% |
49.4% |
| 46.8 |
50.6 |
| ------ |
------ |
| 100 |
100 |
|
| 52.7% |
49.8% |
| 47.3 |
50.2 |
| ------ |
------ |
| 100 |
100 |
|
|
| Cost
of Products and Services |
|
|
| Gross
Profit |
|
|
|
| Selling,
General and Administrative Expenses
Research and Development Costs |
| 27.2 |
27.3 |
| 9.4 |
9.6 |
| ------ |
------ |
|
| 27.8 |
29.4 |
| 9.3 |
9.8 |
| ------ |
------ |
|
|
| Income
from Operations |
|
|
|
| Investment
Income |
|
|
| Income
before Provision for Income Taxes
|
|
|
|
| Provision
for Income Taxes |
|
|
|
| Net
Income |
| 13.5% |
12.5% |
| ====== |
====== |
|
| 13.3% |
11.6% |
| ====== |
====== |
|
For
the Three-Month Periods Ended December
31, 2002 and 2001
The Company's net income for the three
months ended December 31, 2002 was $1,935,000
or $0.32 per share on a basic and $0.30
per share on a diluted basis, as compared
to net income of $1,383,000, or $0.23
per share on a basic and $0.22 on a diluted
basis, for the three months ended December
31, 2001.
Net Revenues. Net revenues for the three
months ended December 31, 2002 increased
31% to $14.4 million from $11.0 million
for the three months ended December 31,
2001. Sales of computer systems, upgrades
and supplies increased 40% to $7.7 million
from $5.5 million while revenues from
maintenance and other services grew 20%
to $6.7 million from $5.6 million during
the comparable period. The increase in
revenues from sales of computer systems,
upgrades and supplies was principally
the result of an increase in license,
hardware, third party software, and services
revenue related to systems sales at the
Company's NextGen Division. The increase
in maintenance and other services revenue
resulted principally from an increase
in maintenance and edi revenues generated
from the Company's expanded NextGen client
base.
Cost of Products and Services. Cost of
products and services for the three months
ended December 31, 2002 rose 31% to $6.4
million from $4.9 million in the prior
year quarter. Cost of products and services
as a percentage of net revenues decreased
to 44.1% from 44.4%. The dollar increase
in the cost of products and services was
primarily the result of a higher volume
of hardware associated with increased
volume of NextGenemr and NextGenepm license
sales as well as the impact of higher
labor costs associated with installation,
training, and support. The cost of products
and services as a percentage of net revenues
decreased slightly in the quarter ended
December 31, 2002, largely as a result
of a decrease in the relative hardware
component of systems sales revenues.
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses for
the three months ended December 31, 2002
increased approximately 30% to approximately
$3.9 million as compared to $3.0 million
for the three months ended December 31,
2001. Selling, general and administrative
expenses as a percentage of net revenues
was roughly unchanged at 27.2% as compared
to 27.3% in the year earlier quarter.
The increase in the dollar amount of such
expenses resulted primarily from increased
staffing and compensation expenses, as
well as increased sales and marketing
expenses at the Company's NextGen Division.
Research and Development Costs. Research
and development costs for the three months
ended December 31, 2002 increased by 27%
to $1,347,000 from $1,057,000 in the prior
year's quarter. The increase in research
and development costs is attributed primarily
to increased investments in the NextGen
product suites. Research and development
costs as a percentage of net revenues
declined to 9.4% as compared to 9.6% for
the quarter ended December 31, 2001. This
decline was driven by the fact that revenues
grew faster than the increase in research
and development expense. The Company has,
over time, changed the mix of its overall
research and development expenditures
to increase funds available for the NextGen
Division while correspondingly decreasing
the level of expenditure at its QSI Division.
This has facilitated increased research
and development spending at the NextGen
Division while moderating the overall
growth rate of research and development
costs.
Investment Income. Investment income for
the three months ended December 31, 2002
decreased by 26% to approximately $109,000
compared to $147,000 for the three months
ended December 31, 2001. Investment income
in the quarter declined due to the lower
interest rates earned on the Company's
balances during the quarter vis a vis
the year earlier quarter. The decrease
in interest income was partially offset
by higher cash balances.
Provision for Income Taxes. The provision
for income taxes for the three months
ended December 31, 2002 was approximately
$956,000 as compared to approximately
$833,000 for the three months ended December
31, 2001. The provision for income taxes
for the three months ended December 31,
2002 and 2001 differs from the combined
statutory rates primarily due to the impact
of varying state income tax rates. The
provision for income taxes for the three
month period ended December 31, 2002 also
includes the application of the estimated
year to date tax credits associated with
research and development activities of
the Company.
For the Nine-Month Periods Ended December
31, 2002 and 2001
The Company's net income for the nine
months ended December 31, 2002 was $5.3
million, or $0.86 per share on a basic
and $0.83 per share on a diluted basis,
as compared to $3.8 million, or $0.63
per share on a basic and $0.61 per share
on a diluted basis for the nine months
ended December 31, 2001.
Net Revenues Net revenues for the nine
months ended December 31, 2002 increased
23% to $39.7 million from $32.4 million
for the nine months ended December 31,
2001. Sales of computer systems, upgrades
and supplies increased 29% to $20.9 million
from $16.2 million while revenues from
maintenance and other services grew 15%
to $18.8 million from $16.3 million during
the comparable period. The increase in
revenues from sales of computer systems,
upgrades and supplies was principally
the result of increases in the sales at
the Company's NextGen Division. The $2.5
million dollar increase in maintenance
and other services revenue resulted principally
from an increase in maintenance and edi
revenues from the NextGen division's growing
client base.
Cost of Products and Services. Cost of
products and services for the nine months
ended December 31, 2002 increased 19%
to $16.9 million from $14.2 million for
the nine months ended December 31, 2001
while cost of products and services as
a percentage of net revenues decreased
to 42.7% from 43.7% during the comparable
periods. The cost of products and services
as a percentage of net revenues decreased
primarily as a result of the impact of
a change in the relative mix of hardware
content of systems sales slightly offset
by higher labor costs. The mix of hardware
content included in systems sales each
quarter v
