UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-K

ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

 

(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, 2008

 

or

 

o

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)

 

 


 

18111 Von Karman Avenue, Suite 600, Irvine, California 92612


(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:


 

 

 

Common Stock, par value $.01 per share

 

Nasdaq Global Select Market

(Title of each class)

 

(Name of each exchange on which registered)


 

Securities registered pursuant to Section 12(g) of the Act:

 

None


(Title of class)

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o  No x

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

          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 o

          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

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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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o      Accelerated Filer x        Non-Accelerated Filer o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

          The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2007: $640,154,000 (based on the closing sales price of the Registrant’s common stock as reported in the NASDAQ National Market System on that date, $36.63 per share).* (1)

          The Registrant has no non-voting common equity.

          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

 

27,454,221


 


(Class)

 

(Outstanding at June 1, 2008)

          * 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.

          (1)      On January 31, 2006, the registrant declared a 2-for-1 stock split with respect to its outstanding shares of common stock for shareholders of record on March 3, 2006. On February 2, 2005, the registrant declared a 2-for-1 stock split with respect to its outstanding shares of common stock for shareholders of record on March 4, 2005. All share prices and share amounts set forth herein have been retroactively adjusted to reflect such stock splits.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K:

Proxy Statement for the 2008 Annual Meeting of Stockholders — Part III Items 10, 11, 12, 13 and 14.

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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 (“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.

Forward-looking statements 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, the risk factors discussed in Item 1A of this report as well as factors discussed elsewhere in this and other reports and documents we file with the 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 unless required by law. Interested persons are urged to review the risks described under Item 1A. “Risk Factors” and in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in our other public disclosures and filings with the Commission.

PART I

 

 

ITEM 1.

BUSINESS

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, “our 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.

Quality Systems, Inc., 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 UNIX1 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 that 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


1 UNIX is a registered trademark of the AT&T Corporation.

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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. Adoption rates for this software, commonly referred to as clinical software, are relatively low. 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 client practices utilize at least some of these services from us or one of our competitors. Other EDI/connectivity services are used more sporadically by client practices. We typically compete to displace incumbent vendors for claims and statements accounts, and attempt to increase usage of other elements in our EDI/connectivity product line. In general, EDI services are only sold to those accounts utilizing software from one of our divisions.

The NextGen Division also offers Revenue Cycle Management (RCM) services under the Practice Solutions name. Services provided through the Practice Solutions/RCM unit consist primarily of billing and collections services for medical practices. The Practice Solutions unit utilizes NextGen EPM software to a significant extent.

The QSI Division’s practice management software suite utilizes a UNIX operating system. Its Clinical Product Suite (CPS) utilizes a Windows NT2 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®3 product name. Major product categories of the NextGen suite include Electronic Medical Records (NextGenemr), Enterprise Practice Management (NextGenepm), Enterprise Appointment Scheduling (NextGeneas), Enterprise Master Patient Index (NextGenepi), NextGen Image Control System (NextGenics), Managed Care Server (NextGenmcs), Electronic Data Interchange, System Interfaces, Internet Operability (NextGenweb), a Patient-centric and Provider-centric Web Portal solution (NextMD4.com), NextGen Express, a version of NextGenemr designed for small practices and NextGen Community Health Solution (NextGenchs). 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 91.4% of our revenue for fiscal year 2008 compared to 89.4% in fiscal year 2007. Inclusive of divisional EDI revenue, the QSI Division accounted for 8.6% and 10.6% of revenue in fiscal year 2008 and 2007, respectively. The NextGen Division’s revenue grew at 21.3% and 35.5% in fiscal year 2008 and 2007, respectively, while the QSI Division’s revenue decreased by 3.3% and increased by 6.7% in fiscal year 2008 and 2007, 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.

On May 20, 2008, the Company acquired Lackland Acquisition II, LLC dba Healthcare Strategic Initiatives (HSI). The acquisition resulted in HSI becoming a wholly owned subsidiary of QSI. We plan to operate HSI as a stand alone Company within the NextGen Division.


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.

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HSI is a full-service healthcare revenue management company servicing the revenue cycle management needs of physician groups and a variety of other healthcare clients. HSI has historically and primarily focused on assisting its clients in increasing the accuracy and speed of client billing and collections activities.

Industry Background

To compete in the continually changing healthcare environment, providers are increasingly using technology to help maximize the efficiency of their business practices, to assist in enhancing patient care, and to maintain the privacy of patient information.

As the reimbursement environment continues to evolve, more healthcare providers enter into contracts, often with multiple entities, which define the terms under which care is administered and paid for. The diversity of payor organizations, as well as additional government regulation and changes in reimbursement models, have greatly increased the complexity of pricing, billing, reimbursement, and records management for medical and dental practices. To operate effectively, healthcare provider organizations must efficiently manage patient care and other information and workflow processes which increasingly extend across multiple locations and business entities.

In response, healthcare provider organizations have placed increasing demands on their information systems. Initially, these information systems automated financial and administrative functions. As it became necessary to manage patient flow processes, the need arose to integrate “back-office” data with such clinical information as patient test results and office visits. We believe 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.

Our Strategy

Our strategy is, at present, to focus on providing software and services to medical and dental practices. Among the key elements of this strategy are:

 

 

Continued development and enhancement of select software solutions in target markets;

 

 

Continued investments in our infrastructure including but not limited to product development, sales, marketing, implementation, and support;

 

 

Continued efforts to make infrastructure investments within an overall context of maintaining reasonable expense discipline;

 

 

Addition of new customers through maintaining and expanding sales, marketing and product development activities; and

 

 

Expanding our relationship with existing customers through delivery of new products and services.

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

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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 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. 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 multi-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:

 

 

Electronic charting of dental procedures, treatment plans and existing conditions;

 

 

Periodontal charting via light-pen, voice-activation, or keyboard entry for full periodontal examinations and PSR scoring;

 

 

Digital imaging of X-ray and intra-oral camera images;

 

 

Computer-based patient education modules, viewable chair-side to enhance case presentation;

 

 

Full access to patient information, treatment plans, and insurance plans via a fully integrated interface with our dental practice management product; and

 

 

Document and image scanning for digital storage and linkage to the electronic patient record.

The result is a comprehensive clinical information management system that helps practices save time, reduce costs, improve case presentation, and enhance the delivery of dental services and quality of care. Clinical information is managed and maintained electronically thus forming an electronic patient record that allows for the implementation of the “chartless” office.

CPS incorporates Windows-based client-server technology consisting of one or more file servers together with any combination of one or more desktop, laptop, or pen-based PC workstations. The file server(s) used in connection with CPS utilize(s) a Windows NT or Windows 2000 or Windows XP operating system and the hardware is typically a Pentium[7]-based single or multi-processor platform. Based on the server configuration chosen, CPS is scalable from one to hundreds of workstations. A typical configuration may also include redundant disk storage, magnetic tape units, intra- and extra-oral cameras, digital X-ray components, digital scanners, conventional and flat screen displays, and printers. The hardware components, including the requisite operating system licenses, are purchased from third party manufacturers or distributors either directly by the customer or by us for resale to the customer.


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.

8 Microsoft and SQL Server is a registered trademark of Microsoft Corporation.

9 Oracle is a registered trademark of Oracle Corporation.

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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 thousands of workstations.

NextGen EMR stores and maintains clinical data including:

 

 

Data captured using user-customizable input “templates”;

 

 

Scanned or electronically acquired images, including X-rays and photographs;

 

 

Data electronically acquired through interfaces with clinical instruments or external systems;

 

 

Other records, documents or notes, including electronically captured handwriting and annotations; and

 

 

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 Express is a version of NextGen EMR designed for small practices.

The NextGen Division also markets NextGen® Community Health Solution (NextGen CHS). NextGen CHS facilitates cross-enterprise data sharing, enabling individual medical practices in a given community to selectively share critical data such as demographics, referrals, medications lists, allergies, diagnoses, lab results, histories and more. This is accomplished through a secure, community-wide data repository that links health care providers, whether they have the NextGen® Electronic Medical Record (NextGen® EMR) system, another compatible EMR system, or no EMR, together with hospitals, payors, labs and other entities. The product is designed to facilitate a Regional Health Information Organization, or “RHIO.” The result is that for every health care encounter in the community, a patient-centric and complete record is accessible for the provider. The availability, currency and completeness of information plus the elimination of duplicate data entry can lead to significantly improved patient safety, enhanced decision making capabilities, time efficiencies and cost savings.

NextGen also markets revenue cycle management services through our Practice Solutions unit. This service provides billing services to solo and group practices.

Connectivity Services. We make available 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:

 

 

Electronic claims submission through our relationships with a number of payors and national claims clearinghouses;

 

 

Electronic patient statement processing, appointment reminder cards and calls, recall cards, patient letters, and other correspondence;

 

 

Electronic insurance eligibility verification; and

 

 

Electronic posting of remittances from insurance carriers into the accounts receivable application.

Revenue Cycle Management Services Our Nextgen Practice Solutions unit offers revenue cycle management services to physicians. On May 20, 2008, we acquired HSI, a full-service healthcare revenue management company servicing the revenue cycle management needs of physician groups and a variety of other healthcare clients. HSI has historically and primarily focused on assisting its clients in increasing the accuracy and speed of client billing and collections activities.


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Internet Applications. Our NextGen Division maintains an Internet-based patient health portal, NextMD®. NextMD is a vertical portal for the healthcare industry, linking patients with their physicians, 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, integrating a number of these features with physicians’ existing systems.

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, 2008, 2007 and 2006.

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 can be performed on the prospective clients’ premises, or 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 six to twenty four 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 normally receive up-front licensing fees. Clients have the option to purchase maintenance services which, if purchased, are invoiced on a monthly, quarterly or annual 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 timeshare 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.

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 adversely affect us. No client accounted for ten percent or more of net revenue during the fiscal years ended March 31, 2008, 2007, or 2006. However, one client did represent approximately 12.5% of gross accounts receivable as of March 31, 2007.

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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, quarterly or annual 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.

In addition, NextGen E-learning is an on-line learning subscription service which allows end users to train on the software on the internet. E-learning allows end users to self manage their own learning with their personal learning path. The service allows users to track the status of courses taken.

At present, our training facilities are located in (i) Horsham, Pennsylvania, (ii) Atlanta, Georgia, (iii) Dallas, Texas and (iv) Irvine, California.

Competition

The markets for healthcare information systems are intensely competitive. The industry is highly fragmented and includes numerous competitors, none of which we believe dominates these markets. The electronic patient records and connectivity markets, in particular, are subject to rapid changes in technology, and we expect that competition in these market segments will increase as new competitors enter the market. We believe our principal competitive advantages are the features and capabilities of our products and services, our high level of customer support, and our extensive experience in the industry.

Product Enhancement and Development

The healthcare information management and computer software and hardware industries are characterized by rapid technological change requiring us to engage in continuing investments to update, enhance, and improve our systems. During fiscal years 2008, 2007, and 2006, we expended approximately $17.4 million, $15.2 million, and $11.4 million, respectively, on research and development activities, including capitalized software amounts of $6.0 million, $5.0 million, and $3.3 million, respectively. In addition, a portion of our product enhancements have resulted from software development work performed under contracts with our clients.

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Employees

As of June 1, 2008, we employed 704 persons, of which 692 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.

 

 

ITEM 1A.

RISK FACTORS

The more prominent risks and uncertainties inherent in our business are described below. However, additional risks and uncertainties may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations will likely suffer. Any of these or other factors could harm our business and future results of operations and may cause you to lose all or part of your investment.

We face significant, evolving competition which, if we fail to properly address, could adversely affect our business, results of operations, financial condition and price of our stock. 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. There has been significant merger and acquisition activity among a number of our competitors in recent years. Transaction induced pressures, or other related factors may result in price erosion or other negative market dynamics that could adversely affect our business, results of operations, financial condition and price of our stock.

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 adversely affect 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 adversely affect our business, results of operations and financial condition. If new systems sales do not materialize, our near term and longer term revenue will be adversely affected.

The unpredictability of our quarterly operating results may cause the price of our common stock to fluctuate or decline. Our revenue 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 specific mix of software, hardware, and services in client orders;

 

 

the length of sales cycles and installation processes;

 

 

the ability of our clients to obtain financing for the purchase of our products;

 

 

changes in pricing policies or price reductions by us or our competitors;

 

 

the timing of new product announcements and product introductions by us or our competitors;

 

 

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;

 

 

the availability and cost of system components;

 

 

the financial stability of clients;

 

 

market acceptance of new products, applications and product enhancements;

 

 

our ability to develop, introduce and market new products, applications and product enhancements;

 

 

our success in expanding our sales and marketing programs;

 

 

deferrals of client orders in anticipation of new products, applications, product enhancements, or public/private sector initiatives;

 

 

accounting policies concerning the timing of the recognition of revenue;

 

 

execution of or changes to our strategy;

 

 

personnel changes; and

 

 

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

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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 adversely affect 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 after 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 six to twenty four 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 Statement of Position (SOP) 97-2, as modified by SOP 98-9 and Staff Accounting Bulletin (SAB) 104. SAB 104 summarizes the staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements.

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 adversely affect our 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 adversely affected.

The failure of auction rate securities to sell at their reset dates could impact the liquidity of the investment and could negatively impact the carrying value of the investment. The Company’s investments includes auction rate securities. Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with longer contractual maturities that range, for our holdings, from nine to 28 years. At the end of each reset period, investors can typically sell at auction or continue to hold the securities at par. These securities are subject to fluctuations in interest rate depending on the supply and demand at each auction. Through March 31, 2008, auctions held for the Company’s auction rate securities with a total aggregate value of approximately $23.0 million failed. As of March 31, 2008, the Company was holding a total of approximately $22.6 million, net of unrealized loss, in auction rate securities. While these debt securities are all highly-rated investments, generally with AAA/Aaa ratings, continued failure to sell at their reset dates could impact the liquidity of the investment which in turn could negatively impact the liquidity of the Company. In addition, continued failure to sell at their reset dates could also negatively impact the carrying value of the investment which resulted in temporary impairment losses in the current period and could lead to permanent impairment charges in future periods should a decline in the value of those securities be other than temporary, which could have a material adverse effect on our financial position and results of operations.

Our common stock price has been volatile, which could result in substantial losses for investors purchasing shares of our common stock and in litigation against us. Volatility may be caused by a number of factors including but not limited to:

 

 

actual or anticipated quarterly variations in operating results;

 

 

rumors about our performance, software solutions, or merger and acquisition activity;

 

 

changes in expectations of future financial performance or changes in estimates of securities analysts;

 

 

governmental regulatory action;

 

 

health care reform measures;

 

 

client relationship developments;

 

 

purchases or sales of company stock;

 

 

activities by one or more of our major shareholders concerning our policies and operations;

 

 

changes occurring in the markets in general; and

 

 

other factors, many of which are beyond our control.

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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.

Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

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 36% of the outstanding shares of our common stock at March 31, 2008. Our Bylaws permit our shareholders to cumulate their votes, the effect of which is to provide shareholders with sufficiently large concentrations of our shares the opportunity to assure themselves one or more seats on our 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, the number of “broker non-votes”, 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 36% of the outstanding shares of our common stock at March 31, 2008 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.

If our principal products and our new product development fail to meet the needs of our clients, we may fail to realize future growth. We currently derive substantially all of our net revenue from sales of our healthcare information systems and related services. We believe that a primary factor in the market acceptance of our systems has been our ability to meet the needs of users of healthcare information systems. Our future financial performance will depend in large part on our ability to continue to meet the increasingly sophisticated needs of our clients through the timely development and successful introduction and implementation of new and enhanced versions of our systems and other complementary products. We have historically expended a significant percentage of our net revenue on product development and believe that significant continuing product development efforts will be required to sustain our growth. Continued investment in our sales staff and our client implementation and support staffs will also be required to support future growth.

There can be no assurance that we will be successful in our product development efforts, that the market will continue to accept our existing products, or that new products or product enhancements will be developed and implemented in a timely manner, meet the requirements of healthcare providers, or achieve market acceptance. If new products or product enhancements do not achieve market acceptance, our business, results of operations and financial condition could be 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 or continue to maintain 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, which may force us to adjust our sales, marketing and pricing strategies. We currently derive substantially all of our systems revenue

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from traditional software license, implementation and training fees, as well as the resale of computer hardware. Today, the majority of our customers pay an initial license fee for the use of our products, in addition to a periodic maintenance fee. If the marketplace increasingly 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 adversely affect 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.

Many of our competitors have greater resources than we do. In order to compete successfully, we must keep pace with our competitors in anticipating and responding to the rapid changes involving the industry in which we operate, or our business, results of operations and financial condition may be adversely affected. 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 shortfall 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 adversely affected.

In response to increasing market demand, we are currently developing new generations of certain of our software products. There can be no assurance that we will successfully develop these new software products or that these products will operate successfully, or that any such development, even if successful, will be completed concurrently with or prior to introduction of competing products. Any such failure or delay could adversely affect our competitive position or could make our current products obsolete.

We face risk and/or the possibility of claims from activities related to strategic partners, which 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 rely on third parties to provide services that affect 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. These third parties could raise their prices and/or be acquired by competitors of our which could potentially create short and long-term disruptions to our business negatively impacting our revenue, profit and/or stock price. 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 face the possibility of claims based upon our website, which may cause us expense and management distraction. We could be subject to third party claims based on the nature and content of information supplied on our website 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 website or third party websites linked from our website or through content and information that may be posted by users in chat rooms, bulletin boards or on websites 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 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. On May 20, 2008, we acquired Lackland Acquisition II, LLC dba Healthcare Strategic Initiatives (HSI), a full-service healthcare revenue management company servicing healthcare clients. The specific risks we may encounter in these types of transactions include but are not limited to the following:

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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;

 

 

use of cash as acquisition currency may adversely affect interest or investment income, thereby potentially adversely affecting our earnings and /or earnings per share;

 

 

difficulty in effectively integrating any acquired technologies or software products into our current products and technologies;

 

 

difficulty in predicting and responding to issues related to product transition such as development, distribution and customer support;

 

 

the possible adverse effect of such acquisitions on existing relationships with third party partners and suppliers of technologies and services;

 

 

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;

 

 

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, including any deficiencies in internal controls and procedures and the costs associated with remedying such deficiencies;

 

 

difficulty in integrating acquired operations due to geographical distance, and language and cultural differences; and

 

 

the possibility that acquired assets become impaired, requiring us to take a charge to earnings which could be significant.

A failure to successfully integrate acquired businesses or technology for any of these reasons could have an adverse effect on our results of operations.

We face the risks and uncertainties that are associated with litigation against us, which may adversely impact our marketing, distract management and have a negative impact upon our business, results of operations and financial condition. We face the risks associated with litigation concerning the operation of our business. The uncertainty associated with substantial unresolved litigation may have an adverse effect 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 an 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.

Because we believe that proprietary rights are material to our success, misappropriation of these rights could adversely affect our financial condition. 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 our management and adversely affect 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.

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If we are deemed to infringe on the proprietary rights of third parties, we could incur unanticipated expense and be prevented from providing our products and services. We are and may continue to be subject to intellectual property infringement claims as the number of our competitors grows and our applications’ functionality is viewed as similar or overlapping with competitive products. We do not believe that we have infringed or are infringing on any proprietary rights of third parties. However, claims are occasionally asserted against us, and we cannot assure you that infringement claims will not be asserted against us in the future. Also, we cannot assure you that any such claims will be unsuccessful. We could incur substantial costs and diversion of management resources defending any infringement claims – even if we are ultimately successful in the defense of such matters. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all.

We are dependent on our license rights and other services from third parties, which may cause us to discontinue, delay or reduce product shipments. We depend upon licenses for some of the technology used in our products as well as other services from third-party vendors. Most of these arrangements can be continued/renewed only by mutual consent and may be terminated for any number of reasons. We may not be able to continue using the products or services made available to us under these arrangements on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce product shipments or services provided until we can obtain equivalent technology or services. Most of our third-party licenses are non-exclusive. Our competitors may obtain the right to use any of the business elements covered by these arrangements and use these elements to compete directly with us. In addition, if our vendors choose to discontinue providing their technology or services in the future or are unsuccessful in their continued research and development efforts, we may not be able to modify or adapt our own products.

We face the possibility of damages resulting from internal and external security breaches, and viruses. In the course of our business operations, we compile and transmit confidential information, including patient health information, in our processing centers and other facilities. A breach of security in any of these facilities could damage our reputation and result in damages being assessed against us. In addition, the other systems with which we may interface, such as the Internet and related systems may be vulnerable to security breaches, viruses, programming errors, or similar disruptive problems. The effect of these security breaches and related issues could 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 our, 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, and which may diminish Internet usage and availability as well as access to our website. 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

15



other website operators may obstruct or diminish access to our website by our customers resulting in a loss of potential or existing users of our services.

Our failure to manage growth could harm our business, results of operations and financial condition. 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 an 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 an 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 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 an 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, which could have an adverse effect on our business, results of operations and financial condition. 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 an 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:

 

 

state and federal privacy and confidentiality laws;

 

 

our contracts with customers and partners;

 

 

state laws regulating healthcare professionals;

 

 

Medicaid laws;

 

 

the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and related rules proposed by the Health Care Financing Administration; and

 

 

Health Care Financing Administration standards for Internet transmission of health data.

The Health Insurance Portability and Accountability Act of 1996 establishes elements including, but not limited to, 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.

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Although we have systems and policies in place for safeguarding Protected Health Information from unauthorized disclosure, these systems and policies may not preclude claims against us for alleged violations of applicable requirements. Also, third party sites and/or links that consumers may access through our web sites may not maintain adequate systems to safeguard this information, or may circumvent systems and policies we have put in place. In addition, future laws or changes in current laws may necessitate costly adaptations to our policies, procedures, or systems.

There can be no assurance that we will not be subject to product liability claims, that such claims will not result in liability in excess of our insurance coverage, that our insurance will cover such claims or that appropriate insurance will continue to be available to us in the future at commercially reasonable rates. Such product liability claims could adversely affect our business, results of operations and financial condition.

We are subject to the effect of payor and provider conduct which we cannot control and accordingly, there is no assurance that revenues for our services will continue at historic levels. 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. As a result of this, or other market factors, we are unable to ensure 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 payors could adversely affect our transaction volume and financial results. In addition, we cannot provide assurance that we will be able to maintain our existing 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, which may adversely impact our business, financial condition and results of operations. 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 effect, if any, such proposals or healthcare reforms might have on our business, financial condition and results of operations.

As existing 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 effect at this time. We have taken steps to modify our products, services and internal practices as necessary to facilitate our compliance with the 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 divert other company resources, and any noncompliance by us could result in civil and criminal penalties.

In addition, developments of additional federal and state regulations and policies have the potential to positively or negatively affect our business.

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In addition, our software may potentially be subject to regulation by the U.S. Food and Drug Administration (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 adversely affect our business, financial condition and results of operations.

We may be subject to false or fraudulent Claim Laws. There are numerous federal and state laws that forbid submission of false information or the failure to disclose information in connection with submission and payment of physician claims for reimbursement. In some cases, these laws also forbid abuse of existing systems for such submission and payment. Any failure of our revenue cycle management services to comply with these laws and regulations could result in substantial liability, including but not limited to criminal liability, could adversely affect demand for Our services and could force us to expend significant capital, research and development and other resources to address the failure. Errors by us or our systems with respect to entry, formatting, preparation or transmission of claim information may be determined or alleged to be in violation of these laws and regulations. Determination by a court or regulatory agency that Our services violate these laws could subject us to civil or criminal penalties, could invalidate all or portions of some of our client contracts, could require us to change or terminate some portions of Our business, could require us to refund portions of our services fees, could cause us to be disqualified from serving clients doing business with government payers and could have an adverse effect on our business.

In most cases where we are permitted to do so, HSI calculates charges for our services based on a percentage of the collections that our clients receive as a result of our services. To the extent that violations or liability for violations of these laws and regulations require intent, it may be alleged that this percentage calculation provides the Company or it’s employees with incentive to commit or overlook fraud or abuse in connection with submission and payment of reimbursement claims. The U.S. Centers for Medicare and Medicaid Services has stated that it is concerned that percentage-based billing services may encourage billing companies to commit or to overlook fraudulent or abusive practices.

A portion of our business involves billing of Medicare claims on behalf of its clients. In an effort to combat fraudulent Medicare claims, the federal government offers rewards for reporting of Medicare fraud which could encourage others to subject us to a charge of fraudulent claims, including charges that are ultimately proven to be without merit.

If our products fail to comply with evolving government and industry standards and regulations, we may have difficulty selling our products. 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.

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We are subject to changes in and interpretations of financial accounting matters that govern the measurement of our performance, one or more of which could adversely affect our business, financial condition, cash flows, revenue and results of operations. 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 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 changes in our revenue recognition and/or other accounting policies and practices that could adversely affect our business, financial condition, cash flows, revenue and results of operations.

If material weaknesses in our internal controls are identified by ourselves or our independent auditors, our per share price may be adversely affected. Any material weaknesses identified in our internal controls as part of the ongoing 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.

No evaluation process can provide complete assurance that our internal controls will detect and correct all failures within our 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, through either organic growth or through acquisitions (or both), the challenges involved in implementing appropriate controls will increase and may require that we evolve some or all of our internal control processes.

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.

Continuing worldwide political and economic uncertainties may adversely affect our revenue and profitability. The last several years have been periodically marked by concerns including but not limited to inflation, decreased consumer confidence, the lingering effects of international conflicts, energy costs and terrorist and military activities. These conditions can 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 stock splits is uncertain. While we effected a 2:1 split of our stock in March 2005 and a second 2:1 stock split in March 2006, there can be no assurance that another stock split will occur in the future. Unfulfilled expectations to the contrary could adversely affect the price of our stock.

Our future policy concerning the payment of dividends is uncertain, which could adversely affect the price of our stock. We have announced our intention to pay a quarterly dividend commencing with the conclusion of our first fiscal quarter of 2008 (June 30, 2007) and pursuant to this policy the Board has declared a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, each quarter thereafter. We anticipate that future quarterly dividends, if and when declared by the Board pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of October, January, April and July. There can be no guarantees that we will have the financial wherewithal to fund this dividend in perpetuity or to pay it at historic rates. Further, the Board may decide not to pay the dividend at some future time for financial or non-financial reasons. Unfulfilled expectations regarding future dividends could adversely affect the price of our stock.

 

 

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

 

None.

 

 

 

ITEM 2.

PROPERTIES

Our principal administrative, accounting and QSI Division operations are located in Irvine, California, under a lease that commenced in May 2005, and expired in May 2008. We leased approximately 12,000 square feet of space at this location. In October 2007, we executed a

19



lease for approximately 24,000 square feet where our principal administrative, accounting and QSI Division operations will reside after May 2008. This lease expires in May 2013.

In September 2005, we executed a lease for approximately 3,300 square feet of space in a building adjacent to our corporate office in Irvine to house additional corporate staff and NextGen training operations. This lease originally expires in January 2011, however, this lease will terminate early in December 2008 and the NextGen training center along with the additional corporate staff will move to the new corporate headquarters described above.

We lease approximately 78,000 square feet of space for the principal office of our NextGen Division in Horsham, Pennsylvania. This lease expires in March 2011. In January 2007, we executed a new lease for approximately 35,000 square feet of space for the NextGen Division in Atlanta, Georgia. This lease expires in October 2011. In May 2006, we executed a lease for approximately 3,000 square feet of space in Dallas, Texas for NextGen staff and a new NextGen training facility. In addition, we lease approximately 6,000 square feet of space in Santa Ana, California, to house our assembly and warehouse operations of the QSI Division. We also have an aggregate of approximately 3,000 square feet of space in Minnesota, 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 October 2011. Should we continue to grow, we may be required to lease additional space. We believe that suitable additional or substitute space is available, if needed, at market rates.

As a result of our acquisition of HSI on May 20, 2008, we lease approximately 46,400 square feet for our HSI operations in St. Louis, Missouri under leases that expire in November 2010.

 

 

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 currently pending matters has yet to be determined, we do not presently believe that their outcome will adversely affect our financial position, results of operations or liquidity.

 

 

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 2008.

PART II

 

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Price and Holders

Our common stock is traded on the Nasdaq Global Select Market under the symbol “QSII.” The following table sets forth for the quarters indicated the high and low sales prices for each period indicated as reported on the Nasdaq Global Select Market and reflects all stock splits effected.

 

 

 

 

 

 

 

 

Quarter Ended

 

High

 

Low

 


 


 


 

 

 

 

 

 

 

June 30, 2006

 

$

38.27

 

$

28.30

 

September 30, 2006

 

$

42.00

 

$

30.43

 

December 31, 2006

 

$

43.68

 

$

34.75

 

March 31, 2007

 

$

45.44

 

$

36.85

 

June 30, 2007

 

$

42.44

 

$

36.96

 

September 30, 2007

 

$

45.35

 

$

32.37

 

December 31, 2007

 

$

38.99

 

$

26.08

 

March 31, 2008

 

$

36.30

 

$

26.90

 

At June 1, 2008, there were approximately 90 holders of record of our common stock.

20



Dividends and Splits

On January 30, 2008, the Board approved a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of March 14, 2008 and was distributed to shareholders on or about April 7, 2008.

On October 25, 2007, the Board approved a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of December 14, 2007 and was distributed to shareholders on or about January 7, 2008.

On July 31, 2007, our Board of Directors approved a regular quarterly dividend of $0.25 per share payable on its outstanding shares of common stock. The cash dividend record date was September 14, 2007 and was distributed to shareholders on or about October 5, 2007.

On May 31, 2007, the Board declared a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of June 15, 2007 and was distributed to shareholders on July 5, 2007.

In February 2007, we paid a $1.00 per share dividend on shares of our common stock. The record date for the dividend was February 13, 2007.

In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend of $0.25 per share on our outstanding common stock commencing with conclusion of our first fiscal quarter of 2008 (June 30, 2007) and continuing each fiscal quarter thereafter, subject to further Board review and approval and establishment of record and distribution dates by our Board of Directors prior to the declaration of each such quarterly dividend. We anticipate that future quarterly dividends, if and when declared by the Board pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of October, January, April and July.

In March 2006, we paid a $0.875 per share dividend on shares of our common stock. The record date for the dividend was February 24, 2006. The dividend per share amount has been adjusted to reflect the stock split noted above.

In January 2006, we announced that our 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 3, 2006. The stock began trading post split on March 27, 2006.

In March 2005, we paid a one-time dividend on shares of our common stock equal to $0.75 per share. The record date for the dividend was February 24, 2005. The dividend per share amount has been adjusted to reflect the stock split noted above.

In February 2005, we announced that our Board of Directors declared a 2-for-1 stock split with respect to our outstanding shares of common stock. The stock split record date was March 4, 2005 and the stock began trading post split on March 28, 2005.

Payment of future dividends, if any, will be at the discretion of our Board after taking into account various factors, including without limitation, our financial condition, operating results, current and anticipated cash needs and plans for expansion.

Performance Graph

The following graph compares the cumulative total returns of our common stock, the Total Return Index for The Nasdaq Stock Market, and the Nasdaq Computer & Data Processing Services Stock Index over the five-year period ended March 31, 2008 assuming $100 was invested on March 31, 2003 with all dividends, if any, reinvested. This performance graph shall not be deemed to be “soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended or the Exchange Act.

21



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Quality Systems, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index

(LINE GRAPH)

 

 

 

* $100 invested on 3/31/03 in stock or index-including reinvestment of dividends.

 

Fiscal year ending March 31.

The last trade price of our common stock on each of March 31, 2004, 2005, 2006, 2007 and 2008 was published by Nasdaq and, accordingly for the periods ended March 31, 2004, 2005, 2006, 2007 and 2008 the reported last trade price was utilized to compute the total cumulative return for our common stock for the respective periods then ended. Shareholder returns over the indicated periods should not be considered indicative of future stock prices or shareholder returns.

Recent Sales of Unregistered Securities

We did not make any unregistered sales of our common stock during the fourth quarter of 2008.

 

 

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, 2008 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. All share prices in the table below have been retroactively adjusted to reflect the fiscal year 2006 and 2005 stock splits.

22


Consolidated Financial Data

(In Thousands, Except Per Share Data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31,

 




 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 










 

 

Statements of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

186,500

 

$

157,165

 

$

119,287

 

$

88,961

 

$

70,934

 

Cost of revenue

 

 

62,501

 

 

50,784

 

 

39,828

 

 

32,669

 

 

28,673

 

 

 















 

Gross profit

 

 

123,999

 

 

106,381

 

 

79,459

 

 

56,292

 

 

42,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

53,260

 

 

45,337

 

 

35,554

 

 

24,776

 

 

19,482

 

Research and development costs

 

 

11,350

 

 

10,166

 

 

8,087

 

 

6,903

 

 

6,139

 

 

 















 

Income from operations

 

 

59,389

 

 

50,878

 

 

35,818

 

 

24,613

 

 

16,640

 

Interest income

 

 

2,661

 

 

3,306

 

 

2,108

 

 

876

 

 

386

 

Other income

 

 

953

 

 

 

 

 

 

 

 

 

 

 















 

 

Income before provision for income taxes

 

 

63,003

 

 

54,184

 

 

37,926

 

 

25,489

 

 

17,026

 

Provision for income taxes

 

 

22,925

 

 

20,952

 

 

14,604

 

 

9,380

 

 

6,626

 

 

 















 

Net income

 

$

40,078

 

$

33,232

 

$

23,322

 

$

16,109

 

$

10,400

 

 

 















 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

1.47

 

$

1.24

 

$

0.88

 

$

0.63

 

$

0.42

 

Diluted net income per share

 

$

1.44

 

$

1.21

 

$

0.85

 

$

0.61

 

$

0.40

 

Basic weighted average shares outstanding

 

 

27,298

 

 

26,882

 

 

26,413

 

 

25,744

 

 

24,872

 

Diluted weighted average shares outstanding

 

 

27,770

 

 

27,550

 

 

27,356

 

 

26,406

 

 

25,932

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

59,046

 

$

60,028

 

$

57,255

 

$

51,157

 

$

51,395

 

Working capital

 

$

79,932

 

$

76,616

 

$

61,724

 

$

55,111

 

$

53,415

 

Total assets

 

$

187,908

 

$

150,681

 

$

122,247

 

$

99,442

 

$

86,678

 

Total liabilities

 

$

74,203

 

$

59,435

 

$

49,838

 

$

36,711

 

$

25,673

 

Total shareholders’ equity

 

$

113,705

 

$

91,246

 

$

72,409

 

$

62,731

 

$

61,005

 

23



 

 

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for the historical information contained herein, the matters discussed in this Annual Report on Form 10-K, including discussions of our product development plans, business strategies and market factors influencing our results, may include forward-looking statements that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but not limited to, our ability to continue to develop new products and increase systems sales in markets characterized by rapid technological evolution, consolidation, and competition from larger, better capitalized competitors. Many other economic, competitive, governmental and technological factors could affect our ability to achieve our goals, and interested persons are urged to review the risks described in “Item 1A. Risk Factors” as set forth above, as well as in our other public disclosures and filings with the Commission.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and related notes thereto included elsewhere in this Report. Historical results of operations, percentage 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 and Estimates

The discussion and analysis of our consolidated financial statements 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 consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate estimates, including but not limited to those related to revenue recognition, uncollectible accounts receivable, and income taxes 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 may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe revenue recognition, valuation of marketable securities, the allowance for doubtful accounts, capitalized software costs, share-based compensation and income taxes are among the most critical accounting policies that affect 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. We currently recognize revenue pursuant to SOP 97-2, as amended by SOP 98-9. We generate revenue from the sale of licensing rights to use our software products sold directly to end-users and value-added resellers (VARs). We also generate revenue from sales of hardware and third party software, and implementation, training, software customization, EDI, post-contract support (“maintenance”) and other services performed for customers who license our products.

A typical system contract contains multiple elements of the above items. SOP 97-2, as amended, requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of those elements. The fair value of an element must be based on vendor specific objective evidence (VSOE). We limit our assessment of VSOE for each element to either the price charged when the same element is sold separately (using a rolling average of stand alone transactions) or the price established by management having the relevant authority to do so, for an element not yet sold separately. VSOE calculations are updated and reviewed at the end of each quarter or annually depending on the nature of the product or service.

When evidence of fair value exists for the delivered and undelivered elements of a transaction, then discounts for individual elements are aggregated and the total discount is allocated to the individual elements in proportion to the elements’ fair value relative to the total contract fair value.

When evidence of fair value exists for the undelivered elements only, the residual method, provided for under SOP 98-9, is used. Under the residual method, we defer revenue related to the undelivered elements in a system sale based on VSOE of fair value of each of the undelivered elements, and allocate the remainder of the contract price net of all discounts to revenue

24



recognized from the delivered elements. Undelivered elements of a system sale may include implementation and training services, hardware and third party software, maintenance, future purchase discounts, or other services. If VSOE of fair value of any undelivered element does not exist, all revenue is deferred until VSOE of fair value of the undelivered element is established or the element has been delivered.

We bill for the entire contract amount upon contract execution except for maintenance which is billed separately. Amounts billed in excess of the amounts contractually due are recorded in accounts receivable as advance billings. Amounts are contractually due when services are performed or in accordance with contractually specified payment dates. Provided the fees are fixed and determinable and collection is considered probable, revenue from licensing rights and sales of hardware and third party software is generally recognized upon shipment and transfer of title. In certain transactions whose collections risk is high, the cash basis method is used to recognize revenue. If the fee is not fixed or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be the lesser of the aggregate of amounts due and payable or the amount of the arrangement fee that would have been recognized if the fees were being recognized using the residual method. Fees which are considered fixed or determinable at the inception of our arrangements must include the following characteristics:

 

 

§

The fee must be negotiated at the outset of an arrangement, and generally be based on the specific volume of products to be delivered without being subject to change based on variable pricing mechanisms such as the number of units copied or distributed or the expected number of users.

 

 

§

Payment terms must not be considered extended. If a significant portion of the fee is due more than 12 months after delivery or after the expiration of the license, the fee is presumed not fixed and determinable.

Revenue from implementation and training services is recognized as the corresponding services are performed. Maintenance revenue is recognized ratably over the contractual maintenance period.

Contract accounting is applied where services include significant software modification, development or customization. In such instances, the arrangement fee is accounted for in accordance with Statement of Position No. 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (SOP 81-1).

Pursuant to SOP 81-1, we use the percentage of completion method provided all of the following conditions exist:

 

 

The contract includes provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement;

 

 

The customer can be expected to satisfy its obligations under the contract;

 

 

We can be expected to perform our contractual obligations; and

 

 

Reliable estimates of progress towards completion can be made.

We measure completion using labor input hours. Costs of providing services, including services accounted for in accordance with SOP 81-1, are expensed as incurred.

If a situation occurs in which a contract is so short term that the consolidated financial statements would not vary materially from using the percentage-of-completion method or in which we are unable to make reliable estimates of progress of completion of the contract, the completed contract method is utilized.

Product returns are estimated in accordance with Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (SFAS 48). The Company also ensures that the other criteria in SFAS 48 have been met prior to recognition of revenue:

 

 

§

The price is fixed or determinable;

 

 

§

The customer is obligated to pay and there are no contingencies surrounding the obligation or the payment;

 

 

§

The customer’s obligation would not change in the event of theft or damage to the product;

 

 

§

The customer has economic substance;

 

 

§

The amount of returns can be reasonably estimated; and

 

 

§

We do not have significant obligations for future performance in order to bring about resale of the product by the customer.

25



We have historically offered short-term rights of return of less than 30 days in certain sales arrangements. If we are able to estimate returns for these types of arrangements, revenue is recognized and these arrangements are recorded in the consolidated financial statements. If we are unable to estimate returns for these types of arrangements, revenue is not recognized in our consolidated financial statements until the rights of return expire.

Revenue related to sales arrangements which include the right to use software stored on the Company’s hardware are accounted for under the Emerging Issues Task Force Issue No. 00-3 “Application of AICPA Statement of Position 97-2 to arrangements that include the right to use software stored on another entity’s hardware”. EITF No. 00-3 requires that for software licenses and related implementation services to continue to fall under SOP No. 97-2, the customer must have the contractual right to take possession of the software without incurring a significant penalty and it must be feasible for the customer to either host the software themselves or through another third party. If an arrangement is not deemed to be accounted for under SOP 97-2, the entire arrangement is accounted for as a service contract in accordance with EITF Issue No. 00-21 “Revenue arrangements with multiple deliverables”. In that instance, the entire arrangement would be recognized as the hosting services are being performed.

From time to time, we offer future purchase discounts on our products and services as part of our sales arrangements. Pursuant to AICPA TPA 5100.51, discounts which are incremental to the range of discounts reflected in the pricing of the other elements of the arrangement, which are incremental to the range of discounts typically given in comparable transactions, and which are significant, are treated as an additional element of the contract to be deferred. Amounts deferred related to future purchase options are not recognized until either the customer exercises the discount offer or the offer expires.

Revenue is divided 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. The majority of the revenue in the system sales category is related to the sale of software. Revenue in the maintenance, EDI and other services category includes, maintenance, EDI, follow on training and implementation services, annual third party license fees and other revenue.

Valuation of marketable securities. Marketable securities are classified as available-for-sale and accordingly are recorded at fair value, based on quoted market rates or on valuation analysis when appropriate, with unrealized gains and losses reflected as a separate component of shareholders’ equity titled accumulated other comprehensive income (loss), net of tax, until realized or until a determination is made that an other-than-temporary decline in market value has occurred. Factors considered in assessing whether an other-than-temporary impairment has occurred include: the nature of the investment; whether the decline in fair value is attributable to specific adverse conditions affecting the investment; the financial condition of the investee; the severity and the duration of the impairment; and whether the Company has the ability to hold the investment to maturity. When it is determined that an other-than-temporary impairment has occurred, the investment is written down to its market value at the end of the period in which it is determined that an other-than-temporary decline has occurred. The cost of marketable securities sold is based upon the specific identification method. In addition, the Company classifies marketable securities as current or non-current based upon whether such assets are reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. Realized gains or losses and other-than-temporary declines in the fair value of marketable securities are determined on a specific identification basis and reported in interest and other income, net, as incurred.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We perform credit evaluations of our customers and maintain reserves for estimated credit losses. Reserves for potential credit losses are determined by establishing both specific and general reserves. Specific reserves are based on management’s estimate of the probability of collection for certain troubled accounts. General reserves are established based on our historical experience of bad debt expense and the aging of our accounts receivable balances net of deferred revenue and specifically reserved accounts. If the financial condition of our customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances would be required.

Software Development Costs. Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established with the completion of a working model of the enhancement or product, any additional development

26



costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (SFAS 86). Such capitalized costs are amortized on a straight line basis over the estimated economic life of the related product, which is generally three years. We perform an annual review of the recoverability of such 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.

Share-Based Compensation. On April 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (SFAS 123R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS 123R requires us to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. During fiscal year 2007 and 2008, we used the simplified method for estimating expected term equal to the midpoint between the vesting period and the contractual term. Prior to using the simplified method, we estimated the expected term of an option. We estimate volatility by using the weighted average historical volatility of our common stock, which we believe approximates expected volatility. The risk free rate is the implied yield available on the U.S Treasury zero-coupon issues with remaining terms equal to the expected term. The expected dividend yield is the average dividend rate during a period equal to the expected term of the option. Those inputs are then entered into the Black Scholes model to determine the estimated fair value. The value of the portion of the award that is expected to vest is recognized as expense over the requisite service period in our consolidated statement of income.

Research and Development Tax Credits. Management’s treatment of research and development tax credits represented a significant estimate which affected the effective income tax rate for the Company for the year ended March 31, 2008 and 2007. Research and development credits taken by the Company involve certain assumptions and judgments regarding qualified expenses under Internal Revenue Code Section 41. These credits are subject to examination by the federal and state taxing authorities.

During each of the years ended March 31, 2008 and 2007, we recognized approximately $0.8 million in credits related to research and development. The Company expects to capture this benefit on its tax returns.

Qualified Production Activities Deduction. Management’s treatment of this deduction represented an estimate that affected the effective income tax rate for the Company for the years ended March 31, 2008 and 2007. The deduction taken by the Company involved certain assumptions and judgments regarding the allocation of indirect expenses as prescribed under Internal Revenue Code Section 199.

During the years ended March 31, 2008 and 2007, we recognized approximately $3.1 million and $1.5 million, respectively, in deductions related to the qualified production activities deduction (QPAD) under Internal Revenue Code (IRS). The QPAD calculation was determined using interim guidance provided by proposed IRS Regulations and Notices. The Company expects to capture this benefit on its tax returns.

Overview of Our Results

 

Total Company revenue increased 18.7% and income from operations grew 16.7% on a consolidated basis for the year ended March 31, 2008. This performance was driven by growth in our NextGen Division, offset by decreases in revenue and operating income in our QSI Division and higher corporate expenses.

 

 

The year over year growth in revenue and operating income for the company during the year ended March 31, 2008 trailed the growth rates achieved during the year ended March 31, 2007 due in part to a shift in revenue mix for the year, with hardware and EDI revenue accounting for a comparatively higher percentage of revenue and system sales accounting for a comparatively lower percentage of revenue than the year prior.

 

 

We do not believe the mix changes represent a change in the overall purchasing environment. 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.

 

27


NextGen Division

 

 

NextGen Division revenue grew 21.3% and income from operations increased 18.2% for the year ended March 31, 2008.

 

 

The Divisions’ year over year growth in revenue and operating income for the Company during the year ended March 31, 2008 trailed the growth rates achieved during the year ended March 31, 2007 due in part to a shift in the revenue mix for the year, with hardware and EDI revenue accounting for a comparatively higher percentage of revenue and new systems sales accounting for a comparatively lower percentage of revenue than in the year prior.

 

 

Divisional headcount additions drove selling, general and administrative expenses to increase at a slightly faster pace than revenue as we added staffing resources to departments including sales, marketing, support, software development, and administration and intend to do so in fiscal year 2009, as business conditions and the hiring environment allow.

 

 

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

 

QSI Division revenue decreased 3.3% in the year ended March 31, 2008 and Divisional operating income decreased 16.6% (excluding unallocated corporate expenses) from the year ended March 31, 2007. Divisional revenue and operating income performance for the Division, while below fiscal year 2007 levels, were within the Division’s historical performance range.

 

 

A drop in annual revenue, slight changes in the Division’s sales mix in favor of lower margin hardware and EDI products, and additional compensation expenses related to the passing of the Division’s lead executive were the chief contributors to the operating income decline.

 

 

Our goals for the QSI Division include maximizing revenue and profit performance given the constraints present in the QSI Division’s target market.

The following table sets forth for the periods indicated the percentage of net revenue represented by each item in our consolidated statements of income.

28



 

 

 

 

 

 

 

 

(Unaudited)

 

Year Ended March 31,

 

 

 


 

 

 

2008

 

2007

 

2006

 

 

 


 


 


 

Revenues:

 

 

 

 

 

 

 

Software, hardware and supplies

 

40.9

%

43.8

%

46.0

%

Implementation and training services

 

7.2

 

7.8

 

9.5

 

 

 


 


 


 

System sales

 

48.1

 

51.6

 

55.5

 

 

 

 

 

 

 

 

 

Maintenance

 

30.3

 

26.7

 

26.1

 

Electronic data interchange services

 

12.0

 

10.8

 

11.1

 

Other services

 

9.6

 

10.9

 

7.3

 

 

 


 


 


 

Maintenance, EDI and other services

 

51.9

 

48.4

 

44.5

 

 

 

 


 


 


 

Total revenue

 

100.0

 

100.0

 

100.0

 

 

 


 


 


 

 

 

 

 

 

 

 

 

Cost of revenue:

 

 

 

 

 

 

 

Software, hardware and supplies

 

5.8

 

5.4

 

6.8

 

Implementation and training services

 

5.5

 

5.5

 

6.8

 

 

 


 


 


 

Total cost of system sales

 

11.3

 

10.9

 

13.6

 

 

 

 

 

 

 

 

 

Maintenance

 

6.7

 

7.5

 

9.2

 

Electronic data interchange services

 

8.5

 

7.7

 

7.2

 

Other services

 

7.0

 

6.2

 

3.4

 

 

 


 


 


 

Total cost of maintenance, EDI and other services

 

22.2

 

21.4

 

19.8

 

 

 

 


 


 


 

Total cost of revenue

 

33.5

 

32.3

 

33.4

 

 

 


 


 


 

 

Gross profit

 

66.5

 

67.7

 

66.6

 

 

 


 


 


 

 

Selling, general and administrative

 

28.6

 

28.8

 

29.8

 

Research and development

 

6.1

 

6.5

 

6.8

 

 

 


 


 


 

 

Income from operations

 

31.8

 

32.4

 

30.0

 

 

 


 


 


 

 

Interest income

 

1.4

 

2.1

 

1.8

 

Other income

 

0.5

 

0.0

 

0.0

 

 

 


 


 


 

 

Income before provision for income taxes

 

33.7

 

34.5

 

31.8

 

Provision for income taxes

 

12.3

 

13.3

 

12.2

 

 

 


 


 


 

 

Net income

 

21.4

%

21.1

%*

19.6

%

 

 


 


 


 

* does not foot due to rounding

Comparison of Fiscal Years Ended March 31, 2008 and March 31, 2007

For the year ended March 31, 2008, our net income was $40.1 million or $1.47 per share on a basic and $1.44 per share on a fully diluted basis. In comparison, we earned $33.2 million or $1.24 per share on a basic and $1.21 per share on a fully diluted basis in the year ended March 31, 2007. The increase in net income for the year ended March 31, 2008 was achieved primarily through the following:

 

 

a 18.7% increase in consolidated revenue;

 

 

a 21.3% increase in NextGen Division revenue which accounted for 91.4% of consolidated revenue; and

 

 

approximately $1.0 million gain on life insurance proceeds the Company recorded, which was offset by additional compensation expense of approximately $0.2 million. The additional compensation expense was recorded in Selling, General and Administrative Expenses and the insurance proceeds were recorded as Other Income in the Consolidated Statement of Income.

29



The above increases to net income were offset by a decline in gross profit margin resulting from a greater proportion of revenue being derived from hardware and EDI revenue which have relatively lower gross margin percentages. The gross profit margin declined to 66.5% in the year ended March 31, 2008 versus 67.7% in the prior year period.

Revenue. Revenue for the year ended March 31, 2008 increased 18.7% to $186.5 million from $157.2 million for the year ended March 31, 2007. Revenue for the year ended March 31, 2007 increased 31.8% to $157.2 million from $119.3 million for the year ended March 31, 2006. NextGen Division revenue increased 21.3% from $140.6 million to approximately $170.5 million in the period ended March 31, 2008, while QSI Division revenue decreased by 3.3% during that same period, from $16.6 million to $16.0 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. The majority of the revenue in the system sales category is related to the sale of software. Revenue in the maintenance, EDI and other services category includes, maintenance, EDI, follow-on training and implementation services, annual third party license fees and other revenue. Maintenance revenue includes amounts initially deferred in conjunction with new customer arrangements and subsequently amortized and billings to existing customers.

System Sales. Company-wide sales of systems for the year ended March 31, 2008 increased 10.8% to $89.8 million from $81.0 million in the prior year.

Our increase in revenue from sales of systems was principally the result of a 12.2% increase in category revenue at our NextGen Division whose sales in this category grew from $77.7 million during the year ended March 31, 2007 to $87.1 million during the year ended March 31, 2008. This increase was driven primarily by higher sales of NextGenemr and NextGenepm 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 decreased to approximately $2.6 million in the year ended March 31, 2008 from $3.4 million in the year ended March 31, 2007.

The following table breaks down our reported system sales into software, hardware, third party software, supplies, and implementation and training services components by division:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

Software

 

Hardware, Third
Party Software
and Supplies

 

Implementation
and Training
Services

 

Total System
Sales

 

 

 


 


 


 


 

Year ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

360

 

$

1,134

 

$

1,154

 

$

2,648

 

NextGen Division

 

 

69,276

 

 

5,593

 

 

12,252

 

 

87,121

 

 

 



 



 



 



 

Consolidated

 

$

69,636

 

$

6,727

 

$

13,406

 

$

89,769

 

 

 



 



 



 



 

 

Year ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

355

 

$

2,356

 

$

655

 

$

3,366

 

NextGen Division

 

 

62,957

 

 

3,203

 

 

11,522

 

 

77,682

 

 

 



 



 



 



 

Consolidated

 

$

63,312

 

$

5,559

 

$

12,177

 

$

81,048

 

 

 



 



 



 



 

NextGen Division software revenue increased 10.0% between the year ended March 31, 2007 and the year ended March 31, 2008. The Division’s software revenue accounted for 79.5% of Divisional system sales revenue during the year ended March 31, 2008, a decrease from 81.0% in the prior year period.

Sales of additional licenses to existing customers grew to $31.3 million during the year ended March 31, 2008 compared to $23.3 million during the prior year as an increasing number of customers who expanded their use of our software in their practices and purchased additional licenses.

During the year ended March 31, 2008, 6.4% of the NextGen Division’s system sales revenue was represented by hardware and third party software compared to 4.1% in the prior year. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software revenue fluctuates each quarter and year depending on the needs of

30



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 6.3% in the year ended March 31, 2008 compared to the year ended March 31, 2007. The growth in implementation and training revenue is the result of increases in the amount of implementation and training services rendered to our new customers. Implementation and training revenue at the NextGen Division decreased its share of Divisional system sales revenue to 14.0% in the year ended March 31, 2008 from 14.8% in the year ended March 31, 2007. The amount of implementation and training services revenue in any given quarter is dependent 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 year ended March 31, 2008 versus 2007 in order to accommodate the increased amount of implementation services sold in conjunction with increased software sales. In order to achieve growth in this area, additional staffing increases and additional training facilities are anticipated, though actual future increases in revenue and staff will depend upon the availability of qualified staff, business mix and conditions, and our ability to retain current staff members.

The NextGen Division’s growth has come in part from investments in sales and marketing activities including hiring additional sales representatives, trade show attendance, and advertising expenditures. We have also benefited from winning numerous industry awards for the NextGen Division’s flagship NextGenemr and NextGenepm software products and the apparent increasing acceptance of electronic medical records technology in the healthcare industry.

For the QSI Division, total system sales decreased by approximately $0.7 million in the year ended March 31, 2008 compared to the year ended March 31, 2007. We do not presently foresee any material changes in the business environment for the QSI Division with respect to the constrained environment that has been in place for the past several years.

Maintenance, EDI and Other. Company-wide revenue from maintenance, EDI, and other services grew 27.1% to $96.7 million for the year ended March 31, 2008 from $76.1 million for the year ended March 31, 2007. The increase in this category resulted principally from an increase in maintenance, EDI and other revenue generated from the NextGen Division’s client base. Total NextGen Division maintenance revenue for the year ended March 31, 2008 grew 41.3% to $49.3 million from $34.9 million in the prior year, while EDI revenue grew 42.9% to $17.9 million for the year ended March 31, 2008 compared to $12.5 million in the prior year. Other revenue for the NextGen Division, which consists primarily of third party license renewals, time and materials billings, travel reimbursements, and other services grew 4.4% to $16.2 million for the year ended March 31, 2008 compared to $15.5 million a year ago. QSI Division maintenance revenue increased 1.5% to $7.2 million for the year ended March 31, 2007 compared to $7.1 million in the prior year while divisional EDI revenue increased by approximately 1.0% to $4.6 million for the year ended March 31, 2008 compared to $4.5 million in the prior year. Other revenue for the QSI Division was essentially flat for the year ended March 31, 2008 compared to a year ago.

The following table details maintenance, EDI and other revenue by category for the years ended March 31, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 








 

 

 

Maintenance

 

EDI

 

Other

 

Total

 

 

 


 


 


 


 

Year ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

7,186

 

$

4,564

 

$

1,639

 

$

13,389

 

NextGen Division

 

 

49,269

 

 

17,886

 

 

16,187

 

 

83,342

 

 

 



 



 



 



 

Consolidated

 

$

56,455

 

$

22,450

 

$

17,826

 

$

96,731

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

7,081

 

$

4,529

 

$

1,615

 

$

13,225

 

NextGen Division

 

 

34,867

 

 

12,520

 

 

15,505

 

 

62,892

 

 

 



 



 



 



 

Consolidated

 

$

41,948

 

$

17,049

 

$

17,120

 

$

76,117

 

 

 



 



 



 



 

The following table provides the number of billing sites which were receiving maintenance services as of the last business day of the year ended March 31, 2008 and 2007 respectively, as well as the number of billing sites receiving EDI services during the last month of each respective period at each division of our company. The table presents summary information only and includes billing entities added and removed for any reason. Note also that a single client may include one or multiple billing sites.

31



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

NextGen

 

QSI

 

Consolidated

 

 

 


 


 


 

 

 

Maintenance

 

EDI

 

Maintenance

 

EDI

 

Maintenance

 

EDI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 




 




 




 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2007

 

 

982

 

 

769

 

 

257

 

 

173

 

 

1,239

 

 

942

 

Billing sites added

 

 

194

 

 

289

 

 

9

 

 

29

 

 

203

 

 

318

 

Billing sites removed

 

 

(47

)

 

(65

)

 

(15

)

 

(37

)

 

(62

)

 

(102

)

 

 



 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2008

 

 

1,129

 

 

993

 

 

251

 

 

165

 

 

1,380

 

 

1,158

 

 

 



 



 



 



 



 



 

Cost of revenue. Cost of revenue for the year ended March 31, 2008 increased 23.1% to $62.5 million from $50.8 million for the year ended March 31, 2007, while the cost of revenue as a percentage of net revenue increased to 33.5% from 32.3%. Our consolidated gross profit is affected by the level of hardware content included in system sales, the percentage of EDI revenue in our overall sales mix, and certain headcount expenses directly related to the cost of delivering our products and services. Consolidated gross profit for fiscal year 2008 was impacted by the decline in gross profit percentage at the NextGen Division, offset by a slight increase in gross profit percentage at the QSI Division.

The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31, 2008 and 2007:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

 

Year Ended March 31,

 

 

 


 

 

 

2008

 

%

 

2007

 

%

 

 

 


 


 


 


 

QSI Division

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

16,037

 

 

100.0

%

$

16,589

 

 

100.0

%

Cost of revenue

 

 

7,545

 

 

47.0

%

 

7,847

 

 

47.3

%

 

 



 



 



 



 

Gross profit

 

$

8,492

 

 

53.0

%

$

8,742

 

 

52.7

%

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NextGen Division

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

170,463

 

 

100.0

%

$

140,576

 

 

100.0

%

Cost of revenue

 

 

54,956

 

 

32.2

%

 

42,937

 

 

30.5

%

 

 



 



 



 



 

Gross profit

 

$

115,507

 

 

67.8

%

$

97,639

 

 

69.5

%

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

186,500

 

 

100.0

%

$

157,165

 

 

100.0

%

Cost of revenue

 

 

62,501

 

 

33.5

%

 

50,784

 

 

32.3

%

 

 



 



 



 



 

Gross profit

 

$

123,999

 

 

66.5

%

$

106,381

 

 

67.7

%

 

 



 



 



 



 

Gross profit margins at the NextGen Division for the year ended March 31, 2008 decreased to 67.8% from 69.5% primarily due to an increase in the proportionate level of hardware and third party software content included in revenue. The QSI Division’s gross profit margin increased to 53.0% from 52.7% between the years ended March 31, 2008 and 2007 primarily due to a decrease in the level of hardware and third party software content included in revenue.

The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue for our company and our two divisions:

32



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hardware,
Third Party
Software

 

Payroll and
related
Benefits

 

Other

 

Total Cost
of Revenue

 

Gross Profit

 

 

 


 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

 

 

8.0

%

 

 

 

19.1

%

 

 

 

20.0

%

 

 

 

47.0

%

 

 

 

53.0

%

 

NextGen Division

 

 

 

3.8

%

 

 

 

11.2

%

 

 

 

17.3

%

 

 

 

32.2

%

 

 

 

67.8

%

 

 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

Consolidated

 

 

 

4.2

%

 

 

 

11.8

%

 

 

 

17.5

%

 

 

 

33.5

%

 

 

 

66.5

%

 

 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

 

 

10.0

%

 

 

 

17.3

%

 

 

 

20.0

%

 

 

 

47.3

%

 

 

 

52.7

%

 

NextGen Division

 

 

 

3.1

%

 

 

 

11.9

%

 

 

 

15.5

%

 

 

 

30.5

%

 

 

 

69.5

%

 

 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

Consolidated

 

 

 

3.8

%

 

 

 

12.4

%

 

 

 

16.1

%

 

 

 

32.3

%

 

 

 

67.7

%

 

 

 

 



 

 

 



 

 

 



 

 

 



 

 

 



 

 

During the year ended March 31, 2008, hardware and third party software constituted a larger portion of consolidated cost of revenue compared to the prior year period. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software purchased fluctuates each quarter depending on the needs of the customers and is not a priority focus for us.

Our payroll and benefits expense associated with delivering our products and services decreased to 11.8% of consolidated revenue for the year ended March 31, 2008 compared to 12.4% during the prior year ended March 31, 2007. The absolute level of consolidated payroll and benefit expenses grew from $19.6 million in the year ended March 31, 2007 to $22.1 million in the year ended March 31, 2008, an increase of 13% or $2.5 million, primarily due to additions to related headcount, payroll and benefits expense associated with delivering products and services in the NextGen Division. Payroll and benefits expense associated with delivering products and services in the QSI Division increased on a percentage of revenue basis. The application of SFAS 123R in fiscal year 2008 and 2007 added approximately $0.5 million in compensation to consolidated cost of revenue in both fiscal years.

We anticipate continued additions to headcount in the NextGen Division in areas related to delivering products and services in future periods, but due to the uncertainties in the timing of our sales arrangements, our sales mix, the acquisition and training of qualified personnel, and other issues, we cannot accurately predict if related headcount expense as a percentage of revenue will increase or decrease in the future.

We do not currently intend to make any significant changes to related headcount at the QSI Division.

“Other”, which consists of outside service costs, amortization of software development costs, hosting service costs and other service costs, increased to 17.5% of revenue during the year ended March 31, 2008 from 16.1% during the year ended March 31, 2007.

Should the NextGen Division continue to represent a major and or increasing share of our revenue, our consolidated gross margin percentages should move in concert with those of the NextGen Division.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 2008 increased 17.5% to $53.3 million as compared to $45.3 million for the year ended March 31, 2007. The increase in the amount of such expenses resulted primarily from increases of $3.6 million in salaries, commissions, and related benefits in the NextGen Division, $1.7 million in selling related expenses in the NextGen Division, $1.0 million in travel related costs in the NextGen Division, $0.8 million in other general expenses in the NextGen Division and $0.9 million in increased corporate related expenses. The increase in corporate expenses was primarily composed of salaries and related benefits. Selling, general and administrative expenses as a percentage of revenue decreased from 28.9% in the year ended March 31, 2007 to 28.6% in the year ended March 31, 2008 due in to the fact that revenue grew faster than selling, general and administrative expense for the Company.

33



The application of SFAS 123R in fiscal year 2008 and 2007 added approximately $2.5 million in compensation expense to consolidated selling, general and administrative expenses and is included in the aforementioned amounts.

We anticipate increased expenditures for trade shows, advertising and the employment of additional sales and administrative staff at the NextGen Division. We also anticipate future increases in corporate expenditures being made in areas including but not limited to staffing and professional services. While we expect selling, general and administrative expenses to increase on an absolute basis, we cannot accurately predict the impact these additional expenditures will have on selling, general, and administrative expenses as a percentage of revenue.

Research and Development Costs. Research and development costs for the years ended March 31, 2008 and 2007 were $11.4 million and $10.2 million, respectively. The increase in research and development costs was primarily due to increased investment in the NextGen product line. Additionally, the application of SFAS 123R in fiscal year 2008 and 2007 added approximately $0.8 million in both periods, in compensation expense to research and development costs net of amounts capitalized as software development in those fiscal years. Additions to capitalized software costs offset research and development costs. For the year ended March 31, 2008, $6.0 million was added to capitalized software costs while $5.0 million was capitalized during the year ended March 31, 2007. Research and development costs as a percentage of net revenue decreased to 6.1% in the year ended March 31, 2008 from 6.5% in the year ended March 31, 2007 primarily due to revenue growing at a faster rate than the increase in research and development costs. Research and development costs are expected to continue at or above current levels.

Interest Income. Interest income for the year ended March 31, 2008 decreased to $2.7 million compared to $3.3 million in the year ended March 31, 2007. Interest income in the year ended March 31, 2008 decreased primarily due to (i) a greater proportion of funds invested in tax favored auction rate securities which offer lower interest rates but higher after-tax yields compared to money market or short term U.S. Treasuries, and (ii) comparatively lower short term interest rates in the year ended March 31, 2008 versus 2007.

Our investment policy is determined by our Board of Directors. We currently maintain our cash in very liquid short term assets including money market funds and 30-60 day treasury bills as well as auction rate securities (ARS).

Other Income. Other income for the year ended March 31, 2008 was approximately $1.0 million. There was no Other income recorded for the year ended March 31, 2007. The Company recorded a gain on life insurance proceeds as a result of the passing of Gregory Flynn, Executive Vice President and General Manager of the Company’s QSI Division. Mr. Flynn participated in the Company’s deferred compensation plan which is funded through the purchase of life insurance policies with the Company named as beneficiary.

Provision for Income Taxes. The provision for income taxes for the year ended March 31, 2008 was approximately $22.9 million as compared to approximately $21.0 million for the prior year. The effective tax rates for fiscal 2008 and 2007 were 36.4% and 38.7%, respectively. The provision for income taxes for the years ended March 31, 2008 and 2007 differs from the combined statutory rates primarily due to the impact of varying state income tax rates, research and development tax credits, the qualified production activities deduction, and exclusions for company-owned life insurance proceeds and tax-exempt interest income. The effective rate for the year ended March 31, 2008 also includes an increase in benefit from the qualified production activities deduction, which was mostly offset by non-deductible option expense related to incentive stock options.

During the year ended March 31, 2008 and 2007, we claimed research and development tax credits of approximately $0.8 million in both years. The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code, of approximately $3.1 million and $1.5 million during the years ended March 31, 2008 and 2007, respectively. Research

34



and development credits and the qualified production activities income deduction taken by us involve certain assumptions and judgments regarding qualification of expenses under the relevant tax code provision.

Comparison of Fiscal Years Ended March 31, 2007 and March 31, 2006

For the year ended March 31, 2007, our net income was $33.2 million or $1.24 per share on a basic and $1.21 per share on a fully diluted basis. In comparison, we earned $23.3 million or $0.88 per share on a basic and $0.85 on a fully diluted basis in the year ended March 31, 2006. The increase in net income for the year ended March 31, 2007 was achieved primarily through the following:

 

 

a 31.8% increase in consolidated revenue;

 

 

a 35.5% increase in NextGen Division revenue which accounted for 89.4% of consolidated revenue; and

 

 

an increase in our consolidated gross profit margin from 66.6% to 67.7%.

Revenue. Revenue for the year ended March 31, 2007 increased 31.8% to $157.2 million from $119.3 million for the year ended March 31, 2006. NextGen Division revenue increased 35.5% from $103.7 million to approximately $140.6 million in the period, while QSI Division revenue increased by 6.7% during the period from $15.5 million to $16.6 million.

Revenue is divided 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. The majority of the revenue in the system sales category is related to the sale of software. Revenue in the maintenance, EDI and other services category includes, maintenance, EDI, follow on training and implementation services, annual third party license fees and other revenue.

System Sales. Company-wide sales of systems for the year ended March 31, 2007 increased 22.4% to $81.0 million from $66.2 million in the prior year.

Our increase in revenue from sales of systems was principally the result of a 21.7% increase in category revenue at our NextGen Division whose sales in this category grew from $63.8 million during the year ended March 31, 2006 to $77.7 million during the year ended March 31, 2007. This increase was driven primarily by higher sales of NextGenemr and NextGenepm 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 increased to approximately $3.4 million in the year ended March 31, 2007 from $2.4 million in the year ended March 31, 2006.

The following table breaks down our reported system sales into software, hardware, third party software, supplies, and implementation and training services components by division:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 








 

 

 

Software

 

Hardware,
Third Party
Software and
Supplies

 

Implementation
and Training
Services

 

Total
System Sales

 

 

 









Year ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

355

 

$

2,356

 

$

655

 

$

3,366

 

NextGen Division

 

 

62,957

 

 

3,203

 

 

11,522

 

 

77,682

 

 

 



 



 



 



 

Consolidated

 

$

63,312

 

$

5,559

 

$

12,177

 

$

81,048

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

984

 

$

1,013

 

$

411

 

$

2,408

 

NextGen Division

 

 

48,847

 

 

4,094

 

 

10,882

 

 

63,823

 

 

 



 



 



 



 

Consolidated

 

$

49,831

 

$

5,107

 

$

11,293

 

$

66,231

 

 

 



 



 



 



 

NextGen Division software revenue increased 28.9% between the year ended March 31, 2006 and the year ended March 31, 2007. The Division’s software revenue accounted for 81.0% of divisional system sales revenue during the year ended March 31, 2007, an increase from 76.5% in the prior year period.

35



Sales of additional licenses to existing customers grew to $23.3 million during the year ended March 31, 2007 compared to $9.7 million during the prior year as a result of both an increasing number of customers who are expanding their use of our software in their practices and are purchasing additional licenses. Software revenue from VARs totaled approximately $13.6 million during the year ended March 31, 2007 compared to $7.0 million in the prior year. The increase in VAR revenue was affected in part by revenue from sales to Siemens Medical Solutions.

The increase in software’s share of systems sales was not the result of any 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 NextGen Division’s performance in this area.

During the year ended March 31, 2007, 4.1% of the NextGen Division’s system sales revenue was represented by hardware and third party software compared to 6.4% in the prior year. We have noted that the last several quarters’ and years’ results have generally included a relatively lower amount of hardware and third party software compared to prior years. However, this decrease is not the result of any change in emphasis on our part. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software revenue fluctuates each year depending on the needs of customers. The inclusion of hardware and third party software in the NextGen 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 5.9% in the year ended March 31, 2007 compared to the year ended March 31, 2006. The growth in implementation and training revenue is the result of increases in the amount of implementation and training services rendered to our new customers. Implementation and training revenue at the NextGen Division decreased its share of Divisional system sales revenue to 14.8% in the twelve months ended March 31, 2007 from 17.0% in the twelve months ended March 31, 2006. The amount of implementation and training services revenue and the corresponding rate of growth compared to a prior period in any given year is dependent on several factors including timing of customer implementations, the availability of qualified staff, and the mix of services being rendered. 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. 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 2007 and 2006, as well as in prior years, and the apparent increasing acceptance of electronic medical records technology in the healthcare industry.

For the QSI Division, total system sales increased by approximately $1.0 million in the year ended March 31, 2007 compared to the year ended March 31, 2006 due primarily to increases in hardware, third party software and implementation revenue. We do not presently foresee any material changes in the business environment for the QSI Division with respect to the constrained environment that has been in place for the past several years.

Maintenance, EDI and Other. Company-wide revenue from maintenance, EDI, and other services grew 43.5% to $76.1 million for the year ended March 31, 2007 from $53.1 million for the year ended March 31, 2006. The increase in this category resulted principally from an increase in maintenance, EDI and Other revenue generated from the NextGen Division’s client base. Total NextGen Division maintenance revenue for the year ended March 31, 2007 grew 44.2% to $34.9 million from $24.2 million in the prior year, while EDI revenue grew 45.9% to $12.5 million for the year ended March 31, 2007 compared to $8.6 million in the prior year. Other revenue for the NextGen Division, which consists primarily of third party license renewals, time and materials billings, travel reimbursements, and other revenue grew 116.8% to $15.5 million for the year ended March 31, 2007 compared to $7.2 million a year ago. The increase was due primarily to purchases of additional training and other services by existing NextGen customers. QSI Division maintenance revenue increased 2.0% to $7.1 million for the year ended March 31, 2007 compared to $6.9 million in the prior year while divisional EDI revenue declined by approximately 3.1% to $4.5 million for the year ended March 31, 2007 compared to $4.7 million in the prior year. Other revenue for the QSI Division grew 6.0% to $1.6 million for the year ended March 31, 2007 compared to $1.5 million a year ago.

36



The following table details maintenance, EDI and other revenue by category for the years ended March 31, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 








 

 

 

Maintenance

 

EDI

 

Other

 

Total

 

 

 


 


 


 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

7,081

 

$

4,529

 

$

1,615

 

$

13,225

 

NextGen Division

 

 

34,867

 

 

12,520

 

 

15,505

 

 

62,892

 

 

 



 



 



 



 

Consolidated

 

$

41,948

 

$

17,049

 

$

17,120

 

$

76,117

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

$

6,939

 

$

4,673

 

$

1,524

 

$

13,136

 

NextGen Division

 

 

24,185

 

 

8,583

 

 

7,152

 

 

39,920

 

 

 



 



 



 



 

Consolidated

 

$

31,124

 

$

13,256

 

$

8,676

 

$

53,056

 

 

 



 



 



 



 

The following table provides the number of billing sites which were receiving maintenance services as of the last business day of the year ended March 31, 2007 and 2006 respectively, as well as the number of billing sites receiving EDI services during the last month of each respective period at each division of our company. The table presents summary information only and includes billing entities added and removed for any reason. Note also that a single client may include one or multiple billing sites.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 


 


 

 

 

NextGen

 

QSI

 

Consolidated

 

 

 


 


 


 

 

 

Maintenance

 

EDI

 

Maintenance

 

EDI

 

Maintenance

 

EDI

 

 

 












 

March 31, 2006

 

 

831

 

 

567

 

 

275

 

 

189

 

 

1,106

 

 

756

 

Billing sites added

 

 

178

 

 

232

 

 

4

 

 

11

 

 

182

 

 

243

 

Billing sites removed

 

 

(27

)

 

(30

)

 

(22

)

 

(27

)

 

(49

)

 

(57

)

 

 






 






 






 

March 31, 2007

 

 

982

 

 

769

 

 

257

 

 

173

 

 

1,239

 

 

942

 

 

 






 






 






 

Cost of revenue. Cost of revenue for the year ended March 31, 2007 increased 27.5% to $50.8 million from $39.8 million for the year ended March 31, 2006, while the cost of revenue as a percentage of net revenue declined to 32.3% from 33.4%. Our consolidated gross profit is affected by the level of hardware content included in system sales, the percentage of EDI revenue in our overall sales mix, and certain headcount expenses directly related to the cost of delivering our products and services. Consolidated gross profit is also affected by the higher margin revenues of the NextGen Division, which increased its share of total Company revenue to 89.4% from 87.0% in the prior year.

The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31,

 

 

 


 


 

 

 

2007

 

%

 

2006

 

%

 

 

 


 


 


 


 

QSI Division

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

16,589

 

 

100.0

%

$

15,544

 

 

100.0

%

Cost of revenue

 

 

7,847

 

 

47.3

 

 

7,765

 

 

50.0

 

 

 



 



 



 



 

Gross profit

 

$

8,742

 

 

52.7

%

$

7,779

 

 

50.0

%

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NextGen Division

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

140,576

 

 

100.0

%

$

103,743

 

 

100.0

%

Cost of revenue

 

 

42,937

 

 

30.5

 

 

32,063

 

 

30.9

 

 

 



 



 



 



 

Gross profit

 

$

97,639

 

 

69.5

%

$

71,680

 

 

69.1

%

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

157,165

 

 

100.0

%

$

119,287

 

 

100.0

%

Cost of revenue

 

 

50,784

 

 

32.3

 

 

39,828

 

 

33.4

 

 

 



 



 



 



 

Gross profit

 

$

106,381

 

 

67.7

%

$

79,459

 

 

66.6

%

 

 



 



 



 



 

Gross profit margins at the NextGen Division for the year ended March 31, 2007 increased to 69.5% from 69.1% primarily due to a decrease in the proportionate level of hardware and third party software content included in revenue. The QSI Division’s gross profit margin increased to 52.7% from 50.0% between the years ended March 31, 2007 and 2006 primarily due to a decrease in the

37



relative level of applicable headcount expense associated with delivering our products and services.

The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue for our company and our two divisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 


 

 

 

Hardware,
Third Party
Software

 

Payroll
and
related
Benefits

 

Outside
Services,
Amortization
of Software
Development
Costs and
Other

 

Total Cost
of Revenue

 

Gross
Profit

 

 

 


 


 


 


 


 

Year ended March 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

 

 

10.0

%

 

 

 

17.3

%

 

 

 

20.0

%

 

 

 

47.3

%

 

 

 

52.7

%

 

NextGen Division

 

 

 

3.1

 

 

 

 

11.9

 

 

 

 

15.5

 

 

 

 

30.5

 

 

 

 

69.5

 

 

 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

Consolidated

 

 

 

3.8

%

 

 

 

12.4

%

 

 

 

16.1

%

 

 

 

32.3

%

 

 

 

67.7

%

 

 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended March 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QSI Division

 

 

 

9.8

%

 

 

 

19.1

%

 

 

 

21.1

%

 

 

 

50.0

%

 

 

 

50.0

%

 

NextGen Division

 

 

 

4.6

 

 

 

 

11.8

 

 

 

 

14.5

 

 

 

 

30.9

 

 

 

 

69.1

 

 

 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

Consolidated

 

 

 

5.3

%

 

 

 

12.7

%

 

 

 

15.4

%

 

 

 

33.4

%

 

 

 

66.6

%

 

 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

 

 


 

 

During the year ended March 31, 2007, hardware and third party software constituted a smaller portion of consolidated revenue compared to the same prior year period, driven principally both by the composition of NextGen Division revenue and NextGen Division revenue increasing its share of total Company revenue. This year over year reduction continued a previously identified trend and did not result from any change in emphasis on our part. The number of customers who purchase hardware and third party software and the dollar amount of hardware and third party software purchased fluctuates each quarter depending on the needs of the customers and is not a priority focus for us.

Our payroll and benefits expense associated with delivering our products and services decreased to 12.4% of consolidated revenue for the year ended March 31, 2007 compared to 12.7% during the prior year ended March 31, 2006. The absolute level of consolidated payroll and benefit expenses grew from $15.2 million in the twelve months ended March 31, 2006 to $19.6 million in the twelve months ended March 31, 2007, an increase of 29% or $4.4 million, primarily due to additions to related headcount, payroll and benefits expense associated with delivering products and services in the NextGen Division. Payroll and benefits expense associated with delivering products and services in the QSI Division declined on a percentage of revenue basis. The adoption of SFAS 123R in fiscal year 2007 added approximately $0.5 million in compensation to consolidated cost of revenue.

We anticipate continued additions to headcount in the NextGen Division in areas related to delivering products and services in future periods, but due to the uncertainties in the timing of our sales arrangements, our sales mix, the acquisition and training of qualified personnel, and other issues, we cannot accurately predict if related headcount expense as a percentage of revenue will increase or decrease in the future.

We do not currently intend to make any significant changes to related headcount at the QSI Division.

“Other”, which consists of outside service costs, amortization of software development costs and other costs, increased to 16.1% of revenue during the year ended March 31, 2007 from 15.4% during the year ended March 31, 2006.

Should the NextGen Division continue to represent an increasing share of our revenue and should the NextGen Division continue to carry higher gross margins than the QSI Division, our consolidated gross margin percentages should increase to match more closely those of the NextGen Division.

As a result of the foregoing events and activities, our gross profit increased for the year period ending March 31, 2007 versus the prior year.

38



Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 2007 increased 27.5% to $45.3 million as compared to $35.6 million for the year ended March 31, 2006. The increase resulted primarily from increases of $5.1 million in compensation expense and benefit expense in the NextGen Division, $0.9 million in commission expense in the NextGen Division, $1.9 million in other general and administrative expenses primarily in the NextGen Division and $1.8 million in increased corporate expenses. Approximately $1.4 million of the increase in year over year corporate expenses was salaries and related benefits.

The adoption of SFAS 123R in fiscal year 2007 added approximately $2.5 million in compensation expense to consolidated selling, general and administrative expenses and is included in the aforementioned amounts.

Selling, general and administrative expenses as a percentage of revenue decreased to 28.9% in the fiscal year ended March 31, 2007 from 29.8% in the fiscal period ended March 31, 2006 due to revenue growing at a faster rate than selling, general and administrative expenses.

We anticipate increased expenditures for trade shows, advertising and staff additions at the NextGen Division. We also anticipate increased expenditures at the corporate level related to headcount additions, compensation and professional service fees. While we expect selling, general and administrative expenses to increase on an absolute basis, we cannot accurately predict the effect these additional expenditures will have on selling, general, and administrative expenses as a percentage of revenue.

Research and Development Costs. Research and development costs for the years ended March 31, 2007 and 2006 were $10.2 million and $8.1 million, respectively. The increase in research and development costs was primarily due to increased investment in the NextGen product line. Additionally, the adoption of SFAS 123R in fiscal year 2007 added approximately $0.8 million in compensation expense to research and development costs net of amounts capitalized as software development. Additions to capitalized software costs offset research and development costs. For the year ended March 31, 2007, $5.0 million was added to capitalized software costs while $3.3 million was capitalized during the year ended March 31, 2006. Research and development costs as a percentage of net revenue decreased to 6.5% from 6.8% primarily due to revenue growing at a faster rate than the increase in research and development costs. Research and development costs are expected to continue at or above current levels.

Interest Income. Interest income for the year ended March 31, 2007 increased 56.8% to approximately $3.3 million compared with $2.1 million in the year ended March 31, 2006. The increase was primarily due to the effect of an increase in short term interest rates versus the prior year period as well as comparatively higher amounts available for investment during the fiscal year ended March 31, 2007. During the fourth quarter of fiscal year 2007, we paid a dividend of $27.1 million, which reduced the amount of funds available for investment during this period. During the fourth quarter of fiscal year 2006, we paid a dividend of approximately $23.4 million, which reduced the amount of funds available for investment during such period.

Provision for Income Taxes. The provision for income taxes for the year ended March 31, 2007 was approximately $21.0 million as compared to approximately $14.6 million for the prior year. The effective tax rates for fiscal 2007 and 2006 were 38.7% and 38.5%, respectively. The provision for income taxes for the years ended March 31, 2007 and 2006 differs from the combined statutory rates primarily due to the impact of varying state income tax rates, research and development tax credits, and the qualified production activities deduction. The effective rate for the year ended March 31, 2007 also includes an increase in benefit from the qualified production activities deduction, which was mostly offset by non-deductible option expense related to incentive stock options.

During the year ended March 31, 2007 and 2006, we claimed research and development tax credits of approximately $0.8 million in both years. The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code, of approximately $1.5 million and $0.8 million during the years ended March 31, 2007 and 2006, respectively. Research and development credits and the qualified production activities income deduction taken by us involve certain assumptions and judgments regarding qualification of expenses under the relevant tax code provision.

39



Liquidity and Capital Resources

The following table presents selected financial statistics and information for each of the years ended March 31, 2008, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended March 31,

 

 

 


 

 

 

2008

 

2007

 

2006

 


 


 


 


 

Cash and cash equivalents

 

$

59,046

 

$

60,028

 

$

57,225

 

 

 

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

$

(982

)

$

2,803

 

$

6,068

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

40,078

 

$

33,232

 

$

23,322

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operations during the year

 

$

43,599

 

$

29,570

 

$

30,678

 

 

 

 

 

 

 

 

 

 

 

 

Number of days of sales outstanding

 

 

136

 

 

129

 

 

115

 

Cash Flow from Operating Activities

Cash provided by operations has historically been our primary source of cash and has primarily been driven by our net income and secondarily by non-cash expenses including depreciation, amortization of capitalized software, provisions for bad debts and inventory obsolescence, and stock option expenses.

The following table summarizes our statement of cash flows for the years ended March 31, 2008, 2007 and 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended March 31,

 

 

 


 

 

 

2008

 

2007

 

2006

 


 


 


 


 

Net income

 

$

40,078

 

$

33,232

 

$

23,322

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash expenses

 

 

11,299

 

 

8,977

 

 

4,140

 

 

 

 

 

 

 

 

 

 

 

 

Gain on life insurance proceeds, net

 

 

(755

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit from exercise of stock options, net

 

 

65

 

 

167

 

 

4,831

 

 

 

 

 

 

 

 

 

 

 

 

Change in deferred revenue

 

 

5,447

 

 

3,532

 

 

10,439

 

 

 

 

 

 

 

 

 

 

 

 

Change in accounts receivable

 

 

(13,811

)

 

(20,760

)

 

(12,484

)

 

 

 

 

 

 

 

 

 

 

 

Change in other assets and liabilities

 

 

1,276

 

 

4,422

 

 

430

 

 

 



 



 



 

Net cash provided by operating activities

 

$

43,599

 

$

29,570

 

$

30,678

 

 

 



 



 



 

Net Income. As referenced in the above table, net income makes up the majority of our cash generated from operations for the years ended March 31, 2008, 2007 and 2006. Our NextGen Division’s contribution to net income has increased each year due to that division’s operating income increasing more quickly than our company as a whole.

Non-Cash Expenses. Non-cash expenses include depreciation, amortization of capitalized software, provisions for bad debts and inventory obsolescence, and stock option expenses. Total non-cash expenses increased by approximately $11.3 million, $9.0 million and $4.1 million for the years ended March 31, 2008, 2007 and 2006, respectively. The change for the year ended March 31, 2008 is primarily related to a $3.8 million increase in stock option expenses related to our application of SFAS 123R, a $2.4 million increase in depreciation, $4.1 million in amortization of capitalized software costs, and a $1.2 million increase in the provision for bad debts.

Tax Benefits From Stock Options. Although the value of stock options exercised by employees grew in the year ended March 31, 2008 and 2007, our application of SFAS 123R required excess tax benefits of $1.3 million and $2.5 million, respectively, to be reclassed to financing activities, resulting in a net decrease in the years ended March 31, 2008 and 2007.

Deferred Revenue. Cash from operations benefited significantly from increases in deferred revenue primarily due to an increase in the volume of implementation and maintenance services invoiced by the NextGen Division which had not yet been rendered or recognized as revenue. This benefit is offset by the increase in unpaid deferred revenue. Deferred revenue grew by approximately $5.4

40



million for the year ended March 31, 2008 versus growth of $3.5 million for the year ended March 31, 2007, resulting in increases to cash provided by operating activities for the respective periods.

Accounts Receivable. Accounts receivable grew by approximately $13.8 million, $20.8 million and $12.5 million for the years ended March 31, 2008, 2007 and 2006, respectively. The increase in accounts receivable in the periods is due to the following factors:

 

 

NextGen Division revenue grew 21.3%, 35.5% and 41.0% for the years ended March 31, 2008, 2007 and 2006, respectively;

 

 

We experienced an increase in the volume of undelivered services billed in advance by the NextGen Division which were unpaid as of the end of each period and included in accounts receivable. This resulted in an increase in both deferred revenue and accounts receivable of approximately $4.9 million, $6.4 million and $4.4 million for the years ended March 31, 2008, 2007 and 2006, respectively; and

 

 

The NextGen Division constituted a larger percentage of our receivables at March 31, 2008 compared to March 31, 2007. Turnover of accounts receivable in the NextGen Division is slower than the QSI Division due to the fact that the majority of the QSI Division’s revenue is coming from maintenance and EDI services which typically have shorter payment terms than systems sales related revenue which historically have accounted for a major portion of NextGen Division sales.

The turnover of accounts receivable measured in terms of days sales outstanding (DSO) fluctuated during the year and increased from 129 days to 136 days during the year ended March 31, 2008 primarily due to the above mentioned factors.

If amounts included in both accounts receivable and deferred revenue were netted, our turnover of accounts receivable expressed as DSO would be 85 days as of March 31, 2008 and 81 days as of March 31, 2007. Provided turnover of accounts receivable, deferred revenue, and profitability remain consistent with the year ended March 31, 2008, we anticipate being able to continue to generate cash from operations during fiscal 2009 primarily from our net income.

Cash flows from investing activities

Net cash used in investing activities for the year ended March 31, 2008, 2007 and 2006 was $30.2 million, $8.3 million and $5.7 million, respectively. The increase in cash used in investing activities is a result of the Company’s net purchases of current investments in ARS of approximately $22.6 million, net of unrealized loss of $0.3 million as of March 31, 2008. These ARS are classified as current and non current investments on the accompanying Consolidated Balance Sheets. In addition to purchases and sales of marketable securities, net cash used in investing activities for the year ended March 31, 2008 consisted of additions to equipment and improvements and capitalized software. Net cash used in investing activities for the years ended March 31, 2007 and 2006 consisted of additions to equipment and improvements and capitalized software.

Cash flows from financing activities

Net cash used in financing activities for the year ended March 31, 2008 was $14.4 million and consisted of a dividend paid to shareholders of $20.5 million offset by $4.8 million of proceeds from the exercise of stock options. We recorded a reduction in income tax liability of $1.3 million related to excess tax deductions received from employee stock option exercises. The benefit was recorded as additional paid in capital.

Cash and cash equivalents and marketable securities

At March 31, 2008, we had cash and cash equivalents of $59.0 million and marketable securities of $22.6 million. We intend to expend some of these funds for the development of products complementary to our existing product line as well as new versions of certain of our products. These developments are intended to take advantage of more powerful technologies and to increase the integration of our products. We have no additional significant current capital commitments.

In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend of $0.25 per share on our outstanding common stock commencing with conclusion of our first fiscal quarter of 2008 (June 30, 2007) and continuing each fiscal quarter thereafter, subject to further review and approval as well as establishment of record and distribution dates by our Board of Directors prior to the declaration of each such quarterly dividend. We anticipate that future quarterly dividends, if and when declared by the Board

41



pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of October, January, April and July.

On May 31, 2007, our Board of Directors approved a quarterly dividend of twenty-five cents ($0.25) per share payable on its outstanding shares of common stock. The cash dividend record date was June 15, 2007 and was distributed to shareholders on or about July 5, 2007.

On July 31, 2007, our Board of Directors approved a quarterly dividend of twenty-five cents ($0.25) per share payable on its outstanding shares of common stock. The cash dividend record date was September 14, 2007 and was distributed to shareholders on or about October 5, 2007.

On October 25, 2007, the Board approved a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of December 14, 2007 with an expected distribution date on or about January 7, 2008.

On January 30, 2008, the Board approved a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of March 14, 2008 with an expected distribution date on or about April 7, 2008.

On May 20, 2008, the Company acquired HSI. The acquisition resulted in HSI becoming a wholly owned subsidiary of QSI. The purchase price consists of approximately $15.4 million plus up to approximately $1.6 million in incentives tied to future performance. The $15.4 million consists of approximately equal parts of cash and restricted QSI common stock, subject to restrictions on resale lapsing over a two year period.

On May 29, 2008, the Board approved a quarterly cash dividend of $0.25 per share on our outstanding shares of common stock, payable to shareholders of record as of June 13, 2008 with an expected distribution date on or about July 2, 2008.

Management believes that its cash and cash equivalents on hand at March 31, 2008, together with its marketable securities and cash flows from operations, if any, will be sufficient to meet its working capital and capital expenditure requirements as well as any dividends paid in the ordinary course of business for the balance of fiscal 2009.

Contractual Obligations. The following table summarizes our significant contractual obligations at March 31, 2008, and the effect that such obligations are expected to have on our liquidity and cash in future periods:

 

 

 

 

 

Contractual Obligations – Non-cancelable lease obligations

 

(in thousands)

 


 

 

 

 

 

 

 

 

Year Ending March 31,

 

 

 

 

2009

 

$

3,156

 

2010

 

$

3,131

 

2011

 

$

3,164

 

2012

 

$

1,716

 

2013 and beyond

 

$

942

 

 

 



 

 

 

$

12,109

 

 

 



 

New Accounting Pronouncements

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles (SFAS 162)”.SFAS No. 162 defines the order in which accounting principles that are generally accepted should be followed. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.

In April 2008, the FASB finalized Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets”. The position amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB SFAS No. 142, Goodwill and Other Intangible Assets. The position applies to intangible assets that are acquired individually or with a group of other assets and both intangible assets acquired in business combinations and asset acquisitions. FSP 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Management is currently evaluating the impact of the pending adoption of FSP 142-3 on the consolidated financial statements.

42



In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (SFAS 141R). SFAS 141(R) retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations. SFAS 141(R) defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. In addition, SFAS 141(R) requires expensing of acquisition-related and restructure-related costs, remeasurement of earn out provisions at fair value, measurement of equity securities issued for purchase at the date of close of the transaction and non-expensing of in-process research and development related intangibles. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. This pronouncement will be applied by the Company when it becomes effective and when or if the Company effectuates a business combination, otherwise there is no impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of SFAS No. 115”, (SFAS 159) which applies to all entities with available-for-sale and trading securities. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”. The Company plans to adopt SFAS 159 effective April 1, 2008 and is in the process of determining the effect, if any, the adoption of SFAS 159 will have on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. This statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of this standard will have on its consolidated financial statements.

 

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

We maintain investments in tax exempt municipal Auction Rate Securities (ARS) which are classified as current and non-current marketable securities on the Company’s Consolidated Balance Sheets.  A small portion of the Company’s portfolio is invested in closed-end funds which invest in tax exempt municipal auction rate securities.  At March 31, 2008, we had approximately $22.6 million of ARS on our Consolidated Balance Sheets.  The ARS are rated by one or more national rating agencies and have contractual terms of up to 30 years, but generally have interest rate reset dates that occur every 7, 28 or 35 days.  

 Despite the underlying long-term maturity of ARS, such securities were priced and subsequently traded as short-term investments because of the interest rate reset feature. If there are insufficient buyers, the auction is said to “fail” and the holders are unable to liquidate the investments through auction. A failed auction does not result in a default of the debt instrument. The securities will continue to accrue interest and be auctioned until the auction succeeds, the issuer calls the securities, or the securities mature. In February 2008, the Company began to experience failed auctions on its ARS and auction rate preferred securities. To determine their estimated fair values at March 31, 2008, factors including credit quality, the likelihood of redemption, and yields or spreads of fixed rate municipal bonds or other trading instruments issued by the same or comparable issuers were considered.  Based on these factors, a temporary impairment of $326 was recorded to accumulated other comprehensive loss in the accompanying consolidated financial statements as of March 31, 2008.  If the Company sells any of the ARS, prior to maturity, at an amount below original purchase value, or if it becomes probable that the Company will not receive 100% of the principal and interest from the issuer as to any of the ARS, the Company will be required to recognize an other-than-temporary impairment charge against net income.  Based on our ability to access our cash and other short-term investments, our expected operating cash flows, and our other sources of cash, we do not anticipate the current lack of liquidity on these investments to have a material impact on our financial condition or results of operation.

43



 

 

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Financial Statements identified in the Index to Financial Statements appearing under “Item 15. Exhibits and Financial Statement Schedules” of this report are incorporated herein by reference to Item 15.

 

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

 

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of March 31, 2008, that the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act) are effective to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2008, there were no changes in our “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2008.

Our internal control over financial reporting is supported by written policies and procedures, that:

 

 

(1)

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

 

(2)

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and

 

 

(3)

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of inherent limitations in all control systems, no matter how well designed, no evaluation of controls can provide absolute assurance that all control issues within the Company have been or will be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our independent registered public accounting firm has audited the effectiveness of our internal control over financial reporting as of March 31, 2008 as stated in their report that is included herein.

44



 

 

ITEM 9B.

OTHER INFORMATION

We have experienced legal claims by parties asserting that we have infringed their intellectual property rights. We believe that these claims are without merit and intend to defend against them vigorously; however, we could incur substantial costs and diversion of management resources defending any infringement claim – even if we are ultimately successful in the defense of such matter. Litigation is inherently uncertain and always difficult to predict. We refer you to the discussion of infringement and litigation risks in our Risk Factors section of this Report.

Part III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is incorporated herein by reference from our definitive proxy statement for our 2008 annual shareholders’ meeting to be filed with the Commission.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference from our definitive proxy statement for our 2008 annual shareholders’ meeting to be filed with the Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated herein by reference from our definitive proxy statement for our 2008 annual shareholders’ meeting to be filed with the Commission.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated herein by reference from our definitive proxy statement for our 2008 annual shareholders’ meeting to be filed with the Commission.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated herein by reference from our definitive proxy statement for our 2008 annual shareholders’ meeting to be filed with the Commission.

45



PART IV

 

 

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


 

 

 

 

 

 

 

(a)

(1)

Index to Financial Statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

 


 

 

 

 

 

 

 

 

 

n

Report of Independent Registered Public Accounting Firm

 

52

 

 

 

 

 

 

 

 

 

 

n

Report of Independent Registered Public Accounting Firm

 

53

 

 

 

 

 

 

 

 

 

 

n

Consolidated Balance Sheets
March 31, 2008 and March 31, 2007

 

54

 

 

 

 

 

 

 

 

 

 

n

Consolidated Statements of Income — Years Ended
March 31, 2008, March 31, 2007 and March 31, 2006

 

55

 

 

 

 

 

 

 

 

 

 

n

Consolidated Statements of Shareholders’ Equity — Years Ended
March 31, 2008, March 31, 2007 and March 31, 2006

 

56

 

 

 

 

 

 

 

 

 

 

n

Consolidated Statements of Cash Flows — Years Ended
March 31, 2008, March 31, 2007 and March 31, 2006

 

57

 

 

 

 

 

 

 

 

 

 

n

Notes to Consolidated Financial Statements

 

58

 

 

 

 

 

 

 

 

 

(2)

The following financial statement schedule for the years ended March 31, 2008, March 31, 2007 and 2008, read in conjunction with the financial statements of Quality Systems, Inc., is filed as part of this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

 

n

Schedule II — Valuation and Qualifying Accounts

 

78

 

 

 

 

 

 

 

 

 

 

Schedules other than that listed above have been omitted since they are either not required, not applicable, or because the information required is included in the financial statements or the notes thereto.

 

 

 

 

 

 

 

 

(3)

The exhibits listed in the Index to Exhibits hereof are attached hereto or incorporated herein by reference and filed as a part of this Report.

46



INDEX TO EXHIBITS

 

 

 

 

Exhibit
Number

 

Description


 


 

 

 

 

3.1

 

 

Restated Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California on September 8, 1989, are hereby incorporated by reference to Exhibit 3.1 to the registrant’s Registration Statement on Form S-1 (Registration No. 333-00161) filed January 11, 1996.

 

 

 

 

3.2

 

 

Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California effective March 4, 2005, is hereby incorporated by reference to Exhibit 3.1.1 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

 

 

 

 

3.3

 

 

Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California effective October 6, 2005 is hereby incorporated by reference to Exhibit 3.01 of the registrant’s Current Report on Form 8-K filed October 11, 2005.

 

 

 

 

3.4

 

 

Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California effective March 3, 2006 is hereby incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K filed March 6, 2006.

 

 

 

 

3.5

 

 

Amended and Restated Bylaws of Quality Systems, Inc., as amended and restated effective May 25, 2005, are hereby incorporated by reference to Exhibit 3.6 of the registrant’s Annual Report on Form 10K for the year ended March 31, 2005.

 

 

 

 

3.6

 

 

Certificate of Amendment of Bylaws of the Company effective September 20, 2006 is hereby incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed September 25, 2006.

 

 

 

 

3.7

 

 

Amended Exhibit A to Amended and Restated Bylaws, adopted by the registrant’s Board of Directors on May 31, 2007, is hereby incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K filed June 5, 2007.

 

 

 

 

3.8

 

 

Amended and Restated Bylaws of Quality Systems, Inc., effective May 29, 2008 is hereby incorporated by reference to Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed June 2, 2008.

 

 

 

 

10.1

*

 

Amended and Restated 1998 Stock Option Plan is hereby incorporated by reference to Exhibit 10.10.1 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

 

 

 

 

10.2

*

 

Form of Incentive Stock Option Agreement for Amended and Restated 1998 Stock Option Plan is hereby incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

 

 

 

 

10.3

*

 

Form of Non-Qualified Stock Option Agreement for Amended and Restated 1998 Stock Option Plan is hereby incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10Q for the quarter ended September 20, 2004.

 

 

 

 

10.4

*

 

2005 Stock Option and Incentive Plan is incorporated by reference to Exhibit 10.01 to the registrant’s Current Report on Form 8-K filed October 5, 2005.

 

 

 

 

10.5

*

 

Form of Nonqualified Stock Option Agreement for 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed June 5, 2007.

 

 

 

 

10.6

*

 

Form of Incentive Stock Option Agreement for 2005 Stock Incentive Plan is incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed June 5, 2007.

47



 

 

 

 

Exhibit
Number

 

Description


 


 

 

 

 

10.7

*

 

1993 Deferred Compensation Plan is hereby incorporated by reference to Exhibit 10.5 to the registrant’s Annual Report on Form 10-KSB for the year ended March 31, 1994.

 

 

 

 

10.8

*

 

1998 Employee Stock Contribution Plan is hereby incorporated by reference to Exhibit 4.1 to the registrant’s Registration Statement on Form S-8 (Registration No. 333-63131).

 

 

 

 

10.9

*

 

Employment Agreement dated July 20, 2000 between Quality Systems, Inc. and Lou Silverman is hereby incorporated by reference to Exhibit 10.18 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

 

 

 

 

10.10

*

 

Form of Indemnification Agreement for directors and executive officers authorized January 27, 2005 is hereby incorporated by reference to Exhibit 10.6.1 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

 

 

 

 

10.11

 

 

Lease Agreement between Company and Tower Place, L.P. dated November 15, 2000, commencing February 5, 2001 is hereby incorporated by reference to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2001.

 

 

 

 

10.12

 

 

Fourth Amendment to lease agreement between the Company and Tower Place, L.P. dated September 22, 2005 is incorporated by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2006.

 

 

 

 

10.13

 

 

Fifth Amendment to lease agreement between the Company and Tower Place, L.P. dated January 31, 2007 is incorporated by reference to Exhibit 10.13 to the registrant's Annual Report on Form 10-K for the year ended March 31, 2007.

 

 

 

 

10.14

 

 

Lease Agreement between Company and Orangewood Business Center Inc. dated April 3, 2000, amended February 22, 2001, is hereby incorporated by reference to Exhibit 10.15 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2001.

 

 

 

 

10.15

 

 

Lease Agreement between the Company and HUB Properties LLC dated May 8, 2002 is hereby incorporated by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2003.

 

 

 

 

10.16

 

 

Second Amendment to Office Lease agreement between the Company and HUB Properties LLC dated February 14, 2006 is incorporated by reference to Exhibit 10.25 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2006.

 

 

 

 

10.17

 

 

Amended and Restated Second Amendment to Office Lease agreement between the Company and HUB Properties LLC dated May 31, 2006 is incorporated by reference to Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the year ended March 31, 2007.

 

 

 

 

10.18

 

 

Lease Agreement between the Company and LakeShore Towers Limited Partnership Phase IV, a California limited partnership, dated September 15, 2004 is hereby incorporated by reference to Exhibit 10.19 of the registrant’s Annual Report on Form 10-K for the year ended March 31, 2005.

 

 

 

 

10.19

 

 

Lease agreement between the Company and Von Karman Michelson Corporation dated September 6, 2005 is incorporated by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2006.

 

 

 

 

10.20

 

 

Office lease between the Company and SLTS Grand Avenue, L.P. dated May 3, 2006 is incorporated by reference to Exhibit 10.20 to the registrant's Annual Report on Form 10-K for the year ended March 31, 2007.

 

 

 

 

10.21

*

 

Board Service Agreement between the Company and Lou Silverman is incorporated by reference to Exhibit 10.2.1 to the registrant’s Current Report of Form 8-K, dated May 31, 2005.

48



 

 

 

 

Exhibit
Number

 

Description


 


 

 

 

 

10.22

*

 

Board Service Agreement between the Company and Patrick Cline is incorporated by reference to Exhibit 10.2.1 to the registrant’s Current Report of Form 8-K dated May 31, 2005.

 

 

 

 

10.23

*

 

Director Compensation Program approved May 25, 2006 is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 30, 2006.

 

 

 

 

10.24

 

 

Settlement Agreement dated as of August 8, 2006 between the registrant and Ahmed Hussein is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 9, 2006.

 

 

 

 

10.25

*

 

Description of Compensation Program for Named Executive Officers for Fiscal Year Ended March 31, 2008 is incorporated by reference to Exhibit 10.25 to the registrant's Annual Report on Form 10-K for the year ended March 31, 2007.

 

 

 

 

10.26

*

 

Description of Compensation Program for Named Executive Officers for Fiscal Year Ending March 31, 2007 is incorporated by reference to Exhibit 10.26 to the registrant's Annual Report on Form 10-K for the year ended March 31, 2007.

 

 

 

 

10.27

 

 

Agreement and Plan of Merger dated May 16, 2008 by and among Quality Systems, Inc., Bud Merger Sub, LLC and Lackland Acquisition II, LLC.**

 

 

 

 

10.28

 

 

Office lease between the Company and Lakeshore Towers Limited Partnership Phase II, a California limited partnership, dated October 18, 2007.**

 

 

 

 

10.29

 

 

Standard Service Center Lease Agreement between the Lincoln National Life Insurance Company and Lackland Acquisition II, LLC, dated November 28, 2001.**

 

 

 

 

10.30
  First Amendment to Standard Service Center Lease Agreement between the Lincoln National Life Insurance Company and Lackland Acquisition II, LLC, dated August 17, 2005.**
   
10.31
Standard Service Center Lease Agreement between the Lincoln National Life Insurance Company and InfoNow Solutions of St. Louis, LLC, dated November 28, 2001.**
 
10.32
Second Amendment to Service Center Lease Agreement between TM Properties, L.L.C., successor to The Lincoln National Life Insurance Company and Lackland Acquisition II, LLC, dated August 17, 2005.**
 
10.33
Assignment of Lease between InfoNow Solutions of St. Louis, Lackland Acquisition II, LLC, and TM Properties, LLC, dated August 17, 2005.**
       

21     

 

 

List of subsidiaries.**

 

 

 

 

23     

 

 

Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP **

 

 

 

 

31.1  

 

 

Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **

 

 

 

 

31.2  

 

 

Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 **

 

 

 

 

32.1  

 

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **


 

 

 


*

This exhibit is a management contract or a compensatory plan or arrangement.

 

 

 

**

Filed herewith.

49



SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

By: /s/ LOUIS E. SILVERMAN

 


 

Louis E. Silverman,

 

President and Chief Executive Officer

Date: June 10, 2008

          KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Louis E. Silverman and Paul A. Holt, each of them acting individually, as his attorney-in-fact, each with the full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to this Annual Report on Form 10-K.

          Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed by the following persons on our behalf in the capacities and on the dates indicated.

 

 

 

 

 

Signature

 

Title

 

Date


 


 


 

 

 

 

 

/s/ Sheldon Razin

 

 

 

May 29, 2008


 

 

 

 

Sheldon Razin

 

Chairman of the Board and Director

 

 

 

 

 

 

 

/s/ Louis E. Silverman

 

President and Chief Executive Officer

 

May 29, 2008


 

(Principal Executive Officer) and

 

 

Louis E. Silverman

 

Director

 

 

 

 

 

 

 

/s/ Paul A. Holt

 

Chief Financial Officer (Principal

 

May 29, 2008


 

Financial Officer) and Secretary

 

 

Paul A. Holt

 

 

 

 

 

 

 

 

 

/s/ Patrick B. Cline

 

President, NextGen Healthcare Information

 

May 29, 2008


Patrick B. Cline

 

Systems Division, and Director

 

 

 

 

 

 

 


 

 

 

Ibrahim Fawzy

 

Director

 

 

 

 

 

 

 

/s/ Edwin Hoffman

 

 

 

May 29, 2008


 

 

 

 

Edwin Hoffman

 

Director

 

 

 

 

 

 

 


 

 

 

 

Ahmed Hussein

 

Director

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Vincent J. Love

 

 

 

May 29, 2008


 

 

 

 

Vincent J. Love

 

Director

 

 

50



 

 

 

 

 

Signature

 

Title

 

Date


 


 


 

 

 

 

 

/s/ Russell Pflueger

 

 

 

May 29, 2008