Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended March 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-12537

QUALITY SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

California

  

95-2888568

(State or other jurisdiction of incorporation or organization)    (IRS Employer Identification No.)

18111 Von Karman Avenue, Suite 700, Irvine, California

  

92612

(Address of principal executive offices)    (Zip Code)

(Registrant’s telephone number, including area code)

(949) 255-2600

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

 

Common Stock, $0.01 Par Value

  

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨    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  ¨    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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨


Table of Contents

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨
    (Do not check if a smaller
reporting company)
 

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2011: $1,910,449,000 (based on the closing sales price of the Registrant’s common stock as reported on the NASDAQ Global Select Market on that date of $48.50 per share).*

The Registrant has no non-voting common equity.

The number of outstanding shares of the Registrant’s common stock as of May 21, 2012 was 59,294,619 shares.

 

* For purposes of this Annual Report on Form 10-K, 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.

Documents Incorporated by Reference

Portions of the Proxy Statement for the 2012 annual meeting of shareholders are

incorporated by reference into Part III.

 

 

 


Table of Contents

QUALITY SYSTEMS, INC.

TABLE OF CONTENTS

2012 Annual Report on Form 10-K

 

 

 

Item         Page  
Part I   
Item 1.   Business      4   
Item 1A.   Risk Factors      16   
Item 1B.   Unresolved Staff Comments      32   
Item 2.   Properties      32   
Item 3.   Legal Proceedings      32   
Item 4.   Mine and Safety Disclosures      32   
Part II   
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      32   
Item 6.   Selected Financial Data      36   
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   
Item 7A.   Quantitative and Qualitative Disclosures about Market Risks      65   
Item 8.   Financial Statements and Supplementary Data      65   
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      65   
Item 9A.   Controls and Procedures      65   
Item 9B.   Other Information      66   
Part III   
Item 10.   Directors, Executive Officers and Corporate Governance      66   
Item 11.   Executive Compensation      67   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      67   
Item 13.   Certain Relationships and Related Transactions, and Director Independence      67   
Item 14.   Principal Accountant Fees and Services      67   
Part IV   
Item 15.   Exhibits and Financial Statement Schedules      68   
  Signatures      71   

 

3


Table of Contents

CAUTIONARY STATEMENT

This Annual Report on Form 10-K (this “Report”) and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, other than statements that are purely historical, are forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “should,” “would,” “could,” “may,” and similar expressions also identify forward-looking statements. These forward-looking statements include, without limitation, discussions of our product development plans, business strategies, future operations, financial condition and prospects, developments in and the impacts of government regulation and legislation and market factors influencing our results. Our expectations, beliefs, objectives, intentions and strategies regarding our future results are not guarantees of future performance and are subject to risks and uncertainties, both foreseen and unforeseen, that could cause actual results to differ materially from results contemplated in our forward-looking statements. These risks and uncertainties include, but are 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 factors discussed in “Item 1A. Risk Factors” of this Report, as well as in our other public disclosures and filings with the Securities and Exchange Commission (“SEC”). Because of these risk factors, as well as other variables affecting our financial condition and results of operations, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. We assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of the filing of this Report.

PART I

 

ITEM 1. BUSINESS

Company Overview

Quality Systems, Inc. and its wholly-owned subsidiaries operate as four business divisions (the “Divisions”) and an India-based offshore captive, and is comprised of: (i) the QSI Dental Division, which includes ViaTrack Systems, LLC (“ViaTrack”); (ii) the NextGen Division, which consists of NextGen Healthcare Information Systems, LLC (“NextGen”); (iii) the Hospital Solutions Division (formerly Inpatient Solutions), which includes Opus Healthcare Solutions, LLC (“Opus”); (iv) the RCM Services Division (formerly Practice Solutions), which consists of NextGen Practice Solutions, LLC (“Practice Solutions”) and (v) Quality Systems India Healthcare Private Limited (“QSIH”) (collectively, the “Company”, “we”, “our”, or “us”). We primarily derive revenue by developing and marketing healthcare information systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations (“PHOs”) and management service organizations (“MSOs”), ambulatory care centers, community health centers and medical and dental schools along with comprehensive systems implementation, maintenance and support and add on complementary services such as revenue cycle management (“RCM”) and electronic data interchange (“EDI”). Our systems and services provide our clients with the ability to redesign patient care and other workflow processes while improving productivity through the 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.

Quality Systems, Inc. was incorporated in California in 1974. Our principal offices are located at 18111 Von Karman Ave., Suite 700, Irvine, California, 92612. We operate on a fiscal year ending on March 31.

 

4


Table of Contents

The Company was founded with an early focus on providing information systems to dental group practices. This focus area would later become the QSI Dental Division. 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 and formed the basis for the NextGen Division. Today, we serve the dental markets through our QSI Dental Division, physician practice, inpatient and RCM services through NextGen Division, Hospital Solutions Division and RCM Services Division.

The Divisions operate largely as stand-alone operations, with each Division maintaining its own distinct product lines, product platforms, development, implementation and support teams and branding. However, there are a small but growing number of customers who are simultaneously utilizing software or services from more than one of our Divisions. In an effort to encourage this cross selling of our products and services between Divisions, we are in the process of further integrating our ambulatory and inpatient products to provide a more robust and comprehensive platform to offer our customers. The Divisions also share the resources of our “corporate office,” which includes a variety of accounting and other administrative functions.

The QSI Dental Division and NextGen Division 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, such as patient scheduling and billing. It is important to note that since in both the medical and dental environments, practice management software systems have already been implemented by the vast majority of practices, we actively compete for the replacement market. The QSI Dental Division and NextGen Division also develop and market software that automates patient records in physician practices, community health centers (CHC’s) and hospital settings. In this patient records area of our business, we are typically competing to replace paper-based patient record alternatives as opposed to replacing previously purchased systems. The Hospital Solutions Division develops and markets an equivalent practice management software product, which performs administrative functions required for operating a small hospital as well as physician documentation and computerized physician order entry (CPOE) charting.

In January 2011, QSIH was formed in Bangalore, India to function as our India-based captive to offshore technology application development and business processing services. As of March 31, 2012, we had 135 full time employees in our Bangalore facility primarily engaged in software development and quality assurance activities.

We continue to pursue product and service enhancement initiatives within each of our Divisions. The majority of such expenditures are currently targeted to the NextGen Division product line and client base.

The following table breaks down our reported segment revenue and segment revenue growth by Division for the fiscal years ended March 31, 2012, 2011 and 2010:

 

     Segment Revenue Breakdown
Fiscal Year  Ended March 31,
    Segment Revenue Growth
Fiscal Year  Ended March 31,
 
     2012     2011     2010     2012     2011     2010  

QSI Dental Division

     4.6     5.7     5.9     (1.9 )%      16.6     8.1

NextGen Division

     75.7     75.3     78.3     22.1     16.5     12.1

Hospital Solutions Division(1)

     8.0     5.1     1.0     92.6     519.1     N/A   

RCM Services Division

     11.7     13.9     14.8     2.8     13.7     67.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

     100.0     100.0     100.0     21.6     21.1     18.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The reported revenue for the Hospital Solutions Division includes four acquisitions. The acquisition of CQI Solutions, Inc. (“CQI”) in July 2011, IntraNexus, Inc. (“IntraNexus”) in April 2011, Opus in February 2010 and Sphere Health Systems, Inc. (“Sphere”) in August 2009.

 

5


Table of Contents

QSI Dental Division.    The QSI Dental Division, co-located with our corporate headquarters in Irvine, California, focuses on developing, marketing and supporting software suites sold to dental organizations located throughout the United States. In addition, the QSI Dental Division supports a growing number of dental organizations using its Software as a Service (“SaaS”) model-based financial and clinical software, as well as a number of medical clients that use the QSI Dental Division’s UNIX®-based legacy medical practice management software product. This SaaS software, formerly called NextDDS™, has undergone a name change and is now “QSIDental™ Web”. The name change was undertaken to give the product stronger identification in the marketplace as a web-based solution.

In July 2009, we licensed source code that allows us to deliver hosted, Web-based SaaS model practice management and clinical software solutions to the dental industry. This software solution, QSIDental Web, is being marketed primarily to the multi-location dental group practice market in which the QSI Dental Division has historically been a dominant player. QSIDental Web moves the QSI Dental Division to the forefront of the emergence of Internet-based applications and cloud computing and represents a significant growth opportunity for the Division to sell to both its existing client base and new clients.

The QSI Dental Division participates jointly with the NextGen Division in providing software and services to safety-net clinics like Federally Qualified Health Centers (“FQHC”) and other “safety net” health centers, including Public Health Centers, Community Health Centers, Free Clinics, as well as Rural and Tribal Health Centers. FQHCs are community-based organizations and are funded by the federal government, which provide medical and dental services to underprivileged and underserved communities. The Patient Protection and Affordable Care Act, which was signed into law in March 2010, reserved $11 billion over a multi-year period for FQHCs, creating unprecedented opportunities for FQHCs growth and the formation of new FQHCs. When combined and used in tandem, NextGen Ambulatory EHR, NextGen Electronic Dental Record and NextGen Practice Management provides a unique product in this marketplace — an integrated patient record accessible by both physicians and dentists.

The QSI Dental Division’s legacy practice management software suite uses a UNIX® operating system. It’s Clinical Product Suite (“CPS”) can be fully integrated with the client server-based practice management software offered from each of our Divisions. When integrated and delivered with the NextGen Healthcare practice management solution, CPS is re-branded as NextGen EDR (Electronic Dental Record). CPS/EDR 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 QSI Dental Division also develops, markets, and provides EDI services to dental practices, including electronic submission of claims to insurance providers as well as automated patient statements. On November 14, 2011, the Company acquired ViaTrack, a developer and provider of information technologies that enhance EDI offerings, to incorporate into the QSI Dental Division. We believe that significant opportunities exist to add EDI services to our portfolio of service offerings in the dental and CHC market and ViaTrack will provide a platform to pursue this opportunity.

NextGen Division.    The NextGen Division, with headquarters in Horsham, Pennsylvania and a significant location in Atlanta, Georgia, provides integrated clinical, financial and connectivity solutions for ambulatory and dental provider organizations. The NextGen Division’s major product categories include the NextGen Ambulatory product suite and NextGen Community Connectivity.

The NextGen Ambulatory product suite streamlines patient care with standardized, real-time clinical and administrative workflows within a physician’s practice, and consists of:

 

   

NextGen Ambulatory Electronic Health Records (“EHR”) to ensure complete, accurate documentation to manage patient care electronically and to improve clinical processes and patient outcomes with electronic charting at the point of care;

 

   

NextGen Practice Management (“PM”) to automate business processes, from front-end scheduling to back-end collections and financial and administrative processes for increased performance and efficiencies;

 

6


Table of Contents
   

NextGen Dashboard, which allows providers to view patient data in a visually rich graphical format. Using bar charts, pie charts, gauges and more, the system displays information at the practice or single provider level;

 

   

NextGen Mobile, which improves patient care through anytime, anywhere access of patient data. In addition, NextGen Mobile has the capability to increase revenue by easily capturing charges at the point of care resulting in potential reduction of medical liability through better documentation of out-of-office actions; and

 

   

NextGen NextPen (“NextPen”), which is a revolutionary digital pen that quickly captures manually-entered data into NextGen Ambulatory EHR. NextPen captures structured data and graphic drawings as part of the patient record without scanning or transcription. This technology requires no learning curve for adoption.

NextGen Community Connectivity consists of:

 

   

NextGen Health Information Exchange (“HIE”) to exchange patient data securely with community healthcare organizations;

 

   

NextGen Patient Portal (“NextMD.com”) to communicate with patients online and import information directly into NextGen Ambulatory EHR; and

 

   

NextGen Health Quality Measures (“HQM”) to allow seamless quality measurement and reporting for practice and physician performance initiatives.

The NextGen Division 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.

Services provided by the NextGen Division include:

 

   

EDI services that are intended to automate the entire patient statement process, reducing labor and printing costs associated with producing statements in-house. In addition, the NextGen Division’s EDI works with the most innovative clearinghouses to transform electronic claims submissions into payments;

 

   

Hosting services that allow practices seeking the benefits of IT automation without the burden of maintaining in-house hardware and networking;

 

   

NextGuard, a data protection services that provides an off-site, data archiving, restoration and disaster recovery preparedness solution for practices to protect clinical and financial data; and

Consulting services provided by the NextGen Division include:

 

   

Strategic governance models and operational transformation;

 

   

Technical consulting, such as data conversions or interface development, which allow practices to build custom add-on features;

 

   

Physician consulting resources that allow practices to consult with the NextGen Division’s physician team; and

 

   

EHealth consulting services that assist in connecting communities of practices for data sharing.

Hospital Solutions Division.    The Hospital Solutions Division, with its primary location in Austin, Texas, provides integrated clinical, financial and connectivity solutions for rural and community hospitals. This Hospital Solutions Division also develops and markets an equivalent practice management software product for the small hospital market, which performs the administrative functions required for operating a small hospital.

In the last few years, we have continued to acquire companies that were established developers of software and services for the inpatient market to operate under the Hospital Solutions Division. On

 

7


Table of Contents

May 1, 2012, we acquired The Poseidon Group, a provider of emergency department software. On July 26, 2011, we acquired CQI, a provider of hospital systems for surgery management. On April 29, 2011, we acquired IntraNexus, a provider of Web-based integrated clinical and hospital information systems. On February 10, 2010, we acquired Opus, a provider of Web-based clinical solutions to hospital systems and integrated health networks nationwide. And on August 12, 2009, we acquired Sphere, a provider of financial information systems to the small hospital inpatient market. These acquisitions are part of our strategy to continue to expand in the small hospital market and to add new clients by taking advantage of cross selling opportunities between the ambulatory and inpatient markets.

The Hospital Solutions Division’s products deliver secure, highly adaptable and easy to use applications to patient centered hospitals and health systems. These products consist of:

 

   

NextGen® Inpatient Clinicals, a system which resides on an active web 2.0 platform, and is designed to initiate widespread work efficiency and communication, reduce errors, time-to-chart, and improve care.

 

   

NextGen® Inpatient Financials, a financial and administrative system that helps hospitals improve the operations and financial and regulatory management of their facilities.

 

   

NextGen® Enterprise Scheduling, a system designed to provide hospital-wide, conflict-free patient scheduling for easier, more efficient patient, resource, and staff management.

 

   

NextGen® Surgical Management, a system designed to help hospitals optimize OR throughput, quality, efficiency, patient safety, revenue, and compliance.

RCM Services Division.    The RCM Services Division, with locations in St. Louis, Missouri and Hunt Valley, Maryland, provides technology solutions and consulting services to cover the full spectrum of healthcare providers’ RCM needs, from patient access through claims denials, with a primary focus on billing and collection services. The RCM Services Division combines a Web-delivered SaaS model and the NextGenpm software platform to execute its service offerings. Execution of the plan to transition our client base onto the NextGen platform is being implemented.

Industry Background

The turbulence in the worldwide economy has impacted almost all industries. While healthcare is not immune to economic cycles, we believe it is more resilient than most segments of the economy. The impact of the current economic conditions on our existing and prospective clients has been mixed. While we continue to see organizations that are doing fairly well operationally, some organizations, especially those with a large dependency on Medicaid populations, have been impacted by the challenging financial conditions faced by many state governments. One factor that is anticipated to have a positive impact on the U.S. healthcare industry is the Obama Administration’s broad healthcare reform efforts. The American Recovery and Reinvestment Act (the “ARRA”), which was enacted on February 17, 2009, includes more than $20 billion in funding to help healthcare organizations modernize operations through the acquisition of health care information technology. During the quarter ended September 30, 2010, the Certification Commission for Health Information Technology (“CCHIT®”), a non-profit organization recognized by the Office of the National Coordinator for Health Information Technology as an approved Authorized Testing and Certification Body, announced that our EHR solution is certified as a Complete EHR and is 2011/2012 compliant. This certification was particularly timely, following the establishment of the Stage 1 Meaningful Use definition criteria under the ARRA, which was announced in July 2010. The continuing clarification of the uncertainties surrounding the Meaningful Use definition has positively impacted the healthcare information technology industry, and we believe we are well positioned to aid physicians and hospitals with their EHR decisions as they prepare to make incentive-based purchases.

Moreover, 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.

 

8


Table of Contents

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. 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, disparate systems, 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. On April 15, 2012, we acquired Matrix Management Solutions (“Matrix”). Since 1998, North Canton, Ohio-based Matrix Management Solutions, a value-added reseller for NextGen Healthcare, has provided RCM services, healthcare IT solutions and training, implementation and support centered on NextGen® technology, to its clients nationwide. The acquisition will enable our RCM Services Division to expand its footprint among private and hospital-based physicians and groups by leveraging Matrix’s RCM expertise.

Our Strategy

Our strategy is to focus on providing software and services to the medical and dental communities, both in the ambulatory and inpatient settings. The key elements of this strategy are to continue development and enhancement of select software solutions in target markets, to continue to bring further integration between our ambulatory and inpatient products, to continue investments in our infrastructure including but not limited to product development, sales, marketing, implementation and support, to continue efforts to make infrastructure investments within an overall context of maintaining reasonable expense discipline, to add new clients through maintaining and expanding sales, marketing and product development activities and to expand our relationship with existing clients through delivery of add-on and complementary products and services while continuing our gold-standard commitment of service in support of our client satisfaction programs. We believe that our growing customer base that is using our software on a daily basis is a strategic asset, and we intend to expand our product and service offerings towards this customer base in order to leverage this strategic asset. We also believe that our products are well positioned to support the creation of accountable care organizations and pay for quality initiatives.

Products and Services

In response to the growing need for more comprehensive, cost-effective healthcare information solutions for medical practices, dental practices, hospitals, health centers and other healthcare providers, our systems and services 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.

 

9


Table of Contents

Utilizing our proprietary software in combination with third party hardware and software solutions, our products enable the integration of a variety of administrative clinical and financial operations. Leveraging more than 30 years of experience in the healthcare information services industry, we believe we continue to add value by providing our clients with sophisticated, full-featured software systems along with comprehensive systems implementation, training, consultation, maintenance and support services.

NextGen Ambulatory 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. We offer both standard licenses and SaaS arrangements in our software offerings; although to date, SaaS arrangements do not represent a significant portion of our arrangements.

NextGenpm is the NextGen Division’s practice management offering. NextGenpm has been developed with a functional graphical user interface (“GUI”) certified for use with Windows 2000 and Windows XP operating systems. The product leverages a relational database (Microsoft SQL Server) with support on both 32 and 64 bit enterprise servers. NextGenpm is a scalable, multi-module solution that 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 NextGenpm product is a highly configurable, cost-effective proven solution that enables the effective management of both single and multi-practice settings.

NextGen Ambulatory Clinical Systems.    The NextGen Division 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 NextGenehr, including services rendered, clinical documentation and diagnoses used for billing purposes. We believe that we currently provide a comprehensive information management solution for the medical marketplace.

NextGenehr was developed with client-server architecture, 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. NextGenehr maintains data using industry standard relational database engines such as Microsoft SQL Server or Oracle. The system is scalable from one to thousands of workstations. NextGenehr 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.

NextGenehr 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.

QSI Dental Division Practice Management and Clinical Systems.    In fiscal year 2010, QSI began selling hosted Software as a Service (SaaS) practice management and clinical software solutions to the dental industry. This software solution is marketed primarily to the multi-location dental group practice market for which the Division has remains a dominate player. This software solution, whose name was changed from NextDDS to QSIDental Web to better identify it as a web-based solution, moves the QSI

 

10


Table of Contents

Dental Division to the forefront of the emergence of Internet-based applications and cloud computing and represents a significant growth opportunity for us to sell to both our existing client base and new clients.

In addition to the SaaS clinical offering, QSI’s dental charting software system, known as the Clinical Product Suite (CPS), provides a comprehensive solution designed specifically for the dental group practice environment. CPS integrates QSI’s 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 planning, existing conditions, periodontal charting via light-pen, voice-activation or keyboard entry for full periodontal examinations and PSR scoring. In addition, digital imaging of X-ray and intra-oral camera images, computer-based patient education modules are 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. All this is supported by 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 and is scalable from one to thousands of workstations. The hardware components, including the requisite operating system licenses, are purchased from third party manufacturers or distributors either directly by the client or by us for resale to the customer.

Hospital Solutions.    The Hospital Solutions Division provides clinical, financial, enterprise scheduling, surgery management and EHR-related applications and services to provide value based solutions for rural, community and specialty hospitals. These solutions are designed to help improve patient safety, automate order entry and facilitate real-time communication of patient information throughout the hospital and across the patient care continuum. The Inpatient solutions are highly scalable, secure and easy to use with a Web 2.0-based clinical component that leverages full “cloud computing” capabilities. Key Inpatient products consist of:

NextGen® Inpatient Clinicals—a suite of CCHIT ONC 2011-certified solutions based on a scalable, secure and web-based enterprise platform that leverages mobile and ‘cloud computing’ technology. Clinicians can enter and retrieve relevant inpatient clinical information (patient vitals, lab results, allergies, medications, and imaging results) from bedside or remote locations. NextGen Inpatient Clinicals’ CPOE, Clinical Documentation, and Clinical Decision support capabilities and help enable hospitals to achieve Stage 1 through Stage 4 adoption for ARRA meaningful use reimbursement and the HIMSS® EMR Adoption Model.

NextGen® Inpatient Financials—a financial and administrative system that helps hospitals streamline operations and improve financial and regulatory management of their facilities. The system is designed to automate and consolidate financials processes at single or multiple facilities, including critical access, rural community and specialty hospitals and physician offices. NextGen® Inpatient Financials uses a common patient database and community-based master patient index. It is designed to help optimize revenue management and claims results.

NextGen® Enterprise Scheduling—a system designed to provide hospital-wide, conflict-free patient scheduling for easier, more efficient patient, resource, and staff management. It can be used as a single module or integrated with any combination of NextGen® Inpatient Clinical Applications. It is designed so that, whether used as a single module or integrated with clinical applications, hospital operations can benefit with better use of resources for increased capacity and patient throughput.

NextGen® Surgical Management—a system designed to help hospitals optimize OR throughput, quality, efficiency, patient safety, revenue, and compliance. Detailed reporting provides surgery directors

 

11


Table of Contents

and hospital administrators with information to fine tune surgical processes, quickly identify cases where costs have exceeded a normal range, and improve use of precious OR resources. Hidden surgical procedure cost drivers can be identified and eliminated. The system also helps ensure compliance with Surgical Care Improvement Project (SCIP) and National Healthcare Safety Network (NHSN) reporting requirements.

Revenue Cycle Management Services.    RCM Services Division partners with private and hospital-based physicians and groups to maximize their use of the NextGen® product suite with best practice, customizable RCM services in order to help them optimize revenue, better leverage automation, and help them focus on practicing medicine. RCM services capabilities include:

Billing and Collections—A robust set of internal controls, checks and balances, audits and reports ensures accuracy and addresses the entire revenue cycle: from patient registration and charge capture, to claim submission, payment posting and accounts receivable management.

Electronic Claims Submission—These services generate HIPAA-compliant insurance transactions to submit client insurance claims electronically to insurance payers nationwide. Our solutions support the CMS-1500, UB-04 and ADA Dental Claim Forms and also accommodate proprietary claim formats.

Electronic Remittance & Payment Posting—These services help ensure payments are posted accurately and promptly. Using the NextGen® Document Management, we link an image of each explanation of benefit (“EOB”) to the corresponding encounter at the time of payment posting to minimize the need for storage of paper EOBs. The services also use electronic remittance and digital lockboxes to post payments and capture specific denial information for management and tracking.

Accounts Receivable Follow-Up—An accounts receivable management methodology designed in cooperation with our clients helps establish joint follow-up parameters, adjustment rules, standards for account elevation, as well as customized follow-up activities.

Expertise and Support—Our team of experts consists of analysts, billing and coding specialists, auditors, customer service professionals, and account managers – all working for our clients to answer patients’ billing questions, monitor RCM performance and trends, and identify opportunities for improvement and increased collections.

Electronic Data Interchange.    We make available EDI capabilities and connectivity services to our clients. The EDI/connectivity capabilities encompass direct interfaces between our products and external third party systems, as well as transaction-based services.

EDI 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 payers 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 either the QSI Dental or NextGen Divisions. On November 14, 2011, the Company acquired ViaTrack, a developer and provider of information technologies that enhance EDI offerings. This acquisition has provided the Company with in house EDI capabilities at less cost to the Company compared to third party providers. We believe that significant opportunities exist to add EDI services to our portfolio of service offerings in the inpatient market and ViaTrack will provide a platform to pursue this opportunity.

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;

 

12


Table of Contents
   

Electronic insurance eligibility verification; and

 

   

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

Community Connectivity.    The NextGen Division also markets NextGen HIE to facilitate cross-enterprise data sharing, enabling individual physican 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 NextGenehs system, another compatible electronic health records system, together with hospitals, payors, labs and other entities. The product is designed to facilitate data exchange within an Integrated Delivery Network (IDN) or Regional Health Information Organization (“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, accuracy 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. Our NextGen Division maintains an internet-based patient health portal, NextGen Patient Portal. NextMD.com is the URL for our 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.com, integrating a number of these features with physicians’ existing systems.

Proprietary Rights

We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish and protect proprietary rights in our products and services. To protect our proprietary rights, we enter into confidentiality agreements and invention assignment agreements with our employees with whom such controls are relevant. Certain qualified employees enter into additional agreements that permit them access under certain circumstances, to software matters that are both confidential and more strictly controlled. In addition, we include intellectual property protective provisions in many of our client contracts.

We rely on software that we license from third parties for certain components of our products and services to enhance our products and services, and meet evolving customer needs. The failure to license any necessary technology, or to maintain our existing licenses, could result in reduced demand for our products.

Because the software industry is characterized by rapid technological change, we believe such factors as the technological and creative skills of our personnel, new product developments, frequent product enhancements, name recognition, and reliable product maintenance are more important to establishing and maintaining a technology leadership position than the various legal protections of our technology.

Although we believe our products and services, and other proprietary rights, do not infringe upon the proprietary rights of third parties, third parties may assert intellectual property infringement claims against us in the future. Any such claims may result in costly, time-consuming litigation and may require us to enter into royalty or cross-license arrangements.

Sales and Marketing

We sell and market our products nationwide primarily through a direct sales force and a small number of reseller relationships. Software license sales to resellers represented less than 10% of total revenue for the years ended March 31, 2012, 2011 and 2010.

 

13


Table of Contents

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 client 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 time-share or billing service agreements, the client provides the use of our software for a fee to one or more practitioners. Although we typically do not receive a fee directly from the distributor’s clients, 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 MSOs and PHOs, professional schools, community health centers and other ambulatory care settings.

MSOs, PHOs 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 10% or more of our net revenue during the fiscal years ended March 31, 2012, 2011 or 2010.

Client Service and Support

We believe our success is attributable in part to our client 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.

 

14


Table of Contents

We offer our clients support services for most system components, including hardware and software, for a fixed monthly, quarterly or annual fee. Clients 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 client 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.

The Company has relationships with third party implementation providers to supplement the Company’s in house implementation resources.

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 and pace. 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 and services are intensely competitive. The industry is highly fragmented and includes numerous competitors, none of which we believe dominates these markets. Our principal existing competitors in the healthcare information systems and services market include: eClinicalWorks, GE Healthcare (“GE”), Allscripts Healthcare Solutions, Inc. (“Allscripts”), EPIC, McKesson and other competitors. In addition, our entry into the small hospital market has introduced new competitors, including Computer Programs and Systems, Inc., Healthland and Healthcare Management Systems, Inc.

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 client support and our extensive experience in the industry.

The RCM market is also intensely competitive as other healthcare information systems companies, such as GE, McKesson and Allscripts, are also in the market of selling both practice management and electronic health records software and medical billing and collection services.

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,

 

15


Table of Contents

enhance and improve our systems. During fiscal years 2012, 2011 and 2010, we expended approximately $44.5 million, $32.5 million and $24.5 million, respectively, on research and development activities, including capitalized software amounts of $13.1 million, $10.7 million and $7.9 million, respectively. In addition, a portion of our product enhancements have resulted from software development work performed under contracts with our clients.

Employees

As of March 31, 2012, we employed approximately 1,938 persons, of which 1,908 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.

Available Information

Our website address is www.qsii.com. We make our periodic and current reports, together with amendments to these reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available on our website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. You may access such filings under the “Investor Relations” button on our website. Members of the public may also read and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. To obtain information on the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains the reports, proxy statements and other information that we file electronically with the SEC. Our website and the information contained therein or connected thereto is not intended to be incorporated into this Report or any other report or information we file with the SEC.

 

ITEM 1A. RISK FACTORS

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below, as well as the other cautionary statements and risks described elsewhere and the other information contained in this Report and in our other filings with the SEC, including subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We operate in a rapidly changing environment that involves a number of risks. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these known or unknown risks actually occur, our business, financial condition or results of operations could be materially and adversely affected, in which case the trading price of our common stock may decline and you may lose all or part of your investment.

Risks Related to Our Business

The ongoing uncertainty in global economic conditions may negatively impact our business, operating results or financial condition.

The continuing unfavorable global economic conditions and uncertainty have caused a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy and extreme volatility in credit, equity and fixed income markets. These macroeconomic conditions could negatively affect our business, operating results or financial condition in a number of ways. For example, current or potential clients may be unable to fund software purchases, which could cause them to delay, decrease or cancel purchases of our products and services or to not pay us or to delay paying us for previously purchased products and services. Our clients may cease business operations or conduct business on a greatly reduced basis. Finally, our investment portfolio is generally subject to general credit, liquidity, counterparty, market and interest rate risks that may be exacerbated by these global financial conditions. If the banking system or the fixed income, credit or equity markets continue to deteriorate or remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected as well.

 

16


Table of Contents

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 substantially greater name recognition and 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 us 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.

There has also been increasing consolidation amongst healthcare industry participants in recent years, creating integrated healthcare delivery systems with greater market power. As provider networks and managed care organizations consolidate, the number of market participants decreases and competition to provide products and services like ours will become more intense. The importance of establishing relationships with key industry participants will become greater and our inability to make initial sales of our systems to, or maintain relationships with, 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. These consolidated industry participants may also try to use their increased market power to negotiate price reductions for our products and services. If we were forced to reduce our prices, our business would become less profitable unless we were able to achieve corresponding reductions in our expenses.

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 client 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 client 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 targeted 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.

 

17


Table of Contents

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 for 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 clients. These third parties could raise their prices and/or be acquired by our competitors, 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 may engage in future acquisitions, which may be expensive and time consuming and from which we may not realize anticipated benefits.

We may acquire additional businesses, technologies and products if we determine that these additional businesses, technologies and products are likely to serve our strategic goals. We acquired Opus and Sphere during fiscal year 2010 and IntraNexus and CQI during fiscal year 2012, all of which are developers of software and services for the inpatient market. During fiscal year 2012, we also acquired ViaTrack, which develops information technologies that enhance EDI offerings. The specific risks we may encounter in these types of transactions include but are not limited to the following:

 

   

potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets with indefinite useful lives, which could adversely affect our results of operations and financial condition;

 

   

using cash as acquisition currency may adversely affect interest or investment income, which may in turn adversely affect our earnings and /or earnings per share;

 

   

difficulty in fully or effectively integrating any acquired technologies or software products into our current products and technologies, which would prevent us from realizing the intended benefits of the acquisition;

 

   

difficulty in predicting and responding to issues related to product transition such as development, distribution and client 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 clients 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 entering geographic and business markets in which we have no or limited prior experience;

 

18


Table of Contents
   

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 could, for any of these reasons, have an adverse effect on our financial condition and results of operations.

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 the operation of our business. 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. 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. Equity incentives may be dilutive to our per share financial performance. Failure to provide such types of incentive compensation could jeopardize our recruitment and retention capabilities.

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 clients, our vendors and us 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.

 

19


Table of Contents

We are implementing a new company-wide enterprise resource planning (“ERP”) system. The implementation process is complex and involves a number of risks that may adversely affect our business and results of operations.

We are currently replacing our multiple legacy business systems at different sites with a new company-wide, integrated ERP system to handle various business, operating and financial processes. The new system will enhance a variety of important functions, such as order entry, invoicing, accounts receivable, accounts payable, financial consolidation, and internal and external financial and management reporting matters.

ERP implementations are complex and time-consuming projects that involve substantial expenditures on system hardware and software and implementation activities that often continue for several years. Such an integrated, wide-scale implementation is extremely complex and requires transformation of business and financial processes in order to reap the benefits of the ERP system. Significant efforts are required for requirements identification, functional design, process documentation, data conversion, user training and post implementation support. Problems in any of these areas could result in operational issues including delayed billing and accounting errors and other operational issues. System delays or malfunctioning could also disrupt our ability to timely and accurately process and report results of our operations, financial position and cash flows, which could impact our ability to timely complete important business processes such as the evaluation of its internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

Until the new ERP system is fully implemented, we expect to incur additional selling, general and administrative expenses and capital expenditures to implement and test the system, and there can be no assurance that other issues relating to the ERP system will not occur or be identified. Our business and results of operations may be adversely affected if it experiences operating problems and/or cost overruns during the ERP implementation process or if the ERP system and the associated process changes do not function as expected or give rise to the expected benefits.

We own a captive facility, located in India that subjects us to regulatory, economic, social and political uncertainties in India.

We are subject to several risks associated with having a portion of our assets and operations located in India. Many US companies have benefited from many policies of the Government of India and the Indian state governments in the states in which we operate, which are designed to promote foreign investment generally and the business process services industry in particular, including significant tax incentives, relaxation of regulatory restrictions, liberalized import and export duties and preferential rules on foreign investment and repatriation. There is no assurance that such policies will continue. Various factors, such as changes in the current Government of India, could trigger significant changes in India’s economic liberalization and deregulation policies and disrupt business and economic conditions in India generally and our business in particular. In addition, our financial performance and the market price of our common stock may be adversely affected by general economic conditions and economic and fiscal policy in India, including changes in exchange rates and controls, interest rates and taxation policies, as well as social stability and political, economic or diplomatic developments affecting India in the future. In particular, India has experienced significant economic growth over the last several years, but faces major challenges in sustaining that growth in the years ahead. These challenges include the need for substantial infrastructure development and improving access to healthcare and education. Our ability to recruit, train and retain qualified employees, develop and operate our captive facility could be adversely affected if India does not successfully meet these challenges.

 

20


Table of Contents

Risks Related to Our Products and Service

If our principal products and our new product developments 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, or the launch of our competitors, 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 client 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.

In April 2009, we announced a new subscription based software as a service delivery model which includes monthly subscription pricing. This model is designed for smaller practices to quickly access the NextGenehr or NextGenpm products at a modest monthly per provider price. We currently derive substantially all of our systems revenue from traditional software license, implementation and training fees, as well as the resale of computer hardware. Today, the majority of our clients pay an initial license fee for the use of our products, in addition to a periodic maintenance fee. While the intent of the new subscription based delivery model is to further penetrate the smaller practice market, there can be no assurance that this delivery model will not become increasingly popular with both small and large clients. If the marketplace increasingly demands subscription pricing, we may be forced to further 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

 

21


Table of Contents

operations, as our revenue would initially decrease substantially. There can be no assurance that the marketplace will not increasingly embrace subscription pricing.

We face the possibility of claims based upon our website content, 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.

If our security measures are breached or fail and unauthorized access is obtained to a client’s data, our services may be perceived as not being secure, clients may curtail or stop using our services, and we may incur significant liabilities.

Our services involve the storage and transmission of clients’ proprietary information and protected health information of patients. Because of the sensitivity of this information, security features of our software are very important. If our security measures are breached or fail as a result of third-party action, employee error, malfeasance, insufficiency, defective design, or otherwise, someone may be able to obtain unauthorized access to client or patient data. As a result, our reputation could be damaged, our business may suffer, and we could face damages for contract breach, penalties for violation of applicable laws or regulations and significant costs for remediation and remediation efforts to prevent future occurrences. We rely upon our clients as users of our system for key activities to promote security of the system and the data within it, such as administration of client-side access credentialing and control of client-side display of data. On occasion, our clients have failed to perform these activities. Failure of clients to perform these activities may result in claims against us that this reliance was misplaced, which could expose us to significant expense and harm to our reputation. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and clients. In addition, our clients may authorize or enable third parties to access their client data or the data of their patients on our systems. Because we do not control such access, we cannot ensure the complete propriety of that access or integrity or security of such data in our systems.

Failure by our clients to obtain proper permissions and waivers may result in claims against us or may limit or prevent our use of data, which could harm our business.

We require our clients to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of the information that we receive, and we require contractual assurances from them that they have done so and will do so. If they do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on their behalf may be limited or prohibited by state or federal privacy laws or other applicable laws. This could impair our functions, processes and databases that reflect, contain, or are based upon such data and may prevent use of such data. In addition, this could interfere with or prevent creation or use of rules and analyses or limit other data-driven activities that are beneficial to our business. Moreover, we may be subject to claims or liability for use or disclosure of information by reason of lack of valid notice, permission or waiver. These claims or liabilities could subject us to unexpected costs and adversely affect our operating results.

 

22


Table of Contents

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 clients 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 clients. Anyone who is able to circumvent our security measures could misappropriate confidential user information or interrupt our, or our clients’, 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 clients causing them to seek out other vendors and/or damage our reputation in the market, making it difficult to obtain new clients.

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 its historic trend of expanding usage. As a result of damage to portions of its infrastructure, the Internet has experienced a variety of performance problems which may continue into the foreseeable future. Such Internet related problems may diminish Internet usage and availability of the Internet to us for transmittal of our Internet-based services. In addition, difficulties, outages and delays by Internet service providers, online service providers and other website operators may obstruct or diminish access to our website by our clients, resulting in a loss of potential or existing users of our services.

Our business depends on continued and unimpeded access to the Internet by us and our customers, which is not within our control.

We deliver Internet-based services and, accordingly, depend on our ability and the ability of our customers to access the Internet. This access is currently provided by third parties that have significant market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and government-owned service provides — all of whom are outside of our control. In the event of any difficulties, outages and delays by Internet service providers, we may be impeded from providing services, resulting in a loss of potential or existing customers.

 

23


Table of Contents

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 concerning patients, their medication, treatment and health status, generally, could result in claims against us which could materially and adversely impact our financial performance, industry reputation and ability to market new system sales. 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 websites, 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 clients and partners;

 

   

state laws regulating healthcare professionals;

 

   

Medicaid laws;

 

   

the HIPAA and related rules proposed by the Health Care Financing Administration; and

 

   

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

HIPAA 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.

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 revenue 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

 

24


Table of Contents

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, and 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.

Risks Related to Regulation

We face increasing involvement of the federal government in our industry, which may give rise to uncertain and unwarranted expectations concerning the benefits we are to receive from government funding and programs.

In February 2009, President Obama signed the American Recovery and Reinvestment Act (“ARRA”), which allocates over $20 billion dollars to healthcare IT over the next several years. The provision of the legislation that addresses health information technology specifically is known as the Health Information Technology for Economic and Clinical Health Act (“HITECH Act”). Under the provisions of HITECH Act, the ARRA includes significant financial incentives to healthcare providers who can demonstrate meaningful use of certified EHR technology beginning in 2011. While we expect the ARRA to create significant opportunities for sales of NextGenehr over the next several years, we are unsure of the immediate or long-term impact from the ARRA.

In order for our customers to qualify for incentives related to EHR use, our products must meet various requirements for product certification under the regulations and must enable our customers to achieve “meaningful use,” as such term is currently defined under the July 28, 2010 Final Rule adopted by the Centers for Medicare & Medicaid Services, U.S. Department of Health and Human Services (“CMS”), and under any future regulations and guidance that CMS may release related to the incentive program. The CMS Final Rule provides for a phased approach to implementation of the meaningful use standards, with Stage 1 set forth in the final rule and Stages 2 and 3 reserved for future rulemaking based upon the experiences with Stage 1. Also, a final rule has been implemented by the Office of National Coordinator, U.S. Department of Health and Human Services, to adopt an initial set of standards, implementation specifications, and certification criteria to enhance the use of health information technology and support its meaningful use. Given that CMS will release future regulations related to electronic health records, our ability to achieve product certification by CCHIT® and other regulatory bodies, and the length, if any, of additional related development and other efforts required to meet meaningful use standards could materially impact our ability to compete and to maximize our market opportunity.

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 clients and our ability to obtain new clients. 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.

 

25


Table of Contents

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.

Proprietary rights are material to our success, and the misappropriation of these rights could adversely affect our business and 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.

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 have been, and may be in the future, 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

 

26


Table of Contents

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.

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.

Recently enacted public laws reforming the U.S. healthcare system may have an impact on our business. The Patient Protection and Affordable Care Act (H.R. 3590; Public Law 111-148) (“PPACA”) and The Health Care and Education Reconciliation Act of 2010 (H.R. 4872) (the “Reconciliation Act”), which amends the PPACA (collectively the “Health Reform Laws”), were signed into law in March 2010. The Health Reform Laws contain various provisions which may impact us and our customers. Some of these provisions may have a positive impact, by expanding the use of electronic health records in certain federal programs, for example, while others, such as reductions in reimbursement for certain types of providers, may have a negative impact due to fewer available resources. Increases in fraud and abuse penalties may also adversely affect participants in the health care sector, including us.

Various legislators have announced that they intend to examine further proposals to reform certain aspects of the U.S. healthcare system. 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.

Developments of additional federal and state regulations and policies have the potential to positively or negatively affect our business.

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.

 

27


Table of Contents

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 RCM 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, invalidate all or portions of some of our client contracts, require us to change or terminate some portions of our business, require us to refund portions of our services fees, cause us to be disqualified from serving clients doing business with government payors and have an adverse effect on our business.

In most cases where we are permitted to do so, we calculate charges for our RCM 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 us or our 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.

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, we believe 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.

 

28


Table of Contents

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have an adverse effect on our business, and our per share price may be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) and the rules and regulations promulgated by the SEC to implement Section 404, we are required to include in our Form 10-K a report by our management regarding the effectiveness of our internal control over financial reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting. The assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management.

As part of the ongoing evaluation being undertaken by management and our independent registered public accountants pursuant to Section 404, our internal control over financial reporting was effective as of March 31, 2012. However, if we fail to maintain an effective system of disclosure controls or internal controls over financial reporting, we may discover material weaknesses that we would then be required to disclose. Any material weaknesses identified in our internal controls could have an adverse effect on our business. We may not be able to accurately or timely report on our financial results, and we might be subject to investigation by regulatory authorities. This could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which may have an adverse effect on our stock price.

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 may be revised in the future, thereby causing ourselves to review, revise or reevaluate our internal control processes which may result in the expenditure of additional human and financial resources.

Risks Related to Ownership of Our Common Stock

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 (“FASB”) or other rule-making bodies;

 

   

accounting policies concerning the timing of the recognition of revenue;

 

   

the availability and cost of system components;

 

   

the financial stability of clients;

 

29


Table of Contents
   

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;

 

   

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 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, their decision concerning 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 in accordance with the applicable accounting guidance as defined by the FASB.

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.

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;

 

30


Table of Contents
   

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;

 

   

macroeconomic conditions, both nationally and internationally; and

 

   

other factors, many of which are beyond our control.

Furthermore, the stock market in general, and the market for software, healthcare and high technology companies in particular, has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading price of our common stock, regardless of actual operating performance.

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 are significant shareholders who beneficially own an aggregate of approximately 32.8% of the outstanding shares of our common stock at March 31, 2012. California law and 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 of Directors. The amounts required to assure a seat on our Board Directors 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 the cumulative voting rights. In the event that cumulative voting is invoked, it is likely that these two directors that are significant shareholders will each have sufficient votes to assure themselves of one or more seats on our Board of Directors. With or without cumulative voting, these two significant shareholders will have substantial influence over the outcome of all matters submitted to our shareholders for approval, including the election of our directors and other corporate actions. This influence may be alleged to conflict with our interests and the interests of our other shareholders. For example, in fiscal year 2009, one of the significant shareholders proposed a different slate of directors than what our Company proposed to shareholders. We spent approximately $1.5 million to defend our Company’s slate of directors. In addition, such influence by one or both of these shareholders could have the effect of discouraging others from attempting to acquire our Company or create actual or perceived governance instabilities that could adversely affect the price of our common stock.

Our future policy concerning the payment of dividends is uncertain, which could adversely affect the price of our stock.

We 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 our Board of Directors has declared a quarterly cash dividend ranging from $0.125 to its most recent level of $0.175 per share on our outstanding shares of common stock, each quarter thereafter. We anticipate that future quarterly dividends, if and when declared by our Board of Directors 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

 

31


Table of Contents

can be no guarantees that we will have the financial ability to fund this dividend in perpetuity or to pay it at historic rates. Further, our Board of Directors 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 corporate headquarters, the QSI Dental Division and the NextGen Division training operations are located in Irvine, California. We believe that our present facilities are adequate for our current needs. Should we continue to grow, we may be required to lease or acquire additional space. We believe that suitable additional or substitute space is available, if needed, at market rates.

As of March 31, 2012, we lease an aggregate of approximately 352,800 square feet of space with lease agreements expiring at various dates. Significant locations are as follows:

 

     Square Feet  

QSI Dental Division (including Corporate Headquarters)

  

Irvine, California

     43,700   

NextGen Division

  

Horsham, Pennsylvania

     98,000   

Atlanta, Georgia

     34,800   

Hospital Solutions Division

  

Austin, Texas

     39,200   

Irvine, California

     4,200   

RCM Services Division

  

St. Louis, Missouri

     58,000   

Hunt Valley, Maryland

     33,500   

Other locations

     41,400   
  

 

 

 

Total leased properties

     352,800   
  

 

 

 

 

ITEM 3.    LEGAL PROCEEDINGS

As of the date of the filing of this Report, we know of no material, existing or pending legal proceedings against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

ITEM 4.    MINE AND SAFETY DISCLOSURES

Not applicable.

PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, 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.”

 

32


Table of Contents

On July 27, 2011, our Board of Directors approved a two-for-one split of our common stock and a proportional increase in the number of our common shares authorized from 50 million to 100 million. Each shareholder of record at the close of business on October 6, 2011 received one additional share for every outstanding share held on the record date. The additional shares were distributed October 26, 2011 and trading began on a split-adjusted basis on October 27, 2011. All share and per share amounts have been restated for all periods presented to reflect the two-for-one split of our common stock.

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:

 

     High      Low  

Three Months Ended June 30, 2010

   $ 34.45       $ 26.93   

September 30, 2010

   $ 33.64       $ 26.45   

December 31, 2010

   $ 35.91       $ 29.18   

March 31, 2011

   $ 41.84       $ 34.67   

June 30, 2011

   $ 45.79       $ 38.64   

September 30, 2011

   $ 50.70       $ 37.05   

December 31, 2011

   $ 49.22       $ 33.08   

March 31, 2012

   $ 45.00       $ 35.82   

At May 21, 2012, there were approximately 85 holders of record of our common stock.

Dividends

In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend of $0.125 per share on our outstanding common stock, subject to further review and approval and the establishment of record and distribution dates by our Board of Directors prior to the declaration of each such quarterly dividend. Our Board of Directors subsequently increased the quarterly dividend to $0.150 per share in August 2008 and to $0.175 per share in January 2011. We anticipate that future quarterly dividends, if and when declared by our Board of Directors 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 24, 2012, the Board of Directors approved a quarterly cash dividend of $0.175 per share on the Company’s outstanding shares of Common Stock, payable to shareholders of record as of June 15, 2012 with an expected distribution date on or about July 3, 2012.

 

33


Table of Contents

Our Board of Directors declared the following dividends during the periods presented:

 

Declaration Date

  

Record Date

  

Payment Date

   Per Share
Dividend
 

May 25, 2011

   June 17, 2011    July 5, 2011    $ 0.175   

July 27, 2011

   September 19, 2011    October 5, 2011      0.175   

October 26, 2011

   December 20, 2011    January 5, 2012      0.175   

January 25, 2012

   March 20, 2012    April 5, 2012      0.175   
        

 

 

 

Fiscal year 2012

         $ 0.700   
        

 

 

 

May 26, 2010

   June 17, 2010    July 6, 2010    $ 0.150   

July 28, 2010

   September 17, 2010    October 5, 2010      0.150   

October 25, 2010

   December 17, 2010    January 5, 2011      0.150   

January 26, 2011

   March 17, 2011    April 5, 2011      0.175   
        

 

 

 

Fiscal year 2011

         $ 0.625   
        

 

 

 

May 27, 2009

   June 12, 2009    July 6, 2009    $ 0.150   

July 23, 2009

   September 25, 2009    October 5, 2009      0.150   

October 28, 2009

   December 23, 2009    January 5, 2010      0.150   

January 27, 2010

   March 23, 2010    April 5, 2010      0.150   
        

 

 

 

Fiscal year 2010

         $ 0.600   
        

 

 

 

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

 

34


Table of Contents

Performance Graph

The following graph compares the cumulative total returns of our common stock, the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Services Stock Index over the five-year period ended March 31, 2012 assuming $100 was invested on March 31, 2007 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.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Quality Systems, Inc., The NASDAQ Composite Index

And The NASDAQ Computer & Data Processing Index

 

LOGO

 

* $100 invested on 3/31/2007 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, 2008, 2009, 2010, 2011 and 2012 was published by NASDAQ and, accordingly for the periods ended March 31, 2008, 2009, 2010, 2011 and 2012, 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.

 

35


Table of Contents
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, 2012 and the consolidated balance sheets data as of the end of each such fiscal year are derived from our audited consolidated financial statements. The following information should be read in conjunction with our consolidated financial statements and the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

Consolidated Financial Data

 

     Fiscal Year Ended March 31,  
     2012     2011      2010      2009     2008  
     (In thousands, except per share data)  

Statements of Income Data:

            

Revenue

   $ 429,835      $ 353,363       $ 291,811       $ 245,515      $ 186,500   

Cost of revenue

     151,223        127,482         110,807         88,890        62,501   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     278,612        225,881         181,004         156,625        123,999   

Selling, general and administrative

     128,846        108,310         86,951         69,410        53,260   

Research and development costs

     31,369        21,797         16,546         13,777        11,350   

Amortization of acquired intangible assets

     2,198        1,682         1,783         1,035          
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income from operations

     116,199        94,092         75,724         72,403        59,389   

Interest income

     247        263         226         1,203        2,661   

Other income (expense), net

     (139     61         268         (279     953   

Income before provision for income taxes

     116,307        94,416         76,218         73,327        63,003   

Provision for income taxes

     40,650        32,810         27,839         27,208        22,925   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 75,657      $ 61,606       $ 48,379       $ 46,119      $ 40,078   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Basic net income per share

   $ 1.29      $ 1.06       $ 0.84       $ 0.82      $ 0.73   

Diluted net income per share

   $ 1.28      $ 1.06       $ 0.84       $ 0.81      $ 0.72   

Basic weighted average shares outstanding

     58,729        57,894         57,270         56,062        54,596   

Diluted weighted average shares outstanding

     59,049        58,236         57,592         56,792        55,540   

Dividends declared per common share

   $ 0.700      $ 0.625       $ 0.600       $ 0.575      $ 0.500   

 

     March 31,
2012
     March 31,
2011
     March 31,
2010
     March 31,
2009
     March 31,
2008
 

Balance Sheet Data:

              

Cash and cash equivalents

   $ 134,444       $ 116,617       $ 84,611       $ 70,180       $ 59,046   

Working capital

   $ 183,277       $ 145,758       $ 118,935       $ 98,980       $ 79,932   

Total assets

   $ 440,352       $ 378,686       $ 310,180       $ 242,101       $ 187,908   

Total liabilities

   $ 145,175       $ 154,016       $ 121,891       $ 86,534       $ 74,203   

Total shareholders’ equity

   $ 295,177       $ 224,670       $ 188,289       $ 155,567       $ 113,705   

 

36


Table of Contents
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 management’s discussion and analysis of financial condition and results of operations (“MD&A”), 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 any risks that may be described in “Item 1A. Risk Factors” as set forth herein, as well as in our other public disclosures and filings with the SEC.

Overview

This MD&A, is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this Report in order to enhance your understanding of our results of operations and financial condition and 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 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.

Our MD&A is organized as follows:

 

   

Management Overview.    This section provides a general description of our Company and operating segments, a discussion as to how we derive our revenue, background information on certain trends and developments affecting our Company, a summary of our acquisition transactions and a discussion on management’s strategy for driving revenue growth.

 

   

Critical Accounting Policies and Estimates.    This section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations, and whose application requires us to exercise subjective or complex judgments in making estimates and assumptions. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 2, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included elsewhere in this Report.

 

   

Company Overview.    This section provides a more detailed description of our Company, operating segments, products and services offered.

 

   

Overview of Results of Operations and Results of Operations by Operating Divisions.    These sections provide our analysis and outlook for the significant line items on our consolidated statements of income, as well as other information that we deem meaningful to understand our results of operations on both a consolidated basis and an operating division basis.

 

   

Liquidity and Capital Resources.    This section provides an analysis of our liquidity and cash flows and discussions of our contractual obligations and commitments as of March 31, 2012.

 

   

New Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted by our Company or may be adopted in the future.

Management Overview

Quality Systems, Inc. and its wholly-owned subsidiaries operate as four business divisions which are comprised of: (i) the QSI Dental Division, (ii) the NextGen Division, (iii) the Hospital Solutions Division

 

37


Table of Contents

and (iv) the RCM Services Division. In fiscal year 2011, we opened a captive entity in India called Quality Systems India Healthcare Private Limited (“QSIH”). We primarily derive revenue by developing and marketing healthcare information systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations (“PHOs”) and management service organizations (“MSOs”), ambulatory care centers, community health centers and medical and dental schools along with comprehensive systems implementation, maintenance and support and add on complementary services such as revenue cycle management (“RCM”) and electronic data interchange (“EDI”). Our systems and services provide our clients with the ability to redesign patient care and other workflow processes while improving productivity through the 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.

On August 12, 2009, we acquired Sphere, a provider of financial information systems to the small hospital inpatient market. On February 10, 2010, we acquired Opus, a provider of web-based clinical solutions to hospital systems and integrated health networks nationwide. On April 29, 2011, we acquired IntraNexus, a provider of web-based integrated clinical and hospital information systems. On July 26, 2011, we acquired CQI, a provider of hospital systems for surgery management. These acquisitions are part of tour strategy to expand into the small hospital market and to add new clients by taking advantage of cross selling opportunities between the ambulatory and inpatient markets. All these companies were established developers of software and services for the inpatient market and are operating under the Hospital Solutions Division.

On November 14, 2011, we acquired ViaTrack, a developer and provider of information technologies that enhance EDI offerings. This acquisition provides a platform to pursue significant opportunities that exist to add EDI services to our portfolio of offerings in the Inpatient market and is operating under the QSI Dental Division.

In January 2011, QSIH was formed in Bangalore, India to function as our India-based captive to offshore technology application development and business processing services.

Our strategy is to focus on providing software and services to the medical and dental communities, both in the ambulatory and inpatient settings. The key elements of this strategy are to continue development and enhancement of our software solutions to support healthcare reform and the transition from fee for service to pay for performance/quality initiatives such as accountable care organizations. We also want to continue to bring further integration between our ambulatory and inpatient products, to continue investments in our infrastructure including but not limited to product development, sales, marketing, implementation and support, to continue efforts to make infrastructure investments within an overall context of maintaining reasonable expense discipline, to add new clients through maintaining and expanding sales, marketing and product development activities and to expand our relationship with existing clients through delivery of add-on and complementary products and services while continuing our gold-standard commitment of service in support of our client satisfaction programs. We believe that our growing customer base that is using our software on a daily basis is a strategic asset, and we intend to expand our product and service offerings towards this customer base in order to leverage this strategic asset.

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, software development cost, intangible assets and

 

38


Table of Contents

self-insurance accruals) 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 that the 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. We believe the following table depicts the most critical accounting policies that affect our consolidated financial statements:

 

Revenue Recognition    Judgments and Uncertainties

We generate revenue from the sale of licensing rights to use our software products sold directly to end-users and value-added resellers, or VARs. We also generate revenue from sales of hardware and third party software, implementation, training, software customization, EDI, post-contract support (maintenance) and other services, including RCM services, performed for clients who license our products.

 

Revenue from implementation and training services is recognized as the corresponding services are performed. Maintenance revenue is recognized ratably over the contractual maintenance period. RCM revenue is derived from services fees, which include amounts charged for ongoing billing and other related services and are generally billed to the client as a percentage of total collections. We do not recognize revenue for services fees until these collections are made as the services fees are not fixed or determinable until such time.

  

A typical system contract contains multiple elements of the above items. Revenue earned on software arrangements involving multiple elements is allocated to each element based on the relative fair values of those elements. The fair value of an element is based on vendor-specific objective evidence (“VSOE”). The Company limits its assessment of VSOE for each element to either the price charged when the same element is sold separately 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 quarterly or annually depending on the nature of the product or service. The Company has established VSOE for the related undelivered elements based on the bell-shaped curve method. Maintenance VSOE for the Company’s largest clients is based on stated renewal rates only if the rate is determined to be substantive and falls within the Company’s customary pricing practices.

 

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 is used. Under the residual method, the Company defers revenue related to the undelivered elements in a system sale based on VSOE of fair value of each of the undelivered elements and allocates the remainder of the contract price net of all discounts to revenue recognized from the delivered elements. 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.

 

39


Table of Contents
Revenue Recognition (continued)     
   The Company records accounts receivable for the entire system sales contract amount upon contract execution except for arrangements that provide for services to be billed as incurred. 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 or determinable and collection is considered probable, revenue from licensing rights and sales of hardware and third-party software is generally recognized upon physical or electronic shipment and transfer of title. In certain transactions where collection risk is high, the revenue is deferred until collection occurs or becomes probable. 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 the Company’s arrangements must include the following characteristics:
  

•  Thefee 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; and

  

•  Paymentterms 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 or determinable.

   Effect if Actual Results Differ from Assumptions
   Although we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may be exposed to increases or decreases in revenue that could be material.

 

40


Table of Contents

Allowance for Doubtful Accounts

   Judgments and Uncertainties
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our clients to make required payments. We perform credit evaluations of our clients 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 clients were to deteriorate resulting in an impairment of their ability to make payments, additional allowances would be required.
   Effect if Actual Results Differ from Assumptions
   Although we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may be exposed to increases or decreases in required reserves that could be material.

Software Development Costs

   Judgments and Uncertainties
Development costs incurred in the research and development of new software products and enhancements to existing software products for external use are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional external software development costs are capitalized and amortized on a straight-line basis over the estimated economic life of the related product, which is typically three years.   

We perform an annual review of the estimated economic life and the recoverability of such capitalized software costs. If 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.

 

Effect if Actual Results Differ from Assumptions

 

Although we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may be exposed to increases or decreases in revenue that could be material.

  
  

Goodwill

   Judgments and Uncertainties
   The Company tests goodwill for impairment annually at the end of its first fiscal quarter, referred to as the annual test date, and has determined that there was no impairment to its goodwill as of June 30, 2011. The Company will also test for impairment between annual test dates if an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is performed at a reporting-unit level, which is defined as an operating segment or one level below an operating segment (referred to as a component). A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component.

 

41


Table of Contents

Goodwill (continued)

  
   Effect if Actual Results Differ from Assumptions
  

We have not made any material changes in the accounting methodology we use to assess impairment loss during the past three fiscal years. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. As of March 31, 2012 and 2011, we have not identified any events or circumstances that would require an interim goodwill impairment test.

 

We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill and other intangible assets. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.

Business Combinations — Purchase Price Allocations    Judgments and Uncertainties

During the last three fiscal years, we completed four acquisitions:

 

In November 2011, we acquired ViaTrack for $10.9 million.

 

In July 2011, we acquired CQI for $8.5 million.

 

In April 2011, we acquired IntraNexus for $4.2 million.

 

In February 2010, we acquired Opus for $21.1 million.

   In accordance with the accounting for business combinations, we allocate the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. Our purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.

 

42


Table of Contents
Business Combinations — Purchase Price Allocations (continued)   
   Effect if Actual Results Differ from Assumptions
   We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to complete the purchase price allocation and estimate the fair value of acquired assets and liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.

Intangible Assets

   Judgments and Uncertainties
Intangible assets consist of trade names, customer relationships, and software technology, all is which arose in connection with the acquisition of Sphere, Opus, IntraNexus, CQI and ViaTrack.    These intangible assets are recorded at fair value and are stated net of accumulated amortization. The Company currently amortizes the intangible assets using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed.
   Effect if Actual Results Differ from Assumptions
   Although we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may be exposed to decreases in the fair value of our intangible assets, resulting in impairment charges that could be material. We test intangible assets for impairment if we believe indicators of impairment exist.

Share-Based Compensation

   Judgments and Uncertainties
Our stock-based compensation plans consist of stock options and restricted stock units. See Note 9 of our consolidated financial statements for a complete discussion of our stock-based compensation programs.   

The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. Expected term is estimated using historical exercise experience. Volatility is estimated by using the weighted-average historical volatility of the Company’s common stock, which 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 ultimately expected to vest is recognized ratably as expense over the requisite service period in the Company’s consolidated statements of income. On May 25, 2011, the Board of Directors approved its fiscal year 2012

 

43


Table of Contents

Share-Based Compensation (continued)

  
  

equity incentive program for certain employees to be awarded options to purchase the Company’s common stock. Under the program, executives are eligible to receive options based on meeting certain target increases in EPS performance and revenue growth during fiscal year 2012. Non-executive employees are also eligible to receive options based on satisfying certain management established criteria and recommendations of senior management. The options shall be issued pursuant to one of the Company’s shareholder approved option plans, have an exercise price equal to the closing price of the Company’s shares on the date of grant, a term of eight years and vesting in five equal annual installments commencing one year following the date of grant.

 

Compensation expense associated with the performance based awards under the Company’s 2012 incentive plan are initially based on the number of options expected to vest after assessing the probability that certain performance criteria will be met. Cumulative adjustments are recorded quarterly to reflect subsequent changes in the estimated outcome of performance-related conditions.

   Effect if Actual Results Differ from Assumptions
   We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.

Self-Insured Liabilities

   Judgments and Uncertainties
Effective January 1, 2010, we became self-insured with respect to healthcare claims, subject to stop-loss limits. We accrue for estimated self-insurance costs and uninsured exposures based on claims filed and an estimate of claims incurred but not reported as of each balance sheet date. However, it is possible that recorded accruals may not be adequate to cover the future payment of claims. Adjustments, if any, to estimated accruals resulting from ultimate claim payments will be reflected in earnings during the periods in which such adjustments are determined.   

Our self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date.

 

Effect if Actual Results Differ from Assumptions

 

We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.

 

44


Table of Contents

Overview of Our Results

 

   

Consolidated revenue increased 21.6% and income from operations grew by 23.5% in the year ended March 31, 2012 as compared to the prior year period. Revenue was positively impacted by growth in certain recurring revenue streams including maintenance and EDI, as well as system sales revenue, which grew 26.2%, 20.1% and 19.5% over the prior period, respectively. Other services revenue, which includes consulting and other add on services, grew 44.8% compared to the prior year.

 

   

Income from operations increased primarily from growth in both system sales and recurring revenue streams such as maintenance and EDI. This was partially offset by: (a) higher selling, general and administrative expenses, which was primarily a result of increased headcount expenses and selling-related expenses at the NextGen Division, (b) increased research and development costs, (c) higher corporate-related expenses and a slightly higher effective tax rate.

 

   

We have benefited and hope to continue to benefit from the increased demands on healthcare providers for greater efficiency and lower costs, financial incentives from the ARRA to physicians who adopt electronic health records, as well as increased adoption rates for electronic health records and other technology in the healthcare arena. We also believe that healthcare reform and the movement towards pay for performance/quality initiatives will also stimulate demand for robust enterprise electronic health record software as well.

 

   

While we expect to benefit from the increasing demands for greater efficiency as well as government support for increased adoption of electronic health records, the current economic environment, the increased adoption rates already achieved by large practices, combined with unpredictability of the federal government’s plans to promote increased adoption of electronic medical records, makes the near term achievement of such benefits and, ultimately, their impact on system sales, uncertain.

 

   

The consolidation of healthcare providers by Hospitals, Payers, and large physician groups is creating both competitive threats as well as opportunities for our products. Hospital software providers are leveraging their position with their hospital customers to gain market share with hospital owned physician practices. Insurance providers and large physician groups are also consolidating physician offices creating additional opportunity for ambulatory software providers such as NextGen.

QSI Dental Division

 

   

QSI Dental Division revenue decreased 1.9% in the year ended March 31, 2012 and divisional operating income (excluding unallocated corporate expenses) decreased 28.3% as compared to the same prior year period. The decline is the result of higher selling, general and administrative expenses in the current period. It should also be noted that the QSI Dental Division’s new software solution (“NextDDS™”) is being sold as a SaaS solution where revenue is recognized over time rather than upfront. Revenue recognized from NextDDS was not significant in the year ended March 31, 2012. Additionally, our acquisition of ViaTrack in November 2011 did not significantly impact the QSI Dental Division results for the period.

 

   

The QSI Dental Division is well-positioned to sell to the FQHCs market and intends to continue leveraging the NextGen Division’s sales force to sell its dental electronic medical records software to practices that provide both medical and dental services, such as FQHCs, which are receiving grants as part of the ARRA.

 

   

Our goal for the QSI Dental Division is to maximize profit performance given the constraints represented by a relatively weak purchasing environment in the dental group practice market while taking advantage of opportunities with the new NextDDS™ product.

 

45


Table of Contents

NextGen Division

 

   

NextGen Division revenue increased 22.1% in the year ended March 31, 2012 and divisional operating income (excluding unallocated corporate expenses) increased 21.7% as compared to the prior year period.

 

   

Recurring revenue, which consists of maintenance and EDI revenue, increased 23.6% to $160.8 million and accounted for 49.4% of total NextGen Division revenue for the year ended March 31, 2012. In the same period a year ago, recurring revenue of $130.0 million represented 48.8% of total NextGen Division revenue.

 

   

During the year ended March 31, 2012, we added staffing resources and increased our investment in research and development in anticipation of growth from the ARRA and the future of healthcare reform and accountable care organizations. Our goals include taking maximum advantage of benefits related to the ARRA and continuing to further enhance our existing products, including continued efforts to maintain our status as a qualified vendor under the ARRA, integrating our inpatient and ambulatory software products, further development and enhancements of our portfolio of specialty focused templates within our EHR software, developing new products for targeted markets, continuing to add new clients, selling additional software and services to existing clients, expanding penetration of connectivity and other services to new and existing clients, and capitalizing on growth and cross selling opportunities within the RCM Services Division and the Hospital Solutions Division.

 

   

The NextGen Division’s growth is attributed to a strong brand name and reputation within a growing marketplace for electronic health records and investments in sales and marketing activities, including new marketing campaigns, trade show attendance and other expanded advertising and marketing expenditures. We have also benefited from winning numerous industry awards for the NextGen Division’s flagship NextGenehr and NextGenpm software products and more recently in 2010 for its NextGen HIE product. Further, the increasing acceptance of electronic records technology in the healthcare industry continues to provide growth opportunities.

Hospital Solutions Division

 

   

Hospital Solutions Division revenue increased 92.5% in the year ended March 31, 2012 and divisional operating income (excluding unallocated corporate expenses) increased 94.3% to $10.4 million as compared to $5.4 million for the same prior year period. This division consists of four acquisitions, CQI, IntraNexus, Opus and Sphere, acquired in July 2011, April 2011, February 2010 and August 2009, respectively. The Hospital Solutions Division’s core products consist of financial and clinical software which we acquired with the Sphere, IntraNexus, and Opus acquisitions. Our acquisition of CQI added surgery scheduling capability. In May, 2012 we also announced the acquisition of The Poseidon Group, a developer of emergency department software. This acquisition further adds to the Division’s offerings in the inpatient market.

 

   

The Hospital Solutions Division has benefited from being able to offer both financial and CCHIT® certified clinical software, which has been packaged together. The Hospital Solutions Division has also benefited from cross sell opportunities with existing NextGen Division customers, including hospitals that are owned or affiliated with physician offices.

 

   

Operating income as a percentage of revenue increased to approximately 30.2% of revenue in the year ended March 31, 2012 versus 30.0% of revenue in the same prior year period primarily as a result of a $16.6 million increase in divisional revenue, including system sales, implementation and training services, and maintenance.

 

   

We intend to continue to invest in implementation and training, support, and development to support our growing customer base.

 

46


Table of Contents

RCM Services Division

 

   

RCM Services Division revenue increased 2.8% in the year ended March 31, 2012 and divisional operating income (excluding unallocated corporate expenses) increased 37.8% to $5.8 million as compared to $4.2 million for the same prior year period.

 

   

The RCM Services Division benefited from organic growth achieved through cross selling RCM services to existing NextGen Division clients and well as new clients added during the year ended March 31, 2012. The division also benefited from the cross sale of software and services to its existing customers. Systems sales to existing RCM Services customers are credited to the division.

 

   

The Company believes that a significant opportunity exists to cross sell revenue cycle management services to existing NextGen ambulatory customers. The portion of existing the NextGen Division’s customers who are using the RCM Services Division’s RCM services is less than 15%. There is also a significant opportunity to expand the RCM Services Division’s services into the Hospital Solution Division’s customers as well. Management is actively pursuing efforts to achieve faster growth from expanded efforts to leverage the existing NextGen Division’s sales force towards selling revenue cycle management services.

 

   

Operating income as a percentage of revenue increased to approximately 11.6% of revenue in the year ended March 31, 2012 versus 8.7% of revenue in the same prior year period primarily as a result of higher RCM revenue as well as systems sales. The same prior year period also included higher expenses related to certain non-recurring integration related expenses related to integrating the two entities that make up the RCM Services Division, transitioning and training of staff on the NextGen platform, initial set up and other costs related to achieving higher production volume from a new business.

 

47


Table of Contents

The following table sets forth for the periods indicated the percentage of net revenue represented by each item in our consolidated statements of income (certain percentages below may not sum due to rounding):

 

     Fiscal Year Ended March 31,  
         2012         2011         2010  

Revenues:

      

Software, hardware and supplies

     28.5     30.1     30.8

Implementation and training services

     6.1        5.1        4.9   
  

 

 

   

 

 

   

 

 

 

System sales

     34.6        35.2        35.7   

Maintenance

     32.3        31.1        30.6   

Electronic data interchange services

     11.5        11.6        12.0   

Revenue cycle management and related services

     10.6        12.8        12.6   

Other services

     11.0        9.3        9.2   
  

 

 

   

 

 

   

 

 

 

Maintenance, EDI, RCM and other services

     65.4        64.8        64.3   
  

 

 

   

 

 

   

 

 

 

Total revenues

     100.0        100.0        100.0   
  

 

 

   

 

 

   

 

 

 

Cost of revenue:

      

Software, hardware and supplies

     4.3        5.6        4.2   

Implementation and training services

     5.0        4.2        4.1   
  

 

 

   

 

 

   

 

 

 

Total cost of system sales

     9.2        9.8        8.3   

Maintenance

     4.0        3.7        4.6   

Electronic data interchange services

     7.5        7.8        8.7   

Revenue cycle management and related services

     8.0        9.6        9.5   

Other services

     6.4        5.2        7.0   
  

 

 

   

 

 

   

 

 

 

Total cost of maintenance, EDI, RCM and other services

     25.9        26.2        29.7   

Total cost of revenue

     35.2        36.1        38.0   
  

 

 

   

 

 

   

 

 

 

Gross profit

     64.8        63.9        62.0   

Operating expenses:

      

Selling, general and administrative

     30.0        30.7        29.8   

Research and development costs

     7.3        6.2        5.7   

Amortization of acquired intangible assets

     0.5        0.5        0.6   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     37.8        37.3        36.1   

Income from operations

     27.0        26.6        25.9   

Interest income

     0.1        0.1        0.1   

Other income (expense), net

     0.0        0.0        0.1   
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     27.1        26.7        26.1   

Provision for income taxes

     9.5        9.3        9.5   
  

 

 

   

 

 

   

 

 

 

Net income

     17.6     17.4     16.6
  

 

 

   

 

 

   

 

 

 

Comparison of the Fiscal Years Ended March 31, 2012 and March 31, 2011 Net Income.    The Company’s net income for the year ended March 31, 2012 was $75.7 million, or $1.29 per share on a basic and $1.28 per share on a fully diluted basis. In comparison, we earned $61.6 million, or $1.06 per share on both a basic and fully diluted basis for the year ended March 31, 2011. The increase in net income for the year ended March 31, 2012 was primarily attributed to the following:

 

   

a 21.6% increase in consolidated revenue, including an increase in revenues of $58.9 million from our NextGen Division and $16.6 million from our Hospital Solutions Division;

 

   

a 21.3% increase in consolidated software license revenue, which accounted for 77.2% of total system sales;

 

48


Table of Contents
   

a 19.2% increase in recurring revenue, including RCM, maintenance and EDI revenue; offset by

 

   

an increase in selling, general and administrative expenses and research and development costs.

Revenue.    Revenue for the year ended March 31, 2012 increased 21.6% to $429.8 million from $353.4 million for the year ended March 31, 2011. NextGen Division revenue increased 22.1% to $325.5 million from $266.5 million in the year ended March 31, 2012, QSI Dental Division revenue decreased 1.9% to $19.6 million from $20.0 million, RCM Services Division revenue increased 2.8% to $50.3 million from $49.0 million, and Hospital Solutions Division revenue increased 92.5% to $34.5 million from $17.9 million in the same prior year period.

System Sales.    Revenue earned from Company-wide sales of systems for the year ended March 31, 2012 increased 19.5% to $148.8 million from $124.5 million in the prior year period.

Our increase in revenue from sales of systems was principally the result of a 13.9% increase in category revenue at our NextGen Division and a 114.4% increase at our Hospital Solutions Division. NextGen Division sales in this category grew $15.2 million to $124.1 million during the year ended March 31, 2012 from $108.9 million during the same prior year period while the Hospital Solutions Division delivered a $9.5 million increase in category revenue to $17.8 million in the year ended March 31, 2012 as compared to $8.3 million in the same prior year period. The increases were driven by higher sales of software to both new and existing clients at the NextGen Division and higher software and implementation revenue at the Hospital Solutions Division.

The following table breaks down our reported system sales into software, hardware, third-party software, supplies and implementation and training services components on a consolidated and divisional basis for the years ended March 31, 2012 and 2011 (in thousands):

 

     Software      Hardware, Third
Party Software
and Supplies
     Implementation
and Training
Services
     Total
System

Sales
 

Fiscal Year Ended March 31, 2012

           

QSI Dental Division

   $ 2,865       $ 1,662       $ 1,104       $ 5,631   

NextGen Division

     100,517         4,839         18,708         124,064   

Hospital Solutions Division

     10,576         987         6,189         17,752   

RCM Services Division

     961                 390         1,351   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 114,919       $ 7,488       $ 26,391       $ 148,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fiscal Year Ended March 31, 2011

           

QSI Dental Division

   $ 3,239       $ 2,190       $ 1,066       $ 6,495   

NextGen Division

     84,812         8,979         15,097         108,888   

Hospital Solutions Division

     6,187         612         1,482         8,281   

RCM Services Division

     473         22         370         865   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 94,711       $ 11,803       $ 18,015       $ 124,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

NextGen Division software license revenue increased 18.5% in the year ended March 31, 2012 versus the same period last year. The Division’s software revenue accounted for 81.0% of divisional system sales revenue during the year ended March 31, 2012 compared to 77.9% during the same period a year ago. Software license revenue continues to be an area of primary emphasis for the NextGen Division.

Hospital Solutions Division software license revenue increased 70.9% in the year ended March 31, 2012 versus the same period last year. The Division’s software revenue accounted for 59.6% of divisional system sales revenue during the year ended March 31, 2012 compared to 74.7% during the same period a year ago.

 

49


Table of Contents

During the year ended March 31, 2012, 3.9% of the NextGen Division’s system sales revenue was represented by hardware and third-party software compared to 8.2% during the same period a year ago. The number of clients who purchase hardware and third-party software and the dollar amount of hardware and third-party software revenue fluctuates each period depending on the needs of clients. The inclusion of hardware and third-party software in the NextGen Division’s sales arrangements is typically at the request of our clients.

Implementation and training revenue related to system sales at the NextGen Division increased 23.9% in the year ended March 31, 2012 compared to the same prior year period. Implementation and training revenue related to system sales at the Hospital Solutions Division increased 317.6%, in the year ended March 31, 2012 as compared to the same prior year period. The amount of implementation and training services revenue is dependent on several factors, including timing of client 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, 2012 versus the same prior year period 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.

For the RCM Services Division, total system sales increased $0.5 million, or 56.2%, to $1.4 million in the year ended March 31, 2012 as compared to the same prior year period. Systems sales revenue within the RCM Services Division is composed of sales to existing RCM clients only and can fluctuate given the size of the current client base of the RCM Services Division.

Maintenance, EDI, RCM and Other Services.    For the year ended March 31, 2012, our company-wide revenue from maintenance, EDI, RCM and other services grew 22.8% to $281.0 million from $228.8 million in the same prior year period. The increase is primarily due to an increase in maintenance, EDI and other services revenue from the NextGen and Hospital Solutions Divisions.

Total NextGen Division maintenance revenue for the year ended March 31, 2012 grew 24.1% to $116.5 million from $93.9 million for the same prior year period while NextGen Division EDI revenue grew 22.4% to $44.2 million compared to $36.1 million in the same prior year period. Other services revenue for the NextGen Division, which consists primarily of third-party annual software license renewals, follow-on training hours, consulting services and hosting services, increased 47.1% to $40.6 million in the year ended March 31, 2012 from $27.6 million in the same prior year period. Other services revenue benefited from a strong increase in consulting revenue and follow-on training services revenue to existing NextGen Division customers.

The Hospital Solutions Division maintenance and other services revenue for the year ended March 31, 2012 increased 73.8% as compared to the same prior year period primarily due to a $5.9 million increase in divisional maintenance revenue to $14.6 million from $8.6 million in the same prior year period. Maintenance revenue grew as a result of both new customers as well as the acquisitions of IntraNexus and CQI which brought additional maintenance revenue of $4.5 million from their existing customers. QSI Dental Division maintenance, EDI and other services revenue for the year ended March 31, 2012 and 2011 was $14.0 million and $13.5 million, respectively. For the year ended March 31, 2012, RCM revenue for the RCM Services Division grew $0.5 million, or 1.1%, to $45.6 million compared to $45.1 million in the same prior year period.

 

50


Table of Contents

The following table details maintenance, EDI, RCM and other services revenue by category on a consolidated and divisional basis for the years ended March 31, 2012 and 2011 (in thousands):

 

     Maintenance      EDI      RCM      Other      Total  

Fiscal Year Ended March 31, 2012

              

QSI Dental Division

   $ 7,639       $ 5,045       $       $ 1,281       $ 13,965   

NextGen Division

     116,544         44,214                 40,645         201,403   

Hospital Solutions Division

     14,553                         2,158         16,711   

RCM Services Division

     96                 45,572         3,290         48,958   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 138,832       $ 49,259       $ 45,572       $ 47,374       $ 281,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fiscal Year Ended March 31, 2011

              

QSI Dental Division

   $ 7,329       $ 4,891       $       $ 1,251       $ 13,471   

NextGen Division

     93,890         36,131                 27,637         157,658   

Hospital Solutions Division

     8,642                         975         9,617   

RCM Services Division

     158                 45,065         2,865         48,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 110,019       $ 41,022       $ 45,065       $ 32,728       $ 228,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Maintenance revenue for the NextGen Division increased by $22.7 million for the year ended March 31, 2012 as compared to the same prior year period. The growth in maintenance revenue is primarily a result of increases related to net additional licenses from new clients and existing clients as well as a price increase that became effective during the quarter ended September 30, 2011.

The NextGen Division’s EDI revenue growth has come from new clients and from further penetration of the division’s existing client base while the growth in RCM revenue has come from new clients that have been acquired from cross selling opportunities with the NextGen Division client base. We intend to continue to promote maintenance, EDI and RCM services to both new and existing clients. Growth in other services revenue is primarily due to increases in third-party annual software licenses, follow on training services, consulting services and hosting services revenue.

Cost of Revenue.    Cost of revenue for the year ended March 31, 2012 increased 18.6% to $151.2 million from $127.5 million in the same prior year period and the cost of revenue as a percentage of revenue decreased to 35.2% from 36.1% primarily due to a lower amount of hardware included in systems sales as compared to the same prior year period as well as strong software sales achieved in the current year period.

 

51


Table of Contents

The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31, 2012 and 2011 (in thousands):

 

     Fiscal Year Ended March 31,  
     2012      %     2011      %  

QSI Dental Division

        

Revenue

   $ 19,596         100.0   $ 19,966         100.0

Cost of revenue

     9,097         46.4     9,034         45.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 10,499         53.6   $ 10,932         54.8
  

 

 

    

 

 

   

 

 

    

 

 

 

NextGen Division

        

Revenue

   $ 325,467         100.0   $ 266,546         100.0

Cost of revenue

     93,723         28.8     78,496         29.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 231,744         71.2   $ 188,050         70.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Hospital Solutions Division

        

Revenue

   $ 34,463         100.0   $ 17,898         100.0

Cost of revenue

     10,540         30.6     4,671         26.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 23,923         69.4   $ 13,227         73.9
  

 

 

    

 

 

   

 

 

    

 

 

 

RCM Services Division

        

Revenue

   $ 50,309         100.0   $ 48,953         100.0

Cost of revenue

     35,559         70.7     34,896         71.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 14,750         29.3   $ 14,057         28.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Unallocated cost of revenue(1)

   $ 2,303         N/A      $ 385         N/A   

Consolidated

        

Revenue

   $ 429,835         100.0   $ 353,363         100.0

Cost of revenue

     151,223         35.2     127,482         36.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 278,612         64.8   $ 225,881         63.9
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Relates to the amortization of software technology intangible assets acquired from the purchase of ViaTrack, CQI, IntraNexus, Opus and Sphere

Gross profit margins at the QSI Dental Division for the year ended March 31, 2012 decreased to 53.6% from 54.8% for the same prior year period primarily as a result of lower software license revenue included in total revenue. Gross profit margins at the NextGen Division for year ended March 31, 2012 increased to 71.2% compared to 70.6% for the same prior year period due to strong software sales and an increase in maintenance revenue, which yields higher margins than other services, along with improvements in EDI margins. Gross margin in the Hospital Solutions Division decreased to 69.4% for the year ended March 31, 2012 as compared to 73.9% for the same prior year period due to growth in implementation and training revenue which carries lower profit margins compared to software. Gross margin in the RCM Services Division increased to 29.3% for the year ended March 31, 2012 as compared to 28.7% for the same prior year period due to growth in higher margin software revenue.

 

52


Table of Contents

The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue on a consolidated and divisional basis for the years ended March 31, 2012 and 2011:

 

     Hardware,
Third Party
Software
    Payroll and
Related
Benefits
    EDI     Other     Total Cost
of Revenue
    Gross
Profit
 

Fiscal Year Ended March 31, 2012

            

QSI Dental Division

     7.1     23.2     7.9     8.2     46.4     53.6

NextGen Division

     1.3     12.4     7.8     7.3     28.8     71.2

Hospital Solutions Division

     3.2     17.0         10.4     30.6     69.4

RCM Services Division

         46.1     2.2     22.4     70.7     29.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

     1.6     17.2     6.5     9.9     35.2     64.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal Year Ended March 31, 2011

            

QSI Dental Division

     8.7     17.7     11.6     7.2     45.2     54.8

NextGen Division

     2.9     11.8     8.1     6.6     29.4     70.6

Hospital Solutions Division

     5.4     16.7         4.0     26.1     73.9

RCM Services Division

         43.8     0.5     27.0     71.3     28.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

     3.0     16.8     6.9     9.4     36.1     63.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the year ended March 31, 2012, hardware and third-party software constituted a lower portion of cost of revenue compared to the same prior year period in the NextGen Division. The number of clients 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 our clients.

Our payroll and benefits expense associated with delivering our products and services increased to 17.2% of consolidated revenue in the year ended March 31, 2012 compared to 16.8% during the same period last year. The absolute level of consolidated payroll and benefit expenses grew from $59.3 million in the year ended March 31, 2011 to $73.9 million in the year ended March 31, 2012, an increase of 24.5%, or approximately $14.6 million. Of the $14.6 million increase, approximately $1.8 million of the increase is related to the RCM Services Division as RCM is a service business, which inherently has higher percentage of payroll costs as a percentage of revenue. Increases of $8.9 million in the NextGen Division, $2.9 million for the Hospital Solutions Division and $1.0 million in the QSI Dental Division for the year ended March 31, 2012 are primarily due to headcount additions and increased payroll and benefits expense associated with delivering products and services. The amount of share-based compensation expense included in cost of revenue was $0.3 million for both the years ended March 31, 2012 and 2011.

Other expense, which primarily consists of third-party annual license, hosting costs and outsourcing costs, increased to 9.9% of total revenue during the year ended March 31, 2012 as compared to 9.4% for the same period a year ago.

As a result of the foregoing events and activities, our gross profit percentage increased to 64.8% for the year ended March 31, 2012 versus 63.9% for the same prior year period.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the year ended March 31, 2012 increased 19.0% to $128.8 million as compared to $108.3 million for the same prior year period. The increase in these expenses resulted primarily from:

 

   

$12.6 million increase in salaries and related benefit expenses primarily as a result of headcount additions and acquisitions;

 

   

$2.9 million increase in sales commissions primarily related to the NextGen Division;

 

53


Table of Contents
   

$1.9 million increase in bad debt expense;

 

   

$3.1 million net increase in other selling and administrative expenses.

Share-based compensation expense was approximately $2.9 million and $3.3 million for the year ended March 31, 2012 and 2011, respectively, and is included in the aforementioned amounts. Selling, general and administrative expenses as a percentage of revenue decreased from 30.7% in the year ended March 31, 2011 to 30.0% in the year ended March 31, 2012.

Research and Development Costs.    Research and development costs for the years ended March 31, 2012 and 2011 were $31.4 million and $21.8 million, respectively. The increases in research and development expenses were due in part to increased investment in the NextGen and Hospital Solutions Division product lines. We have also invested significantly in enhancements to our specialty template development, preparation for ICD10 requirements, new products including NextGen Mobile, NextGen NextPen, NextGen Community Connectivity consisting of NextGen Health Information Exchange (“NextGen HIE,” formerly Community Health Solution), NextGen Patient Portal (“NextMD.com”), and NextGen Health Quality Measures (“NextGen HQM”), and other enhancements to our existing products. Additions to capitalized software costs offset increases in research and development costs. For the years ended March 31, 2012 and 2011, our additions to capitalized software were at $13.1 million and $10.7 million, respectively, as we continue to enhance our software to meet the Meaningful Use definitions under the ARRA as well as further integrate both ambulatory and inpatient products. Research and development costs as a percentage of revenue increased to 7.3% in the year ended March 31, 2012 from 6.2% for the same prior year period. Research and development expenses are expected to continue at or above current dollar levels as we develop a new integrated inpatient and outpatient, web-based software platform. Share-based compensation expense included in research and development costs was $0.2 million for both the years ended March 31, 2012 and 2011.

Amortization of Acquired Intangible Assets.    Amortization included in operating expense related to acquired intangible assets for the years ended March 31, 2012 and 2011 was $2.2 million and $1.7 million, respectively.

Interest and Other Income.    Total interest and other income for the year ended March 31, 2012 was $0.1 million as compared to $0.3 million for the year ended March 31, 2011. Interest and other income consist primarily of dividends and interest earned on our investments offset by foreign currency losses.

Our investment policy is determined by our Board of Directors. We currently maintain our cash in very liquid short term assets including tax exempt and taxable money market funds and short-term U.S. Treasury securities with maturities of 90 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including, but not limited to, payment of a special dividend, initiation of a stock buyback program, an expansion of our investment policy to include investments with longer maturities of greater than 90 days, and other items. Additionally, it is possible that we will utilize some or all of our cash to fund acquisitions or other similar business activities. Any or all of these programs could significantly impact our investment income in future periods.

Provision for Income Taxes.    The provision for income taxes for the years ended March 31, 2012 and 2011 were $40.6 million and $32.8 million, respectively. The effective tax rates were 35.0% and 34.8% for the years ended March 31, 2012 and 2011, respectively. The effective rate for the year ended March 31, 2012 increased slightly as compared to the prior year period primarily due to the qualified production activities deduction and research and development credits and fluctuations in the state effective tax rate.

During both the year ended March 31, 2012 and 2011, we recognized research and development tax credits of approximately $1.0 million. The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code (“IRC”) of approximately $10.0 million and $8.1 million during the years ended March 31, 2012 and 2011, respectively. Research and development credits and the qualified production activities income deduction calculated by us involve certain assumptions and judgments regarding qualification of expenses under the relevant tax code provision.

 

54


Table of Contents

Comparison of the Fiscal Years Ended March 31, 2011 and March 31, 2010

Net Income.    The Company’s net income for the year ended March 31, 2011 was $61.6 million, or $1.06 per share on both a basic and fully diluted basis. In comparison, we earned $48.4 million, or $0.84 per share on both a basic and fully diluted basis for the year ended March 31, 2010. The increase in net income for the year ended March 31, 2011 was primarily attributed to the following:

 

   

a 21.1% increase in consolidated revenue, including an increase in revenues of $37.8 million from our NextGen Division, $15.0 million from our Hospital Solutions Division and $5.9 million from our RCM Services Division;

 

   

a 16.5% increase in NextGen Division revenue, which accounted for 75.4% of consolidated revenue;

 

   

an increase of recurring revenue, including RCM, maintenance and EDI revenue, which accounted for 55.5% of total consolidated revenue;

 

   

offset by an increase in selling, general and administrative expenses and research and development costs.

Revenue.    Revenue for the year ended March 31, 2011 increased 21.1% to $353.4 million from $291.8 million for the year ended March 31, 2010. NextGen Division revenue increased 16.5% to $266.5 million from $228.7 million in the year ended March 31, 2010 while QSI Dental Division revenue increased 16.6% to $20.0 million from $17.1 million and RCM Services Division revenue increased 13.7% during that same period to $49.0 million from $43.1 million.

System Sales.    Revenue earned from Company-wide sales of systems for the year ended March 31, 2011 increased 19.6% to $124.5 million from $104.1 million in the prior year period.

Our increase in revenue from sales of systems was principally the result of a 12.6% increase in category revenue at our NextGen Division, whose sales in this category grew to $108.9 million during the year ended March 31, 2011 from $96.7 million during the same prior year period. This increase was driven by higher sales of software to both new and existing clients, as well as increases in hardware and third-party software and implementation and training services revenue.

The following table breaks down our reported system sales into software, hardware, third-party software, supplies and implementation and training services components on a consolidated and divisional basis for the years ended March 31, 2011 and 2010 (in thousands):

 

      Software      Hardware, Third
Party Software

and Supplies
     Implementation
and Training
Services
     Total System
Sales
 

Fiscal Year Ended March 31, 2011

           

QSI Dental Division

   $ 3,239       $ 2,190       $ 1,066       $ 6,495   

NextGen Division

     84,812         8,979         15,097         108,888   

Hospital Solutions Division

     6,187         612         1,482         8,281   

RCM Services Division

     473         22         370         865   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 94,711       $ 11,803       $ 18,015       $ 124,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fiscal Year Ended March 31, 2010

           

QSI Dental Division

   $ 1,699       $ 1,409       $ 825       $ 3,933   

NextGen Division

     78,703         4,931         13,058         96,692   

Hospital Solutions Division

     1,129         13         226         1,368   

RCM Services Division

     1,877                 267         2,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 83,408       $ 6,353       $ 14,376       $ 104,137   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

55


Table of Contents

NextGen Division software license revenue increased 7.8% in the year ended March 31, 2011 versus the same period last year. The Division’s software revenue accounted for 77.9% of divisional system sales revenue during the year ended March 31, 2011, compared to 81.4% during the same period a year ago. The September 2010 announcement that NextGenehr became CCHIT® certified along with the finalization of the Stage 1 Meaningful Use definition criteria under the ARRA in July 2010 positively impacted the growth in software license revenue during the year ended March 31, 2011. Software license revenue continues to be an area of primary emphasis for the NextGen Division.

During the year ended March 31, 2011, 8.2% of the NextGen Division’s system sales revenue was represented by hardware and third-party software compared to 5.1% during same period a year ago. The number of clients who purchase hardware and third-party software and the dollar amount of hardware and third-party software revenue fluctuates each quarter depending on the needs of clients. The inclusion of hardware and third-party software in the Division’s sales arrangements is typically at the request of our clients.

Implementation and training revenue related to system sales at the NextGen Division increased 15.6% in the year ended March 31, 2011 compared to the prior year period. The amount of implementation and training services revenue is dependent on several factors, including timing of client 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, 2011 versus the same prior year period 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.

For the QSI Dental Division, total system sales increased $2.6 million, or 65.1%, to $6.5 million in the year ended March 31, 2011 as compared to $3.9 million in the prior year period. Systems sales in the QSI Dental Division were positively impacted by greater joint sales of dental and medical software to FQHCs. In addition, the Division began selling the SaaS based NextDDS™ product during fiscal year 2010.

For the RCM Services Division, total system sales decreased by 59.7% in the year ended March 31, 2011 as compared to the prior year period. Systems sales revenue within the Practice Solutions Division is composed of sales to existing RCM clients only and can fluctuate given the size of the current client base of the Practice Solutions Division.

For the Hospital Solutions Division, total systems sales increased $6.9 million because only two months of revenue was recorded in the year ended March 31, 2010 for Opus, which was acquired in February 2010, as compared to a full year of revenue for the year ended March 31, 2011.

Maintenance, EDI, RCM and Other Services.    For the year ended March 31, 2011, Company-wide revenue from maintenance, EDI, RCM and other services grew 21.9% to $228.8 million from $187.7 million in the prior year period. The increase is primarily due to an increase in maintenance, EDI and other services revenue from the NextGen Division and RCM revenue from the RCM Services Division.

Total NextGen Division maintenance revenue for the year ended March 31, 2011 grew 16.7% to $93.9 million from $80.5 million for the same prior year period while NextGen Division EDI revenue grew 20.4% to $36.1 million compared to $30.0 million in the prior year period. Other services revenue for the NextGen Division, which consists primarily of third-party annual software license renewals, follow-on training hours and hosting services, increased 28.0% to $27.6 million in the year ended March 31, 2011 from $21.6 million in the same prior year period. QSI Dental Division maintenance, EDI and other revenue for the year ended March 31, 2011 increased $0.3 million to $13.5 million compared to $13.2 million for the same prior year period. For the year ended March 31, 2011, RCM revenue grew $8.4 million to $45.1 million compared to $36.7 million in the prior year period primarily as a result of increases in RCM revenue to new and existing clients.

 

56


Table of Contents

The following table details maintenance, EDI, RCM and other services revenue by category on a consolidated and divisional basis for the years ended March 31, 2011 and 2010 (in thousands):

 

     Maintenance      EDI      RCM      Other      Total  

Fiscal Year Ended March 31, 2011

              

QSI Dental Division

   $ 7,329       $ 4,891       $       $ 1,251       $ 13,471   

NextGen Division

     93,890         36,131                 27,637         157,658   

Hospital Solutions Division

     8,642                         975         9,617   

RCM Services Division

     158                 45,065         2,865         48,088   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 110,019       $ 41,022       $ 45,065       $ 32,728       $ 228,834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fiscal Year Ended March 31, 2010

              

QSI Dental Division

   $ 7,217       $ 5,038       $       $ 940       $ 13,195   

NextGen Division

     80,451         29,997                 21,589         132,037   

Hospital Solutions Division

     1,416                         108         1,524   

RCM Services Division

     108                 36,665         4,145         40,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consolidated

   $ 89,192       $ 35,035       $ 36,665       $ 26,782       $ 187,674   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Maintenance revenue for the NextGen Division increased by $13.4 million for the year ended March 31, 2011 as compared to the same prior year period. The growth in maintenance revenue is a result of an $11.5 million increase in net additional licenses from new clients and existing clients and approximately $1.9 million related to a recent price increase that became effective during the quarter ended September 30, 2010.

The NextGen Division’s EDI revenue growth has come from new clients and from further penetration of the Division’s existing client base while the growth in RCM revenue has come from new clients that have been acquired from cross selling opportunities with the NextGen Division client base. We intend to continue to promote maintenance, EDI and RCM services to both new and existing clients. Growth in other services revenue is primarily due to increases in third-party annual software licenses, consulting services and hosting services revenue.

For the Hospital Solutions Division, maintenance revenue increased $7.2 million because only two months of revenue was recorded in the year ended March 31, 2010 for Opus, which was acquired in February 2010, as compared to a full year of revenue for the year ended March 31, 2011.

Cost of Revenue.    Cost of revenue for the year ended March 31, 2011 increased 15.0% to $127.5 million from $110.8 million in the prior year period and the cost of revenue as a percentage of revenue decreased to 36.1% from 38.0% due to the fact that the rate of growth in cost of revenue grew slower than the aggregate revenue growth rate for the Company.

 

57


Table of Contents

The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31, 2011 and 2010 (in thousands):

 

     Fiscal Year Ended March 31,  
     2011      %     2010      %  

QSI Dental Division

        

Revenue

   $ 19,966         100.0   $ 17,128         100.0

Cost of revenue

     9,034         45.2     7,788         45.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 10,932         54.8   $ 9,340         54.5
  

 

 

    

 

 

   

 

 

    

 

 

 

NextGen Division

        

Revenue

   $ 266,546         100.0   $ 228,730         100.0

Cost of revenue

     78,496         29.4     73,122         32.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 188,050         70.6   $ 155,608         68.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Hospital Solutions Division

        

Revenue

   $ 17,898         100.0   $ 2,891         100.0

Cost of revenue

     4,671         26.1     412         14.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 13,227         73.9   $ 2,479         85.7
  

 

 

    

 

 

   

 

 

    

 

 

 

RCM Services Division

        

Revenue

   $ 48,953         100.0   $ 43,062         100.0

Cost of revenue

     34,896         71.3     29,485         68.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 14,057         28.7   $ 13,577         31.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Unallocated cost of revenue(1)

   $ 385         N/A      $         N/A   

Consolidated

        

Revenue

   $ 353,363         100.0   $ 291,811         100.0

Cost of revenue

     127,482         36.1     110,807         38.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 225,881         63.9   $ 181,004         62.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Relates to the amortization of software technology intangible assets acquired from the purchases of Sphere and Opus.

Gross profit margins at the QSI Dental Division for the year ended March 31, 2011 increased slightly to 54.8% from 54.5% for the prior year period. Gross profit margins at the NextGen Division for year ended March 31, 2011 increased to 70.6% compared to 68.0% for the prior year period due to strong software sales and an increase in maintenance revenue, which yields higher margins than other services, along with improvements in EDI margins. Gross margin in the RCM Services Division decreased to 28.7% for the year ended March 31, 2011 as compared to 31.5% for the prior year period because of higher outsourcing costs in connection with delivering RCM services in the year ended March 31, 2011 as compared to the same period a year ago.

 

58


Table of Contents

The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue on a consolidated and divisional basis for the years ended March 31, 2011 and 2010:

 

     Hardware,
Third Party
Software
    Payroll and
Related
Benefits
    EDI     Other     Total
Cost
of Revenue
    Gross
Profit
 

Fiscal Year Ended March 31, 2011

            

QSI Dental Division

     8.7     17.7     11.6     7.2     45.2     54.8

NextGen Division

     2.9     11.8     8.1     6.6     29.4     70.6

Hospital Solutions Division

     5.4     16.7         4.0     26.1     73.9

RCM Services Division

         43.8     0.5     27.0     71.3     28.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

     3.0     16.8     6.9     9.4     36.1     63.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fiscal Year Ended March 31, 2010

            

QSI Dental Division

     8.5     13.8     16.0     7.2     45.5     54.5

NextGen Division

     2.5     13.4     9.6     6.5     32.0     68.0

Hospital Solutions Division

     3.1             11.2     14.3     85.7

RCM Services Division

     0.5     43.6     1.1     23.3     68.5     31.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated

     2.5     17.7     8.7     9.1     38.0     62.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the year ended March 31, 2011, hardware and third-party software constituted a higher portion of cost of revenue compared to the prior year period in the NextGen Division. The number of clients 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 our clients.

Our payroll and benefits expense associated with delivering our products and services decreased to 16.8% of consolidated revenue in the year ended March 31, 2011 compared to 17.7% during the same period last year. The absolute level of consolidated payroll and benefit expenses grew from $51.8 million in the year ended March 31, 2010 to $59.3 million in the year ended March 31, 2011, an increase of 14.7%, or approximately $7.5 million. Of the $7.5 million increase, approximately $2.7 million of the increase is related to the RCM Services Division because RCM is a service business, which inherently has higher percentage of payroll costs as a percentage of revenue. Increases of $1.2 million in the QSI Dental Division and $0.7 million in the NextGen Division for the year ended March 31, 2011 are primarily due to headcount additions and increased headcount and payroll and benefits expense associated with delivering products and services. For the Hospital Solutions Division, payroll and benefits expense associated with delivering our products and services increased $2.9 million because fiscal year 2010 included only two months of payroll and benefits expenses for Opus, which was acquired in February 2010, as compared to a full year of expenses for the year ended March 31, 2011. The amount of share-based compensation expense included in cost of revenue was $0.3 million and $0.1 million for years ended March 31, 2011 and 2010, respectively.

Other expense, which primarily consists of third-party annual license, hosting costs and outsourcing costs, increased to 9.4% of total revenue during the year ended March 31, 2011 as compared to 9.1% for the same period a year ago. Contributing to this increase was higher outsources costs in delivering RCM services offset by better profit margins achieved in our hosting and annual licenses revenues that are included in other services.

As a result of the foregoing events and activities, the gross profit percentage for the Company increased to 63.9% for the year ended March 31, 2011 versus 62.0% for the prior year period.

We anticipate continued additions to headcount in all of our Divisions 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

 

59


Table of Contents

cannot accurately predict if related headcount expense as a percentage of revenue will increase or decrease in the future.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the year ended March 31, 2011 increased 24.6% to $108.3 million as compared to $87.0 million for the prior year period. The increase in these expenses resulted primarily from:

 

   

$18.7 million increase in salaries and related benefit expenses primarily as a result of headcount additions;

 

   

$4.6 million increase due to a full year of selling and administrative expenses from Opus, which was acquired in February 2010;

 

   

$3.2 million increase in sales commissions primarily related to the NextGen Division;

 

   

$1.4 million increase primarily due to fair value adjustments to the contingent consideration liability related to the acquisitions of Opus and Sphere; offset by

 

   

$1.6 million decrease in legal and outside services expenses;

 

   

$2.1 million net decrease in advertising, tradeshows and travel related expenses; and

 

   

$2.8 million net decrease in other selling and administrative expenses.

Share-based compensation expense was approximately $3.3 million and $1.9 million for the years ended March 31, 2011 and 2010, respectively, and is included in the aforementioned amounts. Selling, general and administrative expenses as a percentage of revenue increased from 29.8% in the year ended March 31, 2010 to 30.7% in the year ended March 31, 2011.

We do not anticipate significant increases in expenditures for trade shows, advertising and the employment of additional sales and administrative staff at the NextGen Division until additional revenue growth is achieved. We anticipate future increases in corporate expenditures being made in a wide range of areas including professional services and investment in a companywide enterprise resource planning (“ERP”) system. 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, 2011 and 2010 were $21.8 million and $16.5 million, respectively. The increases in research and development expenses were due in part to increased investment in the NextGen Division product line. The Opus acquisition added $1.4 million in research and development expenses during the year ended March 31, 2011. Additions to capitalized software costs offset increases in research and development costs. For the year ended March 31, 2011, our additions to capitalized software increased to $10.7 million compared to $7.9 million capitalized during the same prior year period as we continue to enhance our software to meet the Meaningful Use definitions under the ARRA. Research and development costs as a percentage of revenue increased to 6.2% in the year ended March 31, 2011 from 5.7% for the same prior year period. Research and development expenses are expected to continue at or above current dollar levels as the Company is developing a new integrated inpatient and outpatient, web-based software platform. Share-based compensation expense included in research and development costs, net of amounts capitalized as software development, was $0.2 million and $0.1 million for years ended March 31, 2011 and 2010, respectively.

Amortization of Acquired Intangible Assets.    Amortization included in operating expense related to acquired intangible assets for the years ended March 31, 2011 and 2010 was $1.7 million and $1.8 million, respectively.

Interest and Other Income.    Total interest and other income for the years ended March 31, 2011 and 2010 were $0.3 million and $0.5 million, respectively. Interest and other income consist primarily of dividends and interest earned on our investments.

 

60


Table of Contents

Our investment policy is determined by our Board of Directors. We currently maintain our cash in very liquid short term assets including tax exempt and taxable money market funds and short-term U.S. Treasury securities with maturities of 90 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including, but not limited to, payment of a special dividend, initiation of a stock buyback program, an expansion of our investment policy to include investments with longer maturities of greater than 90 days, and other items. Additionally, it is possible that we will utilize some or all of our cash to fund acquisitions or other similar business activities. Any or all of these programs could significantly impact our investment income in future periods.

Provision for Income Taxes.    The provision for income taxes for the years ended March 31, 2011 and 2010 were $32.8 million and $27.8 million, respectively. The effective tax rates were 34.8% and 36.5% for the years ended March 31, 2011 and 2010, respectively. The effective rate for the year ended March 31, 2011 decreased as compared to the prior year period primarily due to increased benefits from the qualified production activities deduction and research and development credits and fluctuations in the state effective tax rate.

During the year ended March 31, 2011 and 2010, we recognized research and development tax credits of approximately $1.0 million and $0.7 million, respectively. The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code (“IRC”) of approximately $8.1 million and $4.1 million during the years ended March 31, 2011 and 2010, respectively. Research and development credits and the qualified production activities income deduction calculated by us involve certain assumptions and judgments regarding qualification of expenses under the relevant tax code provision.

Liquidity and Capital Resources

The following table presents selected financial statistics and information for the years ended March 31, 2012, 2011 and 2010 (in thousands):

 

     Fiscal Year Ended March 31,  
     2012      2011      2010  

Cash and cash equivalents

   $ 134,444       $ 116,617       $ 84,611   

Net increase in cash and cash equivalents

   $ 17,827       $ 32,006       $ 14,431   

Net income

   $ 75,657       $ 61,606       $ 48,379   

Net cash provided by operating activities

   $ 76,786       $ 70,064       $ 55,220   

Number of days of sales outstanding

     122         131         125   

Cash Flows from Operating Activities

Cash provided by operations has historically been our primary source of cash and has primarily been driven by our net income plus adjustments to add back non-cash expenses, including depreciation, amortization of intangibles and capitalized software costs, provisions for bad debts and inventory obsolescence, share-based compensation and deferred taxes.

The following table summarizes our consolidated statements of cash flows for the years ended March 31, 2012, 2011 and 2010 (in thousands):

 

     Fiscal Year Ended March 31,  
     2012     2011     2010  

Net income

   $ 75,657      $ 61,606      $ 48,379   

Non-cash expenses

     19,077        17,978        16,152   

Change in deferred revenue

     5,993        13,211        12,528   

Change in accounts receivable

     (10,389     (36,094     (18,944

Change in other assets and liabilities

     (13,552     13,363        (2,895
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 76,786      $ 70,064      $ 55,220   
  

 

 

   

 

 

   

 

 

 

 

61


Table of Contents

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, 2012, 2011 and 2010.

Non-Cash Expenses.    Non-cash expenses include depreciation, amortization of intangibles and capitalized software costs, provisions for bad debts, share-based compensation and deferred taxes. Total non-cash expenses were $19.1 million, $18.0 million and $16.2 million for the years ended March 31, 2012, 2011 and 2010, respectively.

The $1.1 million increase in non-cash expenses for the year ended March 31, 2012 as compared to the same prior year period is related to increases of approximately $0.9 million in depreciation, $1.2 million of amortization of capitalized software costs, $1.9 million of bad debt expense, $1.2 million of amortization of other intangibles, and a $0.1 million loss on disposal of fixed assets, offset by a $0.4 million decrease in share-based compensation and a $3.8 million increase in deferred income tax benefit.

The $1.8 million increase in non-cash expenses for the year ended March 31, 2011 as compared to the prior year period is primarily related to increases of approximately $0.6 million in depreciation, $1.2 million of amortization of capitalized software costs, $1.5 million of amortization of other intangibles, $0.3 million in bad debt expense and $1.7 million in share-based compensation, offset by a $3.4 million increase in deferred income tax benefit.

Deferred Revenue.    Cash from operations benefited from increases in deferred revenue primarily due to an increase in the volume of implementation and maintenance services invoiced by the NextGen Division which had not yet been rendered or recognized as revenue. Deferred revenue increased by approximately $6.0 million for the year ended March 31, 2012 versus an increase of $13.2 million and $12.5 million in the years ended March 31, 2011 and 2010, respectively, resulting in increases to cash from operations as compared to the prior year periods. During the quarter ended March 31, 2012, the Company modified its standard payment terms for implementation services sold in conjunction with software to separate license fee payments from services and to bill for services as services are incurred. This change results in implementation service fees not being recorded as both accounts receivable and deferred revenue upon the execution of a contract. In future periods, deferred implementation and training revenue is not expected to increase as fast as prior periods due to this change in standard payment terms.

Accounts Receivable.    Accounts receivable grew by approximately $10.4 million, $36.1 million and $18.9 million for the years ended March 31, 2012, 2011 and 2010, respectively. The increase in accounts receivable is due to the following factors:

 

   

NextGen Division revenue grew 22.1%, 16.5% and 12.2% for the years ended March 31, 2012, 2011 and 2010, respectively;

 

   

Hospital Solutions Division revenue grew to $34.5 million and $17.9 million for the years ended March 31, 2012 and 2011, respectively, as compared to $2.9 million for the year ended March 31, 2010 primarily because only two months of revenue was recorded for Opus, which was acquired in February 2010;

 

   

Turnover of accounts receivable is generally slower for systems sales revenue in the NextGen Division and Hospital Solutions Division due to the fact that the systems sales related revenue have longer payment terms, generally up to one year, which historically have accounted for a major portion of both divisions’ sales;

 

   

Accounts receivable growth is expected to be slowed by a smaller amount of services sold in advance of being rendered. This is a result of the Company modifying its standard payment terms for implementation services sold in conjunction with software to separate license fee payments from services and instead billing for services as services are incurred. This change results in implementation service fees not being recorded as both accounts receivable and deferred revenue upon the execution of a contract; and

 

62


Table of Contents
   

The turnover of accounts receivable measured in terms of days sales outstanding (“DSO”) decreased from 131 days to 122 days during the year ended March 31, 2012 as compared the prior year period. The decrease in DSO is primarily due to the factors mentioned.

If amounts included in both accounts receivable and deferred revenue were netted, the turnover of accounts receivable expressed as DSO would be 77 days as of March 31, 2012 and 79 days as of March 31, 2011. Provided turnover of accounts receivable, deferred revenue and profitability remain consistent with the 2012 fiscal year, we anticipate being able to continue generating cash from operations during fiscal year 2013 primarily from our net income.

Other Assets and Liabilities.    The $27.0 million net decrease in other assets and liabilities for the year ended March 31, 2012 as compared to the same prior year period is primarily related to the $12.7 million earnout settlement paid to Opus and a $12.6 million increase in net income taxes receivable.

For the year ended March 31, 2011, the $13.4 million change in other assets and liabilities consists of a total increase in other liabilities of $14.9 million, offset by a decrease in other assets of $1.5 million. The $14.9 million increase in other liabilities consisted of a $1.1 million increase in contingent consideration related to the Opus and Sphere acquisitions, $3.3 million increase in accounts payable and $10.5 million increase in all other liabilities.

Cash Flows from Investing Activities

Net cash used in investing activities for the years ended March 31, 2012, 2011 and 2010 was $34.9 million, $10.6 million and $13.9 million, respectively. The increase in net cash used in investing activities during the year ended March 31, 2012 as compared to the same prior year period is primarily due to net cash paid for the acquisitions of IntraNexus, CQI, and ViaTrack of $3.3 million, $2.5 million, and $5.7 million, respectively, in addition to increases of $2.4 million and $3.5 million, respectively, for capitalized software and equipment and improvements.

During the year ended March 31, 2011, $17.2 million of cash was used for net additions of equipment and improvements and capitalized software and $1.1 million for the purchase of marketable securities, offset by proceeds of $7.7 million received from the sale of our ARS investments.

During the year ended March 31, 2010, $12.9 million of cash was used for net additions of equipment and improvements and capitalized software, $3.0 million was paid for contingent consideration related to the acquisition of PMP and $0.6 million was paid for the acquisition of Opus and Sphere. Net cash used for the year ended March 31, 2010 was offset by $2.0 million cash acquired from the purchase of Opus and $0.4 million proceeds from the sale of marketable securities.

Cash Flows from Financing Activities

Net cash used in financing activities for the years ended March 31, 2012, 2011 and 2010 was $24.1 million, $27.5 million and $26.8 million, respectively. During the year ended March 31, 2012, we received proceeds of $12.8 million from the exercise of stock options and paid $41.0 million in dividends to shareholders compared to proceeds of $5.7 million from the exercise of stock options and payment of $34.7 million in dividends to shareholders during the year ended March 31, 2011 and proceeds of $5.9 million from the exercise of stock options and payment of $34.3 million in dividends to shareholders during the year ended March 31, 2010.

We recorded a reduction in our tax benefit from share-based compensation of $4.1 million, $1.5 million and $1.6 million during the years ended March 31, 2012, 2011 and 2010, respectively, related to excess tax deductions received from stock option exercises. The benefit was recorded as additional paid in capital.

 

63


Table of Contents

Cash and Cash Equivalents and Marketable Securities

At March 31, 2012, we had cash and cash equivalents of $134.4 million. We may use a portion of these funds towards future acquisitions although the timing and amount of funds to be used has not been determined. 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 also intend to expend some of these funds related to the implementation of the ERP system. We believe the ERP will greatly enhance and streamline our operational processes and provide a common technology platform to support future growth opportunities. We anticipate capital expenditures will increase in fiscal year 2013 and will be funded from cash on hand and cash flows from operations.

In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend of $0.125 per share on our outstanding common stock, subject to further review and approval and the establishment of record and distribution dates by our Board of Directors prior to the declaration of each such quarterly dividend. Our Board of Directors subsequently increased the quarterly dividend to $0.150 per share in August 2008 and to $0.175 per share in January 2011. We anticipate that future quarterly dividends, if and when declared by our Board of Directors 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 24, 2012, the Board of Directors approved a quarterly cash dividend of $0.175 per share on our outstanding shares of common stock, payable to shareholders of record as of June 15, 2012 with an expected distribution date on or about July 3, 2012.

Our Board of Directors declared the following dividends during the periods presented (stock split adjusted):

 

Declaration Date

  

Record Date

  

Payment Date

  

Per Share

Dividend

 

May 25, 2011

   June 17, 2011    July 5, 2011    $ 0.175   

July 27, 2011

   September 19, 2011    October 5, 2011      0.175   

October 26, 2011

   December 20, 2011    January 5, 2012      0.175   

January 25, 2012

   March 20, 2012    April 5, 2012      0.175   
        

 

 

 

Fiscal year 2012

         $ 0.700   
        

 

 

 

May 26, 2010

   June 17, 2010    July 6, 2010    $ 0.150   

July 28, 2010

   September 17, 2010    October 5, 2010      0.150   

October 25, 2010

   December 17, 2010    January 5, 2011      0.150   

January 26, 2011

   March 17, 2011    April 5, 2011      0.175   
        

 

 

 

Fiscal year 2011

         $ 0.625   
        

 

 

 

May 27, 2009

   June 12, 2009    July 6, 2009    $ 0.150   

July 23, 2009

   September 25, 2009    October 5, 2009      0.150   

October 28, 2009

   December 23, 2009    January 5, 2010      0.150   

January 27, 2010

   March 23, 2010    April 5, 2010      0.150   
        

 

 

 

Fiscal year 2010

         $ 0.600   
        

 

 

 

 

64


Table of Contents

Management believes that its cash and cash equivalents on hand at March 31, 2012, 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 to be paid in the ordinary course of business for fiscal year 2013.

Contractual Obligations

The following table summarizes our significant contractual obligations, all of which relate to operating leases, at March 31, 2012 and the effect that such obligations are expected to have on our liquidity and cash in future periods:

 

For the year ended March 31,

      

2013

   $ 6,640   

2014

     6,227   

2015

     5,504   

2016

     4,814   

2017 and beyond

     1,855   
  

 

 

 
   $ 25,040   
  

 

 

 

New Accounting Pronouncements

Refer to Note 2, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included elsewhere in this Report for a discussion of new accounting standards.

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We currently maintain our cash in very liquid short term assets including tax exempt and taxable money market funds and short-term U.S. Treasury securities with maturities of 90 days or less at the time of purchase.

 

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See our consolidated financial statements identified in the Index to Financial Statements appearing under “Item 15. Exhibits and Financial Statement Schedules” of this Report.

 

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, 2012, that the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended) are effective to provide reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Security Exchange Act of 1934, as amended, 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.

 

65


Table of Contents

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. Internal control over financial reporting is a process designed by, or under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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.

Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2012 in making our assessment of internal control over financial reporting, management used the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of March 31, 2012.

The effectiveness of the Company’s internal control over financial reporting as of March 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report contained in Item 15 of Part IV of this Report, “Exhibits and Financial Statement Schedules.”

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2012, 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.

 

ITEM 9B.    OTHER INFORMATION

None.

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 2012 Annual Shareholders’ Meeting to be filed with the SEC.

 

66


Table of Contents
ITEM 11.    EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated herein by reference from our definitive proxy statement for our 2012 Annual Shareholders’ Meeting to be filed with the SEC.

 

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 2012 Annual Shareholders’ Meeting to be filed with the SEC.

 

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 2012 Annual Shareholders’ Meeting to be filed with the SEC.

 

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 2012 Annual Shareholders’ Meeting to be filed with the SEC.

 

67


Table of Contents

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

     Page  

(1) Index to Financial Statements:

  

Report of Independent Registered Public Accounting Firm

     73   

Consolidated Balance Sheets as of March 31, 2012 and 2011

     74   

Consolidated Statements of Income — Years Ended March 31, 2012, 2011 and 2010

     75   

Consolidated Statements of Shareholders’ Equity — Years Ended March 31, 2012, 2011 and 2010

     76   

Consolidated Statements of Cash Flows — Years Ended March 31, 2012, 2011 and 2010

     77   

Notes to Consolidated Financial Statements

     79   

(2) The following supplementary financial statement schedule of Quality Systems, Inc., required to be included in Item 15(a)(2) on Form 10-K is filed as part of this Report.

  

Schedule II — Valuation and Qualifying Accounts

     109   

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 Consolidated 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.

  

Index to Exhibits

     110   

 

68


Table of Contents

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    Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of California effective October 6, 2011 is hereby incorporated by reference to Exhibit 3.1 of the regsitrant’s Current Report on Form 8-K filed October 6, 2011.
3.6    Amended and Restated Bylaws of Quality Systems, Inc., effective October 30, 2008, are hereby incorporated by reference to Exhibit 3.1 of the registrant’s Current Report on Form 8-K filed October 31, 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 11, 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.
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*    Form of Second Amended and Restated Indemnification Agreement for directors and executive officers is hereby incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K filed on February 2, 2010.

 

69


Table of Contents

  Exhibit
Number

 

Description

10.9*   Separation Agreement and General Release of All Claims between the Company and Patrick Cline is incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for quarter ended September 30, 2011.
10.10*   2012 Director Compensation Program is incorporated by reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed June 1, 2011.
10.11*   Form of Outside Director’s Restricted Stock Unit Agreement is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 15, 2011.
10.12*   Description of 2012 Compensation Program for Named Executive Officers for Fiscal Year Ended March 31, 2012 is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 1, 2011.
10.13*   Employment Agreement dated August 11, 2008 between Quality Systems, Inc., and Steven Plochocki, is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on August 12, 2008.
10.14*   Outside Directors Amended and Restated Restricted Stock Agreement is incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 2, 2010.
21**   List of subsidiaries.
23.1**   Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers 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.
101.INS***   XBRL Instance
101.SCH***   XBRL Taxonomy Extension Schema
101.CAL***   XBRL Taxonomy Extension Calculation
101.DEF***   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***   XBRL Taxonomy Extension Label
101.PRE***   XBRL Taxonomy Extension Presentation

 

* This exhibit is a management contract or a compensatory plan or arrangement.
** Filed herewith.
*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities and Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these section.

 

70


Table of Contents

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/    Steven T. Plochocki
 

Steven T. Plochocki

 

Chief Executive Officer

(Principal Executive Officer)

By:   /s/    Paul A. Holt
  Paul A. Holt
 

Chief Financial Officer

(Principal Accounting Officer)

Date: May 25, 2012

KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes and appoints Steven T. Plochocki 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

Sheldon Razin

   Chairman of the Board and Director   May 25, 2012

/s/    Steven T. Plochocki

Steven T. Plochocki

  

Chief Executive Officer

(Principal Executive Officer)

and Director

  May 25, 2012

/s/    Paul A. Holt

Paul A. Holt

  

Chief Financial Officer

(Principal Accounting Officer) and Executive Vice President

  May 25, 2012

/s/    Craig Barbarosh

Craig Barbarosh

   Director   May 25, 2012

 

Murray Brennan

   Director  

 

71


Table of Contents

Signature

  

Title

 

Date

/s/    George Bristol

George Bristol

   Director   May 25, 2012

 

Ahmed Hussein

   Director  

/s/    Russell Pflueger

Russell Pflueger

   Director   May 25, 2012

/s/    Maureen Spivack

Maureen Spivack

   Director   May 25, 2012

 

Lance Rosenzweig

   Director  

 

72


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Quality Systems, Inc.

In our opinion, the consolidated balance sheets and the related consolidated statements of income, statements of shareholders’ equity and statements of cash flow present fairly, in all material respects, the financial position of Quality Systems, Inc. and its subsidiaries at March 31, 2012 and March 31, 2011, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule in the index appearing under Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PricewaterhouseCoopers LLP

Orange County, California

May 25, 2012

 

73


Table of Contents

QUALITY SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

 

     March 31,
2012
     March 31,
2011
 
     (In thousands, except
per share data)
 
ASSETS   

Current assets:

     

Cash and cash equivalents

   $ 134,444       $ 116,617   

Restricted cash (Note 1)

     1,962         3,787   

Marketable securities

     4,987         1,120   

Accounts receivable, net (Note 9)

     145,756         139,772   

Inventories

     3,715         1,933   

Income taxes receivable

     2,628           

Deferred income taxes, net

     10,127         10,397   

Other current assets

     9,090         8,768   
  

 

 

    

 

 

 

Total current assets

     312,709         282,394   

Equipment and improvements, net

     17,841         12,599   

Capitalized software costs, net

     19,994         15,150   

Intangibles, net

     23,259         16,890   

Goodwill

     60,776         46,721   

Other assets

     5,773         4,932   
  

 

 

    

 

 

 

Total assets

   $ 440,352       $ 378,686   
  

 

 

    

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities:

     

Accounts payable

   $ 4,532       $ 6,686   

Deferred revenue

     83,108         76,695   

Accrued compensation and related benefits

     11,870         10,247   

Income taxes payable

             3,530   

Dividends payable

     10,354         10,162   

Other current liabilities

     19,568         29,316   
  

 

 

    

 

 

 

Total current liabilities

     129,432         136,636   

Deferred revenue, net of current

     1,293         1,099   

Deferred income taxes, net

     5,351         11,384   

Deferred compensation

     3,497         2,488   

Other noncurrent liabilities

     5,602         2,409   
  

 

 

    

 

 

 

Total liabilities

     145,175         154,016   

Commitments and contingencies (Note 13)

     

Shareholders’ equity:

     

Common stock

     

$0.01 par value; authorized 100,000 shares; issued and outstanding 59,180 and 58,068 shares at March 31, 2012 and March 31, 2011, respectively

     592         580   

Additional paid-in capital

     168,988         132,969   

Retained earnings

     125,597         91,121   
  

 

 

    

 

 

 

Total shareholders’ equity

     295,177         224,670   
  

 

 

    

 

 

 

Total liabilities and shareholders’ equity

   $ 440,352       $ 378,686   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

74


Table of Contents

QUALITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

     Fiscal Year Ended March 31,  
     2012     2011      2010  
     (In thousands, except per share data)  

Revenues:

       

Software, hardware and supplies

   $ 122,407      $ 106,514       $ 89,761   

Implementation and training services

     26,391        18,015         14,376   
  

 

 

   

 

 

    

 

 

 

System sales

     148,798        124,529         104,137   

Maintenance

     138,832        110,019         89,192   

Electronic data interchange services

     49,259        41,022         35,035   

Revenue cycle management and related services

     45,572        45,065         36,665   

Other services

     47,374        32,728         26,782   
  

 

 

   

 

 

    

 

 

 

Maintenance, EDI, RCM and other services

     281,037        228,834         187,674   
  

 

 

   

 

 

    

 

 

 

Total revenues

     429,835        353,363         291,811   
  

 

 

   

 

 

    

 

 

 

Cost of revenue:

       

Software, hardware and supplies

     18,399        19,779         12,115   

Implementation and training services

     21,298        15,010         11,983   
  

 

 

   

 

 

    

 

 

 

Total cost of system sales

     39,697        34,789         24,098   

Maintenance

     17,104        12,948         13,339   

Electronic data interchange services

     32,422        27,711         25,262   

Revenue cycle management and related services

     34,295        33,815         27,715   

Other services

     27,705        18,219         20,393   
  

 

 

   

 

 

    

 

 

 

Total cost of maintenance, EDI, RCM and other services

     111,526        92,693         86,709   
  

 

 

   

 

 

    

 

 

 

Total cost of revenue

     151,223        127,482         110,807   
  

 

 

   

 

 

    

 

 

 

Gross profit

     278,612        225,881         181,004   

Operating expenses:

       

Selling, general and administrative

     128,846        108,310         86,951   

Research and development costs

     31,369        21,797         16,546   

Amortization of acquired intangible assets

     2,198        1,682         1,783   
  

 

 

   

 

 

    

 

 

 

Total operating expenses

     162,413        131,789         105,280   
  

 

 

   

 

 

    

 

 

 

Income from operations

     116,199        94,092         75,724   

Interest income

     247        263         226   

Other income (expense), net

     (139     61         268   
  

 

 

   

 

 

    

 

 

 

Income before provision for income taxes

     116,307        94,416         76,218   

Provision for income taxes

     40,650        32,810         27,839   
  

 

 

   

 

 

    

 

 

 

Net income

   $ 75,657      $ 61,606       $ 48,379   
  

 

 

   

 

 

    

 

 

 

Net income per share:

       

Basic

   $ 1.29      $ 1.06       $ 0.84   

Diluted

   $ 1.28      $ 1.06       $ 0.84   

Weighted-average shares outstanding:

       

Basic

     58,729        57,894         57,270   

Diluted

     59,049        58,236         57,592   

Dividends declared per common share

   $ 0.700      $ 0.625       $ 0.600   

The accompanying notes are an integral part of these consolidated financial statements.

 

75


Table of Contents

QUALITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     Common Stock      Additional
Paid-in
Capital
     Retained
Earnings
    Total
Shareholders’
Equity
 
     Shares      Amount          
     (In thousands)  

Balance, March 31, 2009

     56,894       $ 568       $ 103,240       $ 51,759      $ 155,567   

Exercise of stock options

     476         6         5,849                5,855   

Tax benefit resulting from exercise of stock options

                     1,576                1,576   

Stock-based compensation

                     2,073                2,073   

Stock-based compensation related to acquisitions

                     433                433   

Common stock issuance for acquisitions

     388         4         8,811                8,815   

Dividends declared

                             (34,409     (34,409

Net income

                             48,379        48,379   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, March 31, 2010

     57,758         578         121,982         65,729        188,289   

Exercise of stock options

     310         3         5,714                5,717   

Tax benefit resulting from exercise of stock options

                     1,524                1,524   

Stock-based compensation

                     3,748                3,748   

Dividends declared

                             (36,214     (36,214

Net income

                             61,606        61,606   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, March 31, 2011

     58,068         581         132,968         91,121        224,670   

Exercise of stock options and vesting of restricted stock

     735         7         12,738                12,745   

Common stock issuance for Opus earnout settlement

     286         3         11,885                11,888   

Common stock issuance for acquisitions

     91         1         3,931                3,932   

Tax benefit resulting from exercise of stock options

                     4,145                4,145   

Stock-based compensation

                     3,321                3,321   

Dividends declared

                             (41,181     (41,181

Net income

                             75,657        75,657   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance, March 31, 2012

     59,180       $ 592       $ 168,988       $ 125,597      $ 295,177   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

76


Table of Contents

QUALITY SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Fiscal Year Ended March 31,  
     2012     2011     2010  
     (In thousands)  

Cash flows from operating activities:

      

Net income

   $ 75,657      $ 61,606      $ 48,379   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation

     5,195        4,304        3,663   

Amortization of capitalized software costs

     8,254        7,091        5,927   

Amortization of other intangibles

     4,501        3,255        1,783   

Provision for bad debts

     5,715        3,780        3,465   

Provision for inventory obsolescence

     43        27        27   

Share-based compensation

     3,321        3,748        2,073   

Deferred income tax benefit

     (8,025     (4,194     (786

Tax benefit associated with stock options

     4,145        1,524        1,576   

Excess tax benefit from share-based compensation

     (4,145     (1,524     (1,576

Loss (gain) on disposal of equipment and improvements

     73        (33       

Changes in assets and liabilities, net of amounts acquired:

      

Accounts receivable

     (10,389     (36,094     (18,944

Inventories

     (1,825     (620     (238

Income taxes receivable

     (2,628     2,953        3,875   

Other current assets

     (2,154     (2,074     (2,310

Other assets

     (841     (1,817     (894

Accounts payable

     (2,184     3,344        (1,810

Deferred revenue

     5,993        13,211        12,528   

Accrued compensation and related benefits

     1,623        1,296        (1,006

Income taxes payable

     (3,530     3,530        (1,404

Other current liabilities

     (3,229     13,096        846   

Deferred compensation

     1,009        605        46   

Other noncurrent liabilities

     207        (6,950       
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     76,786        70,064        55,220   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Additions to capitalized software costs

     (13,098     (10,695     (7,921

Additions to equipment and improvements

     (10,323     (6,804     (4,935

Proceeds from disposal of equipment and improvements

     11        336          

Proceeds from sale of marketable securities

            7,700        425   

Purchases of marketable securities

            (1,120       

Cash acquired from purchase of ViaTrack

     10                 

Purchase of ViaTrack

     (5,710              

Cash acquired from purchase of CQI

     222                 

Purchase of CQI

     (2,737              

Purchase of IntraNexus

     (3,279              

Cash acquired from purchase of Opus