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CORPORATE HEADQUARTERS/QSI DENTAL DIVISION LOCATION
NEXTGEN HEALTHCARE INFORMATION SYSTEMS LOCATIONS
18111 Von Karman Avenue, Suite 600
Irvine, California 92612
949.255.2600
www.qsii.com
795 Horsham Road
Horsham, Pennsylvania 19044
215.657.7010
3340 Peachtree Road NE, Suite 2700
Atlanta, Georgia 30326
404.467.1500
286 Grand Avenue
Southlake, Texas 76092
215.657.7010
1836 Lackland Hill Parkway
St. Louis, Missouri 63146
314.989.0300
11350 McCormick Road
Executive Plaza IV, Suite 600
Hunt Valley, Maryland 21031
443.933.4300
www.nextgen.com
C O M P A N Y P R O F I L E
C O R P O R A T E I N F O R M A T I O N
Quality Systems, Inc. (NASDAQ:QSII) and its NextGen Healthcare Information Systems
subsidiary develop and market computer-based practice management, electronic health records
and revenue cycle management applications as well as connectivity products and services for
medical and dental group practices.
F I N A N C I A L H I G H L I G H T S
Fiscal year ended March 31,
2009
2008
2007
2006
2005
Revenue
Net income
$245,515 $186,500 $157,165 $119,287
$88,961
46,119
40,078
33,232
23,322
16,109
Diluted earnings per share
$1.62
$1.44
$1.21
$0.85
$0.61
Cash dividends declared per share
$1.15
$1.00
$1.00
$0.875
$0.75
Total shareholders’ equity
$155,567 $113,705
$91,246
$72,409
$62,731
(in thousands, except per share amounts)
A B O U T T H E C O V E R
The front cover is a representation of a geometric shape known as a fractal. A fractal is divisible into parts, each of which
is a smaller copy of the whole. Similarly, Quality Systems’ computer-based solutions for the healthcare industry, such as
practice management, patient records and revenue cycle management applications, can be customized into parts to meet
the specifi c needs of a medical and/or dental practice. Currently used by more than 55,000 physicians and dentists
nationwide, Quality Systems’ solutions have been tested, trusted and proven and can be scaled to handle the impending
nationwide demand for a unifi ed transition to Electronic Health Records (EHR).
President and Chief Executive Officer, Quality Systems, Inc.
I N D E P E N D E N T A U D I T O R S
B O A R D O F D I R E C T O R S
Sheldon Razin
Chairman of the Board
Steven T. Plochocki
Murray Brennan, MD
Emeritus Chairman, Memorial Sloan-Kettering
Cancer Center, Department of Surgery
George Bristol
Managing Director, Crowell Weedon & Co.
Patrick B. Cline
President, NextGen Healthcare Information Systems
Ahmed Hussein
Director
Cairo, Egypt
Philip N. Kaplan
Chief Executive Officer, Deer Valley Ventures, LLC
Vincent J. Love
Managing Director, Finance Scholars Group
Russell Pfl ueger
Chairman and CEO, Quiescence Medical, Inc.
O F F I C E R S O F T H E C O M P A N Y
Steven T. Plochocki
President and Chief Executive Officer
Patrick B. Cline
President, NextGen Healthcare Information Systems
Paul A. Holt
Chief Financial Officer and Secretary
Donn Neufeld
QSI Dental Division
Senior Vice President and General Manager,
L E G A L C O U N S E L
Rutan & Tucker, LLP
Costa Mesa, California
Grant Thornton, LLP
Irvine, California
S T O C K T R A N S F E R A G E N T &
R E G I S T R A R
Computershare
Glendale, California
A N N U A L M E E T I N G
The annual meeting of stockholders will be held on
Thursday, August 13, 2009 at 1:00 PM, Pacific Time at:
The Center Club
650 Town Center Drive
Costa Mesa, California 92626
F O R M 10 - K
A copy of the Company’s Annual Report on Form 10-K,
as filed with the Securities and Exchange Commission, is
available on the Company’s website at www.qsii.com or by
contacting the Company at:
18111 Von Karman Avenue, Suite 600
Irvine, California 92612
949.255.2600
F O R W A R D - L O O K I N G S T A T E M E N T S
Statements made in this Annual Report to Shareholders and in our Annual Report on Form 10-K (“Form 10-K”) contained herein (collectively, this “Report”),
other reports and proxy statements fi led with the Securities and Exchange Commission (“Commission”), communications to shareholders, press releases
and oral statements made by our representatives that are not historical in nature, or that state our or management’s intentions, hopes, beliefs, expectations
or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934,
as amended. Forward-looking statements can often be identifi ed by the use of forward-looking terminology, such as “could,” “should,” “will,” “will be,”
“will lead,” “will assist,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “potentially” or “estimate” or
variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve risks,
uncertainties and assumptions. It is important to note that any such performance and actual results, fi nancial condition or business, could differ materially
from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risk
factors discussed in Item 1A of our Form 10-K as well as factors discussed elsewhere in this and other reports and documents we fi le with the Commission.
Other unforeseen factors not identifi ed herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements
to refl ect changed assumptions, the occurrence of unanticipated events or changes in future operating results, fi nancial condition or business over time
unless required by law. Interested persons are urged to review the risks described under Item 1A, “Risk Factors” and in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in our Form 10-K, as well as in our other public disclosures and fi lings with the Commission.
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L E T T E R T O S H A R E H O L D E R S
Steven T. Plochocki
President
and Chief Executive Offi cer
Sheldon Razin
Chairman of the Board
and Founder
Revenues
(in millions)
Thirty-fi ve years ago, Quality
$ 250
Systems, Inc. was incorporated as a computer
$ 200
consulting business. The company quickly iden-
tifi ed an opportunity in the computerization of
$ 150
dental practices and began developing systems
$ 100
to automate them. Quality Systems introduced the
fi rst turn-key, customizable practice management
solution that could meet the needs of any size
dental practice. At that time, no formal healthcare
$ 50
$ 0
05
06
07
08
09
Over the years, both the QSI Dental
Division and NextGen have built strong posi-
tions in large practice markets across the dental
and medical arenas.
Both divisions create software that auto-
mates and streamlines administrative and clinical
functions necessary to the successful operation
of a medical or dental practice. Examples of our
practice management solutions include a range of
information technology (HIT) sector existed. As a pioneer in what
scheduling and billing software.
has now evolved into a fully developed specialty sector within
the healthcare services arena, Quality Systems has emerged a
The Breadth and Depth of
the Quality Systems Offering
leading participant, serving both medical and dental practices.
Quality Systems has continually remained on the cutting edge
Today, Quality Systems’ electronic-based medical solutions are
of electronic health records (EHR). NextGen is one of the
used by approximately 55,000 physicians and dentists, spanning
indusstry’s leaders in the development and provision of EHR
nearly 2,000 practices throughout the country.
and practice management systems (PMS), connectivity solu-
Two Distinctly Complementary and
Successful Divisions
tions and billing services for medical practices.
NextGen’s EHR platform is designed to improve patient
Quality Systems is comprised of its QSI Dental Division and
care, increase revenues, decrease expenses, reduce risk and
a wholly owned subsidiary, NextGen Healthcare Information
improove overall patient satisfaction. NextGen EHR allows
Systems (NextGen).
physician specialty providers to document and manage patient
The QSI Dental Division, located in Irvine, Ca., focuses on
care, automatically create documents and letters, manage
developing, marketing and supporting software suites for dental
presccriptions and clinical images, provide patient education
and certain niche medical practices.
and eexchange data with other systems, within and external to,
NextGen, with headquarters in Horsham, Pa., and loca-
the eenterprise. NextGen EHR is capable of linking fi nancial
tions in Atlanta, Ga., Southlake, Tx., St. Louis, Mo. and Hunt
and clinical information, improving healthcare delivery and
Valley, Md., primarily develops and markets products and
eliminnating paperwork for medical practices of any size.
services for medical practices.
Q u a l i t y S y s t e m s , I n c . | 1
Diluted Earnings
Per Share
NextGen’s revolutionary suite of services
fully automates medical practices. Its enter-
prise practice management system (NextGen
EPM) provides a common registration system,
$ 2.00
$ 1.60
$ 1.20
During fiscal 2009, Quality Systems
continued to further cement its market lead-
ership position within the HIT sector, which
included the completion of two acquisitions.
enterprise-wide appointment scheduling, referral
$ 0.80
These marked our entry into a new market
tracking, a custom report writer and patient
segment – revenue cycle management – which
fi nancial management.
aids physicians in the automation and manage-
$ 0.40
Our QSI Dental Division offers dental
$ 0
05
06
07
08
09
ment of their practice’s billing-related functions
practices powerful, feature-rich and fl exible soft-
and expedites the billing and collections
Cash Flow from
Operations
(in millions)
ware solutions that allow hundreds of dental
practices to operate more effi ciently and cost
effectively. The dental suite of software solu-
tions and services consists of a wide range
of components including those that assist with
patient scheduling and registration, accounts
receivable, billing, management reporting,
$ 50
$ 40
$ 30
$ 20
process. In May 2008, we acquired St. Louis,
Mo.-based Healthcare Strategic Initiatives
(HSI), a full-service healthcare revenue manage-
ment company serving healthcare clients. In
October 2008, Hunt Valley, Md.-based
Practice Management Partners (PMP), also a
full-service healthcare revenue cycle manage-
electronic claims and statement processing
ment entity, joined the Quality Systems network.
and comprehensive electronic patient records,
$ 10
Both of these companies have strengthened the
along with other Internet applications.
scope of our services within the revenue cycle
The Year in Review
$ 0
05
06
07
08
09
management sector and afford us the ability
to cross-sell products and services to our existing customer
Fiscal 2009 was another successful year. Revenue reached
$245.5 million, rising 32 percent when compared with $186.5
million in fi scal 2008. Net income for the year was $46.1
million versus $40.1 million for 2008, an increase of 15
percent. Diluted earnings per share were $1.62 compared
with $1.44 reported in 2008, up 13 percent. The increases
in revenue and income are primarily attributable to growth
in systems sales, maintenance and the addition of revenue
cycle management services to our portfolio of service offerings.
base of users.
The company continued to generate strong operating
cash fl ows, enabling us to pay approximately $30.8 million in
dividends as well as invest in the two revenue cycle manage-
ment acquisitions noted above, while leaving our cash and
marketable securities position roughly unchanged from the start
of the year at $78.9 million from $81.7 million a year ago.
2 | 2 0 0 9 A n n u a l R e p o r t
“We view the H ITECH portion of the economic stimulus plan as a
potentially signifi cant opportunity for Quality Systems.”
New vs.
Recurring Revenues
Positioning for the Future:
Pursuing the Opportunity of
a Lifetime
NNeeeww
4400%%%
future of EHR presents a vast opportunity and
viable competitive advantage for the strongest
exchange health information to improve quality
and promote care coordination; and (iii) the
ability to report on clinical quality measures.
Reeccurrrinnng
6600%
These incentives are expected to be offered
through 2015.
We believe our highly advanced NextGen
and soundest players in the space to secure leadership roles.
EHR products are well positioned to enable physicians to benefitfi
Recently, as part of the Obama Administration’s
from the incentives offered in the stimulus package.
economic stimulus plan, it was announced that more than
$29 billion has been dedicated to the HIT sector, as stated in
Economic and Clinical
The Health Information Technology for Economic and Clinical
ology for E
Health Act (HITECH), which is part of
t
The 2009 American
Recovery and Reinvestment AAct
(ARRA)
, passed into law by
Congress in February 2009.
We have already begun preparing to take advantage of
this extraordinarily rare industry opportunity by expanding our
sales organization as well as our
ll
l
implementation and training
d
l
teams. Additionally, we are establ
ishing new relationships with
third-party consultants to aid in the
implementation and training
process. We are also expanding o
our reseller base to ensure we
The ARRA includes mo
re than $1
19 billion earmarked
can support future sales efforts.
to aid healthcare organizatio
ons in thei
r quest to modernize
Providers are incrreaseasingingly ly us
iing ng tectechnohn logy to: maximize
operations through the acquis
sition and i
implementation of HIT.
Of that amount, $17.2 billion
has been
allocated to HIT infra-
structure relating to Medicar
e and Me
edicaid incentives for
doctors and hospitals.
We view the HITECH p
portion of t
the economic stimulus
plan as a potentially signifi can
t opportun
ity for Quality Systems.
The portions of the stimu
ulus plan d
dedicated to Federally
the effi ciencies of theieir br businesss aa
nd nd medmedicaical pl
ractices; better
compete amid the rapiapidlydly chchangang
inging h healthcac re arena; assist
in enhancing patient carcare; e; and ma
aintain the privacy of patient
information. Additionally, as thehe
rereimbursement environment
also continues to evolvelv , more
e healthcare providers are
entering into contracts ts – oftentin me
es with multiple entities – that
defi ne the terms unded r which carar
rere i is adminnisti ered and paid.
Qualifi ed Healthcare Centers
($1.5 billioon) and Indian Health
on) and Indian Health
The diversity of payoyor organizatat
h d
f
iions, aas wellel as additional
l
dd
ll
Services ($85 million) are jusst starting tto be distributed now.
Quality Systems has worked wwith each oof these constituencies
for the past 15 years. The mmajority of the funds allocated
under the stimulus plan that are tied into physician incen-
tives are slated to begin in 2011 for those physicians that
can demonstrate “meaningfuul use” of EHR. While the fi nal
defi nition of meaningful use haas not yet been determined, we
believe that Quality Systems is ready tto meet the expected
government regulationon and chang
gess in reimbbursursement models,
have greatly increaseedd the compl
exity of ppriricing, b, , illing, reim-
bursement and recoordsrds managem
ment forfo medical and dental
practices. To operate effectively,
, healthcare providers mmustus
effi cientntly manage patient care
and other information and
workfl ow processes which increas
singly extend across multiplee
locations and business entities. A
All of these requirements are
expected to continue to strength
en Quality Systems’ current
fi
nal deefi
nitions arre expected to include:
fi
fi nal requirements. The fi
fi
market leadership position.
(i) e-prescribing capability; (ii) the abbility to electronically
Q u a l i t y S y s t e m s , I n c . | 3
A Time to Recognize
a CCHIT Certifi ed® 08 Ambulatory EHR. According to CCHIT,
2009 marks 35 years since our incorporation and demon-
NextGen‘s product meets the Certifi cation Commission’s EHR
strates decades of continued success in our ability to take
criteria for offi ce-based use. The Commission – a private,
the HIT sector to new levels. For the 10-year period ended
nonprofi t organization – is the recognized certifi cation body in
January 1, 2009, according to Motley Fool, Quality
the U.S. for HIT products.
Systems ranked the third best-performing stock on Wall
As we refl ect upon all the accomplishments since the
Street, appreciating 4,130 percent. In 2008, Quality
company’s founding, we want to take this opportunity to thank
Systems’ shares were up 43.1 percent while the NASDAQ
our shareholders for their continued support; our Board of
Composite was down 40.5 percent.
Directors for their insight and guidance; our customers for their
The company also ranked fourth in Forbes’ 2008
business and commitment to our company; and our employees
America’s 200 Best Small Companies list, moving up a notch
for their loyalty and dedication. Quality Systems is proud to
from its fi fth-place position in 2007.
celebrate 35 years of extraordinary growth and remarkable
Additionally, Quality Systems’ integrated HIT platform
success thanks to all of their contributions.
was evaluated by the non-profi t organization, the National
Network for Oral Health Access (NNOHA). The NNOHA
Respectfully,
Respectfully
recognized the company’s platform for its outstanding features,
functionality and performance. The organization’s HIT
Committee determined that, when used in conjunction with
Sheldon Razin
Steven T. Plochocki
NextGen products on the same platform, Quality Systems’
features, functionality and integration wwere considered to be
Chairman of the Board
and
and Founder
President
and Chief Executive Offi cer
best practice and state-of-the-art.
Furthermore, the Certifi cation Commission for Healthcare
InfInfIn ormormatiation on Tecechnohn loggy (y CCHITT®TT ) approvved NextGen’s EHR as
4 | 2 0 0 9 A n n u a l R e p o r t
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2009
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-12537
QUALITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-2888568
(IRS employer identification no.)
18111 Von Karman Avenue, Suite 600, Irvine, California 92612
(Address of principal executive offices)
(949) 255-2600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value
Title of each class
NASDAQ Global Select Market
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
None
Title of each class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark 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 o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
1
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated Filer o
Non-accelerated Filer o
(Do not check if a smaller
reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2008: $783,989,000
(based on the closing sales price of the Registrant’s common stock as reported on the NASDAQ Global Select Market on that
date of $42.26 per share).*
The Registrant has no non-voting common equity.
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value
(Class)
28,504,868
(Outstanding at May 22, 2009)
*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
The following documents (or parts thereof) are incorporated by
reference into the following parts of this Form 10-K:
Proxy Statement for the 2009 Annual Meeting of Shareholders —
Part III Items 10, 11, 12, 13 and 14.
2
QUALITY SYSTEMS, INC.
FORM 10-K
For the Fiscal Year Ended March 31, 2009
Part I
Item
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
Part II
Page
4
10
19
19
20
20
Item 5. Market for Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities 20
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Part III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Part IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
22
23
44
44
44
44
45
46
46
46
46
46
46
50
3
Cautionary Statement
Statements made in this Annual Report on Form 10-K (this “Report”), the Annual Report to Shareholders in which this Report is
made a part, other reports and proxy statements filed with the Securities and Exchange Commission (“Commission”), communi-
cations to shareholders, press releases and oral statements made by our representatives that are not historical in nature, or that
state our or management’s intentions, hopes, beliefs, expectations or predictions of the future, may constitute “forward-looking
statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”).
Forward-looking statements can often be identified by the use of forward-looking terminology, such as “could,” “should,” “will,”
“will be,” “will lead,” “will assist,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,”
or “estimate” or variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance.
Forward-looking statements involve risks, uncertainties and assumptions. It is important to note that any such performance
and actual results, financial condition or business, could differ materially from those expressed in such forward-looking state-
ments. Factors that could cause or contribute to such differences include, but are not limited to, the risk factors discussed in Item
1A of this Report as well as factors discussed elsewhere in this and other reports and documents we file with the Commission.
Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operat-
ing results, financial condition or business over time unless required by law. Interested persons are urged to review the risks de-
scribed under Item 1A. “Risk Factors” and in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” as well as in our other public disclosures and filings with the Commission.
Part I
ITEM 1. Business
Company Overview
Quality Systems Inc., comprised of the QSI Division (“QSI
Division”), a wholly-owned subsidiary, NextGen Healthcare
Information Systems, Inc. (“NextGen Division”), Lackland
Acquisition II, LLC dba Healthcare Strategic Initiatives (“HSI”)
and Practice Management Partners, Inc. (“PMP”) (collectively,
the “Company”, “we”, “our”, or “us”) develops and markets
healthcare information systems that automate certain aspects
of medical and dental practices, networks of practices such as
physician hospital organizations (“PHOs”) and management
service organizations (“MSOs”), ambulatory care centers, com-
munity health centers, and medical and dental schools. The
Company also provides revenue cycle management (“RCM”)
services through its Practice Solutions division of NextGen.
Operationally, HSI and PMP are considered and administered
as part of the NextGen Division.
The Company, a California corporation formed in 1974,
was founded with an early focus on providing information
systems to dental group practices. In the mid-1980’s, we capi-
talized 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 ac-
quisitions that accelerated our penetration of the medical mar-
ket. These two acquisitions formed the basis for the NextGen
Division. Today, we serve the medical and dental markets
through our two divisions.
The two divisions operate largely as stand-alone opera-
tions, with each division maintaining its own distinct product
lines, product platforms, development, implementation and
support teams, sales staffing and branding. The two divisions
share the resources of our “corporate office” which includes
a variety of accounting and other administrative functions.
Additionally, there are a small number of clients who are si-
multaneously utilizing software from each of our two divisions.
The QSI Division, co-located with our Corporate
Headquarters in Irvine, California, currently focuses on devel-
oping, marketing and supporting software suites sold to dental
and certain niche medical practices. In addition, the division
supports a number of medical clients that utilize the division’s
UNIX based medical practice management software product.
The NextGen Division, with headquarters in Horsham,
Pennsylvania, and significant locations in Atlanta, Georgia, St.
Louis, Missouri and Hunt Valley, Maryland, focuses principally
on developing and marketing products and services for medi-
cal practices.
Both divisions develop and market practice manage-
ment software that is designed to automate and streamline a
number of the administrative functions required for operating a
medical or dental practice. Examples of practice management
software functions include scheduling and billing capabilities.
It is important to note that in both the medical and dental
environments, practice management software systems have
4
already been implemented by the vast majority of practices.
Therefore, we actively compete for the replacement market.
In addition, both divisions develop and market software
that automates the patient record. Adoption rates for this soft-
ware, commonly referred to as clinical software, are relatively
low. Therefore, we are typically competing to replace paper-
based patient record alternatives as opposed to replacing
previously purchased systems.
Electronic Data Interchange (“EDI”)/connectivity products
are intended to automate a number of manual, often paper-
based or telephony intensive communications between patients
and/or providers and/or payors. Two of the more common EDI
services are forwarding insurance claims electronically from pro-
viders to payors and assisting practices with issuing statements
to patients. Most client practices utilize at least some of these
services from us or one of our competitors. Other EDI connectiv-
ity services are used more sporadically by client practices. We
typically compete to displace incumbent vendors for claims and
statements accounts, and attempt to increase usage of other
elements in our EDI/connectivity product line. In general, EDI
services are only sold to those accounts utilizing software from
one of our divisions.
The NextGen Division also offers RCM services under
the Practice Solutions name. Services provided through the
Practice Solutions/RCM unit consist primarily of billing and col-
lections services for medical practices. The Practice Solutions
unit utilizes NextGen Enterprise Practice Management soft-
ware to a significant extent.
The QSI Division’s practice management software suite
utilizes a UNIX operating system. Its Clinical Product Suite
(“CPS”) utilizes a Windows NT operating system and can be
fully integrated with the practice management software from
each division. CPS incorporates a wide range of clinical tools
including, but not limited to, periodontal charting and digi-
tal imaging of X-ray and inter-oral camera images as part of
the electronic patient record. The division develops, markets,
and manages our EDI/connectivity applications. The QSInet
Application Service Provider (“ASP/Internet”) offering is also
developed and marketed by the Division.
Our NextGen Division develops and sells proprietary
electronic medical records software and practice management
systems under the NextGen product name. Major product cat-
egories of the NextGen suite include Electronic Health Records
(“NextGen EHR”), Enterprise Practice Management (“NextGen
EPM”), Enterprise Appointment Scheduling (“NextGen EAS”),
Enterprise Master Patient Index (“NextGen EPI”), NextGen
Image Control System (“NextGen ICS”), Managed Care
Server (“NextGen MCS”), Electronic Data Interchange, System
Interfaces, Internet Operability (“NextGen WEB”), a Patient-
centric and Provider-centric Web Portal solution (“NextMD.
com”), NextGen Express, a version of NextGen EHR designed
for small practices and NextGen Community Health Solution
(“NextGen CHS”). Beginning in the fiscal year ended March
31, 2008, the NextGen Division began offering optional
NextGen Hosting Solutions to new and existing customers.
NextGen products utilize Microsoft Windows technology and
can operate in a client-server environment as well as via private
intranet, the Internet, or in an ASP environment.
We continue to pursue product enhancement initiatives
within each division. The majority of such expenditures are
currently targeted to the NextGen Division product line and
client base.
Inclusive of divisional maintenance, EDI and RCM rev-
enue, the NextGen Division accounted for approximately
93.5% of our revenue for fiscal year 2009 compared to
91.4% in fiscal year 2008. Inclusive of divisional maintenance
and EDI revenue, the QSI Division accounted for approximate-
ly 6.5% and 8.6% of revenue in fiscal year 2009 and 2008,
respectively. The NextGen Division’s revenue grew 34.7%
and 21.3% in fiscal year 2009 and 2008, respectively, while
the QSI Division’s revenue decreased by 1.2% and decreased
by 3.3% in fiscal year 2009 and 2008, respectively, over
the prior year.
In addition to the aforementioned software solutions
which we offer through our two divisions, each division of-
fers comprehensive hardware and software installation ser-
vices, maintenance and support services, and system training
services.
On December 11, 2007, the Company announced the
formal public launch of NextGen Practice Solutions, a business
division devoted to providing physician practices with cost ef-
fective RCM services. This division combines a web-delivered
Software as a Service, or SaaS model and the NextGen EPM
software platform to execute its service offerings. Clients may
also deploy NextGen EHR as part of their Practice Solutions
implementation.
On May 20, 2008, we acquired St. Louis-based HSI, a
full-service healthcare RCM company. HSI operates under the
umbrella of NextGen Practice Solutions. Founded in 1996,
HSI currently provides RCM services to providers including
health systems, hospitals, and physicians in private practice
with an in-house team of more than 200 employees including
specialists in medical billing, coding and compliance, payor
credentialing, and information technology. We intend to cross
sell both software and RCM services to the acquired customer
base of HSI and NextGen.
On October 28, 2008, we acquired Maryland-based
PMP, a full-service healthcare RCM company. This acquisi-
tion is also part of our growth strategy for NextGen Practice
Solutions. Similar to HSI, PMP operates under the umbrella
5
of NextGen Practice Solutions. Founded in 2001, PMP pro-
vides physician billing and technology management services
to healthcare providers, primarily in the Mid-Atlantic region.
We intend to cross sell both software and RCM services to the
acquired customer base of PMP and NextGen.
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 concur-
rent computer users.
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 seg-
ments of the economy. The impact of the current economic
conditions on our existing and prospective clients has been
mixed. We continue to see organizations that are doing fairly
well operationally, however, some organizations with a large
dependency on Medicaid populations are being impacted by
the challenging financial condition of the many state govern-
ments in whose jurisdictions they conduct business. A positive
factor for U.S. healthcare is the fact that the Obama adminis-
tration is pursuing broad healthcare reform aimed at improving
issues surrounding healthcare. The American Recovery and
Reinvestment Act (ARRA), which became law on February 17,
2009, includes more than $20 billion to help healthcare or-
ganizations modernize operations through the acquisition of
health care information technology. While we are unsure of
the immediate impact from the ARRA, the long-term potential
could be significant.
Moreover, to compete in the continually changing health-
care environment, providers are increasingly using technology
to help maximize the efficiency of their business practices, to
assist in enhancing patient care, and to maintain the privacy
of patient information.
As the reimbursement environment continues to evolve,
more healthcare providers enter into contracts, often with mul-
tiple entities, which define the terms under which care is ad-
ministered and paid. The diversity of payor organizations, as
well as additional government regulation and changes in re-
imbursement models, have greatly increased the complexity of
pricing, billing, reimbursement, and records management for
medical and dental practices. To operate effectively, health-
care provider organizations must efficiently manage patient
care and other information and workflow processes which
increasingly extend across multiple locations and business
entities.
In response, healthcare provider organizations have
placed increasing demands on their information systems. Initially,
these information systems automated financial and administrative
functions. As it became necessary to manage patient flow pro-
cesses, the need arose to integrate “back-office” data with such
clinical information as patient test results and office visits. We be-
lieve information systems must facilitate management of patient
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 technol-
ogy 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 efficien-
cies, and improve quality of care. As healthcare organizations
transition to new computer platforms and newer technologies,
we believe such organizations will be migrating toward the
implementation of enterprise-wide, patient-centric computing
systems embedded with automated clinical patient records.
Our Strategy
Our strategy is, at present, to focus on providing software
and services to medical and dental practices. Among the key
elements of this strategy are:
• Continued development and enhancement of select soft-
ware solutions in target markets;
• Continued investments in our infrastructure including, but
not limited to, product development, sales, marketing,
implementation, and support;
• Continued efforts to make infrastructure investments within
an overall context of maintaining reasonable expense
discipline;
• Addition of new customers through maintaining and
expanding sales, marketing and product development
activities; and
• Expanding our relationship with existing customers through
delivery of new products and services.
While these are the key elements of our current strategy,
there can be no guarantee that our strategy will not change,
or that we will succeed in achieving these goals individually
or collectively.
Products
In response to the growing need for more comprehensive,
cost-effective healthcare information solutions for physician
and dental practices, our systems provide our clients with the
ability to redesign patient care and other workflow processes
while improving productivity through facilitation of managed
access to patient information. Utilizing our proprietary soft-
ware in combination with third party hardware and software
6
solutions, our products enable the integration of a variety of
administrative and clinical information operations. Leveraging
more than thirty years of experience in the healthcare informa-
tion services industry, we believe we continue to add value by
providing our clients with sophisticated, full-featured software
systems along with comprehensive systems implementation,
maintenance and support services. Any single transaction may
or may not include software, hardware or services.
Practice Management Systems. Our products consist primarily
of proprietary healthcare software applications together with
third party hardware and other non-industry specific software.
The systems range in capacity from one to thousands of us-
ers, allowing us to address the needs of both small and large
organizations. The systems are modular in design and may
be expanded to accommodate changing client requirements.
The QSI Division’s character-based practice manage-
ment system is available in both dental and medical versions
and primarily uses the IBM RS6000 central processing unit
and IBM’S AIX version of the UNIX operating system as a plat-
form for our application software, enabling a wide range of
flexible and functional systems. The hardware components, as
well as the requisite operating system licenses, are purchased
from manufacturers or distributors of those components. We
configure and test the hardware components and incorporate
our software and other third party packages into completed
systems. We continually evaluate third party hardware compo-
nents with a view toward utilizing hardware that is functional,
reliable and cost-effective.
NextGen EPM is the NextGen Division’s practice man-
agement offering. NextGen EPM has been developed with
a functionally graphical user interface 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 serv-
ers. NextGen EPM is a scalable, multi-module solution that
includes a master patient index, enterprise-wide appointment
scheduling with referral tracking, clinical support, and central-
ized or decentralized patient financial management based on
either a managed care or fee-for-service model. The NextGen
EPM product is a highly configurable, cost-effective proven
solution that enables the effective management of both single
and multi-practice settings.
We also offer a practice management solution for den-
tal practices and an electronic health records and practice
management system for medical practices through the Internet
(software as a service). These products are marketed under the
QSINet and NextGen WEB trade names, respectively.
Clinical Systems. Our dental charting software system, the
Clinical Product Suite (CPS), is a comprehensive solution de-
signed specifically for the dental group practice environment.
CPS integrates the dental practice management product with
a computer-based clinical information system that incorporates
a wide range of clinical tools, including:
• Electronic charting of dental procedures, treatment plans
and existing conditions;
• Periodontal charting via light-pen, voice-activation, or key-
board entry for full periodontal examinations and PSR scoring;
• Digital imaging of X-ray and intra-oral camera images;
• Computer-based patient education modules, viewable
chair-side to enhance case presentation;
• Full access to patient information, treatment plans, and
insurance plans via a fully integrated interface with our
dental practice management product; and
• Document and image scanning for digital storage and link-
age to the electronic patient record.
The result is a comprehensive clinical information manage-
ment system that helps practices save time, reduce costs, im-
prove 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 technol-
ogy consisting of one or more file servers together with any
combination of one or more desktop, laptop, or pen-based
PC workstations. The file server(s) used in connection with CPS
utilize(s) Windows 2000 or Windows 2003 operating sys-
tem and the hardware is typically an Intel-based single or
multi-processor platform. Based on the server configuration
chosen, CPS is scalable from one to hundreds of workstations.
A typical configuration may also include redundant disk stor-
age, magnetic tape units, intra- and extra-oral cameras, digi-
tal X-ray components, digital scanners, conventional and flat
screen displays, and printers. The hardware components, in-
cluding the requisite operating system licenses, are purchased
from third party manufacturers or distributors either directly by
the customer or by us for resale to the customer.
NextGen provides clinical software applications that
are complementary to, and are integrated with, our medical
practice management offerings and interface with many of
the other leading practice management software systems on
the market. The applications incorporated into our practice
management solutions and others such as scheduling, eligibil-
ity, billing and claims processing are augmented by clinical
information captured by NextGen EHR, including services ren-
dered and diagnoses used for billing purposes. We believe
that we currently provide a comprehensive information man-
agement solution for the medical marketplace.
NextGen EHR was developed with client-server architecture
7
and a GUI and utilizes Microsoft Windows 2000, Windows
NT or Windows XP on each workstation and either Windows
2000, Windows NT, Windows XP or UNIX on the database
server. NextGen EHR 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.
NextGen EHR stores and maintains clinical data including:
• Data captured using user-customizable input “templates”;
• Scanned or electronically acquired images, including
X-rays and photographs;
• Data electronically acquired through interfaces with clinical
instruments or external systems;
• Other records, documents or notes, including electronically
captured handwriting and annotations; and
• Digital voice recordings.
NextGen EHR also offers a workflow module, prescrip-
tion management, automatic document and letter generation,
patient education, referral tracking, interfaces to billing and
lab systems, physician alerts and reminders, and powerful re-
porting and data analysis tools. NextGen Express is a version
of NextGen EHR designed for small practices.
The NextGen Division also markets NextGen CHS.
NextGen CHS facilitates cross-enterprise data sharing, en-
abling individual medical practices in a given community to
selectively share critical data such as demographics, referrals,
medications lists, allergies, diagnoses, lab results, histories and
more. This is accomplished through a secure, community-wide
data repository that links health care providers, whether they
have the NextGen EHS system, another compatible EMR sys-
tem, or no EMR, together with hospitals, payors, labs and
other entities. The product is designed to facilitate a Regional
Health Information Organization, or RHIO. The result is that
for every health care encounter in the community, a patient-
centric and complete record is accessible for the provider. The
availability, currency and completeness of information plus the
elimination of duplicate data entry can lead to significantly im-
proved patient safety, enhanced decision making capabilities,
time efficiencies and cost savings.
NextGen also markets RCM services through our Practice
Solutions unit. This service provides billing services to solo and
group practices.
Connectivity Services. We make available EDI capabilities
and connectivity services to our customers. The EDI/connectivity
capabilities encompass direct interfaces between our prod-
ucts and external third party systems, as well as transaction-
based services. Services include:
8
• Electronic claims submission through our relationships with
a number of payors and national claims clearinghouses;
• Electronic patient statement processing, appointment re-
minder cards and calls, recall cards, patient letters, and
other correspondence;
• Electronic insurance eligibility verification; and
• Electronic posting of remittances from insurance carriers
into the accounts receivable application.
Revenue Cycle Management Services. Our NextGen Practice
Solutions unit offers RCM services to physicians. On May 20,
2008, we acquired HSI, a full-service healthcare RCM com-
pany servicing the RCM needs of physician groups and a vari-
ety of other healthcare clients. HSI has historically and primarily
focused on assisting its clients in increasing the accuracy and
speed of client billing and collections activities. On October
28, 2008, we acquired PMP, a full-service healthcare RCM
company. Founded in 2001, PMP provides physician billing
and technology management services to healthcare providers,
primarily in the Mid-Atlantic region.
Internet Applications. Our NextGen Division maintains an
Internet-based patient health portal, NextMD.com. NextMD.com
is a vertical portal for the healthcare industry, linking patients
with their physicians, while providing a centralized source
of health-oriented information for both consumers and medi-
cal 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 com-
municate with their physicians, all in a secure, on-line environ-
ment. Our NextGen suite of information systems are or can be
linked to NextMD.com, integrating a number of these features
with physicians’ existing systems.
Sales and Marketing
We sell and market our products nationwide primarily through
a direct sales force. The efforts of the direct sales force are aug-
mented by a small number of reseller relationships established by
us. Software license sales to resellers represented less than 10%
of total revenue for the years ended March 31, 2009, 2008
and 2007.
Our direct sales force typically makes presentations to
potential clients by demonstrating the system and our capabili-
ties 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 presen-
tations. Our sales and marketing employees identify prospec-
tive clients through a variety of means, including referrals from
existing clients, industry consultants, contacts at professional
society meetings, trade shows and seminars, trade journal ad-
vertising, direct mail advertising, and telemarketing.
Our sales cycle can vary significantly and typically
ranges from six to twenty-four months from initial contact to
contract execution. Software licenses are normally delivered
to a customer almost immediately upon receipt of an order.
Implementation and training services are normally rendered
based on a mutually agreed upon timetable. As part of the
fees paid by our clients, we normally receive up-front licensing
fees. Clients have the option to purchase maintenance ser-
vices 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 bill-
ing 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 dis-
tributor’s customers, implementation of such arrangements has,
from time to time, resulted in the purchase of additional software
capacity by the distributor, as well as new software purchases
made by the distributor’s customers should such customers de-
cide to perform the practice management functions in-house.
We continue to concentrate our direct sales and market-
ing 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 agree-
ments 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 identify-
ing third party sources for financing the purchase of our sys-
tems. 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, 2009, 2008 or 2007.
Customer Service and Support
We believe our success is attributable in part to our customer
service and support departments. We offer support to our
clients seven days a week,twenty-four 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 prob-
lems 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 cli-
ent’s call to the automated support system. Additionally, our
online support systems maintain call records, available at both
the client’s facility and our offices.
We offer our clients support services for most system
components, including hardware and software, for a fixed
monthly, quarterly or annual fee. Customers also receive ac-
cess 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 appro-
priate practice staff. Implementation services include loading
the software, training customer personnel, data conversion,
running test data, and assisting in the development and docu-
mentation of procedures. Implementation and training services
are provided by our employees as well as certified third par-
ties and certain resellers.
Training may include a combination of computer assisted
instruction, or 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 ad-
ditional 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 con-
nection, thus allowing an interactive and client-specific mode
of training without the expense and time required for travel. In
addition, our on-line “help” and other documentation features
facilitate client training as well as ongoing support.
In addition, NextGen “E-learning” is an on-line learning
subscription service which allows end users to train on the soft-
ware 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.
9
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 in-
clude: General Electric, Allscripts, EPIC and other competitors.
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 in-
crease as new competitors enter the market. We believe our
principal competitive advantages are the features and capa-
bilities of our products and services, our high level of customer
support, and our extensive experience in the industry.
Available Information
Our Internet Web site address is www.qsii.com. We make
our periodic and current reports, together with amendments
to these reports, available on our Internet Web site, free of
charge, as soon as reasonably practicable after such material
is electronically filed with, or furnished to, the Commission. You
may access such filings under the “Investor Relations” button
on our Web site. Members of the public may also read and
copy any materials we file with, or furnish to, the Commission
at the Commission’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 Commission maintains an Internet
site at www.sec.gov that contains the reports, proxy state-
ments and other information that we file electronically with the
Commission. The information on our Internet Web site is not
incorporated by reference into this Report or any other report
or information we file with the Commission.
Product Enhancement and Development
The healthcare information management and computer soft-
ware and hardware industries are characterized by rapid
technological change requiring us to engage in continuing
investments to update, enhance, and improve our systems.
During fiscal years 2009, 2008 and 2007, we expended
approximately $19.7 million, $17.4 million and $15.2 million,
respectively, on research and development activities, includ-
ing capitalized software amounts of $5.9 million, $6.0 million
and $5.0 million, respectively. In addition, a portion of our
product enhancements have resulted from software develop-
ment work performed under contracts with our clients.
Other Information
Employees
As of March 31, 2009, we employed approximately 1,263
persons, of which 1,251 were full-time employees. We be-
lieve that our future success depends in part upon recruiting
and retaining qualified sales, marketing and technical person-
nel as well as other employees.
Intellectual Property
To protect our intellectual property, we enter into confidenti-
ality agreements and invention assignment agreements with
our employees with whom such controls are relevant. Certain
qualified employees enter into additional agreements that per-
mit them access under certain circumstances, to software mat-
ters that are both confidential and more strictly controlled. In
addition, we include intellectual property protective provisions
in many of our customer contracts.
ITEM 1A. Risk Factors
The more prominent risks and uncertainties inherent in our
business are described below. However, additional risks and
uncertainties may also impair our business operations. If any
of the following risks actually occur, our business, financial
condition or results of operations will likely suffer. Any of these
or other factors could harm our business and future results of
operations and may cause you to lose all or part of your
investment.
We face increasing involvement of the federal government
in our industry. In February, 2009, President Obama signed
the American Recovery and Reinvestment Act allocates de-
voted over $20 billion dollars to healthcare IT over the next
several years. The ARRA includes significant financial incen-
tives to healthcare providers who can demonstrate meaningful
use of certified EHR technology beginning in 2011. While the
Company expects the ARRA to create significant opportunities
for sales of NextGen EHR over the next several years, the
lack of a final definition of “meaningful use” as well as other
details we believe has negatively impacted sales cycles in
the March, 2009 quarter. While the Federal government has
set a deadline of December 31, 2009 to publish final rules,
there can be no assurance that the slowdown in sales cycles
resulting from such uncertainty will not continue into the fiscal
year, 2010.
The effects of the recent global economic crisis may impact
our business, operating results or financial condition. The
recent global economic crisis has caused a general tighten-
ing in the credit markets, lower levels of liquidity, increases
in the rates of default and bankruptcy, and extreme volatil-
ity in credit, equity and fixed income markets. These macro-
economic developments could negatively affect our business,
10
operating results or financial condition in a number of ways.
For example, current or potential customers 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 opera-
tions or conduct business on a greatly reduced basis. Finally,
our investment portfolio, which includes auction rate securities,
is generally subject to general credit, liquidity, counterparty,
market and interest rate risks that may be exacerbated by the
recent global financial crisis. If the banking system or the fixed
income, credit or equity markets continue to deteriorate or re-
main volatile, our investment portfolio may be impacted and
the values and liquidity of our investments could be adversely
affected as well.
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 com-
petitive, and we face significant competition from a number of
different sources. Several of our competitors have significantly
greater name recognition as well as substantially greater finan-
cial, 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, fi-
nancial condition and price of our stock.
We compete in all of our markets with other major
healthcare related companies, information management com-
panies, 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 mar-
ket acceptance or will successfully compete with other avail-
able software products.
Our inability to make initial sales of our systems to newly
formed groups and/or healthcare providers that are replacing
or substantially modifying their healthcare information systems
could adversely affect our business, results of operations and
financial condition. If new systems sales do not materialize, our
near term and longer term revenue will be adversely affected.
The unpredictability of our quarterly operating results may
cause the price of our common stock to fluctuate or decline.
Our revenue may fluctuate in the future from quarter to quarter
and period to period, as a result of a number of factors includ-
ing, 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 pur-
chase 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 guide-
lines employed by us and/or established by the Financial
Accounting Standards Board or other rule-making bodies;
• Accounting policies concerning the timing of the recogni-
tion of revenue;
• The availability and cost of system components;
• The financial stability of clients;
• Market acceptance of new products, applications and
product enhancements;
• Our ability to develop, introduce and market new prod-
ucts, 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 cer-
tainty. Furthermore, our systems can be relatively large and
expensive, and individual systems sales can represent a signifi-
cant 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
11
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.
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
Because a significant percentage of our expenses are
relatively fixed, a variation in the timing of systems sales, imple-
mentations, and installations can cause significant variations
in operating results from quarter to quarter. As a result, we
believe that interim period-to-period comparisons of our results
of operations are not necessarily meaningful and should not
be relied upon as indications of future performance. Further,
our historical operating results are not necessarily indicative of
future performance for any particular period.
We currently recognize revenue pursuant to Statement
of Position (“SOP”) 97-2, as modified by SOP 98-9 and
Staff Accounting Bulletin (SAB) 104. SAB 104 summarizes
the Commission staff’s views in applying generally accept-
ed accounting principles to revenue recognition in financial
statements.
There can be no assurance that application and subse-
quent interpretations of these pronouncements will not further
modify our revenue recognition policies, or that such modifica-
tions would not adversely affect our operating results reported
in any particular quarter or year.
Due to all of the foregoing factors, it is possible that our
operating results may be below the expectations of public
market analysts and investors. In such event, the price of our
common stock would likely be adversely affected.
The failure of auction rate securities to sell at their reset dates
could impact the liquidity of the investment and could nega-
tively impact the carrying value of the investment. Our invest-
ments include auction rate securities (“ARS”). ARS are securities
that are structured with short-term interest rate reset dates of
generally less than ninety days but with longer contractual
maturities that range, for our holdings, from nine to 28 years.
At the end of each reset period, investors can typically sell
at auction or continue to hold the securities at par. These se-
curities are subject to fluctuations in interest rate depending
on the supply and demand at each auction. Through March
31, 2009, auctions held for the Company’s ARS with a total
aggregate value of approximately $8.1 million failed. As of
March 31, 2009, we were holding a total of approximately
$7.4 million, net of unrealized loss, in ARS. While these debt
securities are all highly-rated investments, generally with AAA/
Aaa ratings, continued failure to sell at their reset dates could
impact the liquidity of the investment which in turn could nega-
tively impact our liquidity position.
results;
• Rumors about our performance, software solutions, or
merger and acquisition activity;
• Changes in expectations of future financial performance or
changes in estimates of securities analysts;
• Governmental regulatory action;
• Health care reform measures;
• Client relationship developments;
• Purchases or sales of company stock;
• Activities by one or more of our major shareholders con-
cerning our policies and operations;
• Changes occurring in the markets in general;
• Macroeconomic conditions, both nationally and interna-
tionally; 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, re-
gardless 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 fu-
ture be the target of similar litigation. Securities litigation could
result in substantial costs and divert management’s attention
and resources.
Two of our directors are significant shareholders, which
makes it possible for them to have significant influence over
the outcome of all matters submitted to our shareholders for
approval and which influence may be alleged to conflict with
our interests and the interests of our other shareholders. Two
of our directors and principal shareholders beneficially owned
an aggregate of approximately 34.2% of the outstanding
shares of our common stock at March 31, 2009. California
law and our Bylaws permit our shareholders to cumulate their
votes, the effect of which is to provide shareholders with suffi-
ciently large concentrations of our shares the opportunity to as-
sure themselves one or more seats on our Board. The amounts
required to assure a Board position can vary based upon the
12
number of shares outstanding, the number of shares voting,
the number of directors to be elected, the number of “broker
non-votes,” and the number of shares held by the shareholder
exercising cumulative voting rights. In the event that cumulative
voting is invoked, it is likely that the two of our directors hold-
ing an aggregate of approximately 34.2% of the outstanding
shares of our common stock at March 31, 2009 will each
have sufficient votes to assure themselves of one or more seats
on our Board. With or without cumulative voting, these share-
holders will have significant influence over the outcome of all
matters submitted to our shareholders for approval, including
the election of our directors and other corporate actions. In
fiscal year 2009, one of the principal shareholders, Ahmed
Hussein, proposed a different slate of directors than what the
Company proposed to shareholders. The Company spent ap-
proximately $1.5 million to defend the Company’s slate. In
addition, such influence by one or both of these shareholders
could have the effect of discouraging others from attempting
to purchase us, implement a change over our Board and man-
agement, and/or reducing the market price offered for our
common stock in such an event.
If our principal products and our new product development
fail to meet the needs of our clients, we may fail to realize
future growth. We currently derive substantially all of our net
revenue from sales of our healthcare information systems and
related services. We believe that a primary factor in the mar-
ket 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 introduc-
tion and implementation of new and enhanced versions of our
systems and other complementary products. We have histori-
cally 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 sup-
port 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 prod-
uct 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 busi-
ness, 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 our-
selves 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 rela-
tional database management system platforms such as those
developed by Microsoft. To date, the standards and technolo-
gies upon which we have chosen to develop our products
have proven to have gained industry acceptance. However,
the market for our software products is subject to ongoing
rapid technological developments, quickly evolving industry
standards and rapid changes in customer requirements, and
there may be existing or future technologies and platforms that
achieve industry standard status, which are not compatible
with our products.
We face the possibility of subscription pricing, which may
force us to adjust our sales, marketing and pricing strategies.
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 prac-
tices to quickly access the NextGen EHR or NextGen EPM
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
customers 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 pen-
etrate the smaller practice market, there can be no assurance
that this delivery model will not become increasingly popular
with both small and large customers. If the marketplace in-
creasingly 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 operations, as our revenue would ini-
tially decrease substantially. There can be no assurance that
the marketplace will not increasingly embrace subscription
pricing.
13
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 char-
acterized by rapid technological change, changing customer
needs, frequent new product introductions, and evolving indus-
try 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 de-
veloping and marketing new products that respond to techno-
logical changes or evolving industry standards. New product
development depends upon significant research and devel-
opment 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 devel-
op and introduce new products in a timely manner in response
to changing market conditions or customer requirements, our
business, results of operations and financial condition may be
adversely affected.
In response to increasing market demand, we are cur-
rently developing new generations of certain of our software
products. There can be no assurance that we will successfully
develop these new software products or that these products
will operate successfully, or that any such development, even
if successful, will be completed concurrently with or prior to
introduction of competing products. Any such failure or delay
could adversely affect our competitive position or could make
our current products obsolete.
We face risk and/or the possibility of claims from activities
related to strategic partners, which could be expensive and
time-consuming, divert personnel and other resources from
our business and result in adverse publicity that could harm
our business. We rely on third parties to provide services that
affect our business. For example, we use national clearing-
houses 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 custom-
ers. These third parties could raise their prices and/or be ac-
quired by competitors of ours, which could potentially create
short and long-term disruptions to our business negatively im-
pacting 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 por-
tion 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
14
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 expen-
sive and time-consuming, divert personnel and other resources
from our business and result in adverse publicity that could
harm our business.
We face the possibility of claims based upon our Web site
content, which may cause us expense and management dis-
traction. We could be subject to third party claims based on
the nature and content of information supplied on our Web
site by us or third parties, including content providers or us-
ers. We could also be subject to liability for content that may
be accessible through our Web site or third party Web sites
linked from our Web site or through content and information
that may be posted by users in chat rooms, bulletin boards or
on Web sites created by professionals using our applications.
Even if these claims do not result in liability to us, investigat-
ing and defending against these claims could be expensive
and time consuming and could divert management’s attention
away from our operations.
We may engage in future acquisitions, which may be ex-
pensive and time consuming and from which we may not
realize anticipated benefits. We may acquire additional busi-
nesses, technologies and products if we determine that these
additional businesses, technologies and products are likely to
serve our strategic goals. On May 20, 2008, we acquired
HSI, and on October 28, 2008, we acquired PMP, both
are full-service healthcare RCM companies servicing physician
groups and other healthcare clients. 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 expens-
es related to intangible assets, which could adversely af-
fect our results of operations and financial condition;
• Use of cash as acquisition currency may adversely affect
interest or investment income, thereby potentially adversely
affecting our earnings and /or earnings per share;
• Difficulty in effectively integrating any acquired tech-
nologies or software products into our current products
and technologies;
• Difficulty in predicting and responding to issues related to
product transition such as development, distribution and
customer support;
• The possible adverse effect of such acquisitions on exist-
ing relationships with third party partners and suppliers of
technologies and services;
• The possibility that staff or customers of the acquired
company might not accept new ownership and may
transition to different technologies or attempt to renego-
tiate contract terms or relationships, including mainte-
nance or support agreements;
• The possibility that the due diligence process in any such
acquisition may not completely identify material issues as-
sociated with product quality, product architecture, product
development, intellectual property issues, key personnel is-
sues or legal and financial contingencies, including any
deficiencies in internal controls and procedures and the
costs associated with remedying such deficiencies;
• Difficulty in integrating acquired operations due to geograph-
ical distance, and language and cultural differences; and
• The possibility that acquired assets become impaired,
requiring us to take a charge to earnings which could
be significant.
A failure to successfully integrate acquired businesses or
technology for any of these reasons could have an adverse
effect on our financial condition and results of operations.
We face the risks and uncertainties that are associated with
litigation against us, which may adversely impact our mar-
keting, distract management and have a negative impact
upon our business, results of operations and financial condi-
tion. We face the risks associated with litigation concerning
the operation of our business. The uncertainty associated with
substantial unresolved litigation may have an adverse effect
on our business. In particular, such litigation could impair our
relationships with existing customers and our ability to obtain
new customers. Defending such litigation may result in a di-
version of management’s time and attention away from busi-
ness operations, which could have an adverse effect on our
business, results of operations and financial condition. Such
litigation may also have the effect of discouraging potential
acquirers from bidding for us or reducing the consideration
such acquirers would otherwise be willing to pay in connection
with an acquisition.
There can be no assurance that such litigation will not
result in liability in excess of our insurance coverage, that our
insurance will cover such claims or that appropriate insurance
will continue to be available to us in the future at commercially
reasonable rates.
Because we believe that proprietary rights are material to our
success, misappropriation of these rights could adversely af-
fect our financial condition. We are heavily dependent on the
maintenance and protection of our intellectual property and
we rely largely on license agreements, confidentiality proce-
dures, 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 mis-
appropriation 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 in-
fringe on the intellectual property rights of others. However,
there can be no assurance that others will not assert infringe-
ment or trade secret claims against us with respect to our cur-
rent 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 busi-
ness, 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 pre-
vented from providing our products and services. We are
and may continue to be subject to intellectual property infringe-
ment 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 as-
sure 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
15
able to continue using the products or services made available
to us under these arrangements on commercially reasonable
terms or at all. As a result, we may have to discontinue, delay
or reduce product shipments or services provided until we can
obtain equivalent technology or services. Most of our third-
party licenses are non-exclusive. Our competitors may obtain
the right to use any of the business elements covered by these
arrangements and use these elements to compete directly with
us. In addition, if our vendors choose to discontinue providing
their technology or services in the future or are unsuccessful in
their continued research and development efforts, we may not
be able to modify or adapt our own products.
We face the possibility of damages resulting from internal and
external security breaches, and viruses. In the course of our
business operations, we compile and transmit confidential infor-
mation, 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 sys-
tems may be vulnerable to security breaches, viruses, program-
ming 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 expend-
ed significant resources toward establishing and enhancing the
security of our related infrastructures, although no assurance can
be given that they will be entirely free from potential breach.
Maintaining and enhancing our infrastructure security may
require us to expend significant capital in the future.
The success of our strategy to offer our EDI services and
Internet solutions depends on the confidence of our customers
in our ability to securely transmit confidential information. Our
EDI services and Internet solutions rely on encryption, authen-
tication and other security technology licensed from third par-
ties to achieve secure transmission of confidential information.
We may not be able to stop unauthorized attempts to gain
access to or disrupt the transmission of communications by
our customers. Anyone who is able to circumvent our security
measures could misappropriate confidential user information
or interrupt our, or our customers’, operations. In addition, our
EDI and Internet solutions may be vulnerable to viruses, physi-
cal or electronic break-ins, and similar disruptions.
Any failure to provide secure infrastructure and/or elec-
tronic communication services could result in a lack of trust by
our customers causing them to seek out other vendors, and/or
damage our reputation in the market, making it difficult to
obtain new customers.
We are subject to the development and maintenance of the
Internet infrastructure, which is not within our control, and
which may diminish Internet usage and availability as well
as access to our Web site. 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 perfor-
mance 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 di-
minish Internet usage and availability of the Internet to us for
transmittal of our Internet-based services. In addition, difficul-
ties, outages, and delays by Internet service providers, online
service providers and other Web site operators may obstruct
or diminish access to our Web site by our customers resulting
in a loss of potential or existing users of our services.
Our failure to manage growth could harm our business, re-
sults 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 reason-
able timeframe, such failure could have an adverse effect on
us. In addition, our ability to manage future increases, if any,
in the scope of our operations or personnel will depend on
significant expansion of our research and development, market-
ing and sales, management, and administrative and financial
capabilities. The failure of our management to effectively man-
age expansion in our business could have an adverse effect
on our business, results of operations and financial condition.
Our operations are dependent upon our key personnel. If such
personnel were to leave unexpectedly, we may not be able to
execute our business plan. Our future performance depends in
significant part upon the continued service of our key technical
and senior management personnel, many of whom have been
with us for a significant period of time. These personnel have
acquired specialized knowledge and skills with respect to our
business. We maintain key man life insurance on only one of
our employees. Because we have a relatively small number of
employees when compared to other leading companies in our
industry, our dependence on maintaining our relationships with
key employees is particularly significant. We are also depen-
dent 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
16
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 employ-
ees and provide other forms of incentive compensation to at-
tract and retain such key personnel. Equity incentives may be
dilutive to our per share financial performance. Failure to pro-
vide such types of incentive compensation could jeopardize
our recruitment and retention capabilities.
Our products may be subject to product liability legal claims,
which could have an adverse effect on our business, results
of operations and financial condition. Certain of our products
provide applications that relate to patient clinical information.
Any failure by our products to provide accurate and timely
information concerning patients, their medication, treatment,
and health status, generally, could result in claims against us
which could materially and adversely impact our financial per-
formance, 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, includ-
ing through licensed practitioners, or delivery of information by
a third party site that a consumer accesses through our Web
sites, exposes us to assertions of malpractice, other personal
injury liability, or other liability for wrongful delivery/handling
of healthcare services or erroneous health information. We
maintain insurance to protect against claims associated with
the use of our products as well as liability limitation language
in our end-user license agreements, but there can be no as-
surance that our insurance coverage or contractual language
would adequately cover any claim asserted against us. A suc-
cessful 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 sys-
tems. Numerous federal and state laws and regulations, the
common law, and contractual obligations, govern collection,
dissemination, use and confidentiality of patient-identifiable
health information, including:
• State and federal privacy and confidentiality laws;
• Our contracts with customers and partners;
• State laws regulating healthcare professionals;
• Medicaid laws;
• The Health Insurance Portability and Accountability Act of
1996 (“HIPAA”) and related rules proposed by the Health
Care Financing Administration; and
• Health Care Financing Administration standards for Internet
transmission of health data.
HIPAA establishes elements including, but not limited to,
federal privacy and security standards for the use and protec-
tion 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 safe-
guarding Protected Health Information from unauthorized dis-
closure, 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 ac-
cess through our web sites may not maintain adequate sys-
tems 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 assur-
ance that revenues for our services will continue at historic
levels. We offer certain electronic claims submission products
and services as part of our product line. While we have imple-
mented certain product features designed to maximize the ac-
curacy and completeness of claims submissions, these features
may not be sufficient to prevent inaccurate claims data from
being submitted to payors. Should inaccurate claims data be
submitted to payors, we may be subject to liability claims.
Electronic data transmission services are offered by cer-
tain payors to healthcare providers that establish a direct link
between the provider and payor. This process reduces rev-
enue to third party EDI service providers such as us. As a result
of this, or other market factors, we are unable to ensure that
we will continue to generate revenue at or in excess of prior
levels for such services.
A significant increase in the utilization of direct links be-
tween 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.
17
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 op-
erations. The healthcare industry is subject to changing politi-
cal, economic and regulatory influences that may affect the
procurement processes and operation of healthcare facilities.
During the past several years, the healthcare industry has
been subject to an increase in governmental regulation of,
among other things, reimbursement rates and certain capital
expenditures.
In the past, various legislators have announced that they
intend to examine proposals to reform certain aspects of the
U.S. healthcare system including proposals which may change
governmental involvement in healthcare and reimbursement
rates, and otherwise alter the operating environment for us and
our clients. Healthcare providers may react to these proposals,
and the uncertainty surrounding such proposals, by curtailing
or deferring investments, including those for our systems and re-
lated services. Cost-containment measures instituted by health-
care 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 organiza-
tions for cost-effective data management and thereby enhance
the overall market for healthcare management information sys-
tems. 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 non-
compliance by us could result in civil and criminal penalties.
In addition, developments of additional federal and state
regulations and policies have the potential to positively or neg-
atively affect our business.
In addition, our software may po-
tentially 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
18
clearance requirement could create delays in marketing, and
the FDA could require supplemental filings or object to certain
of these applications, the result of which could adversely affect
our business, financial condition and results of operations.
We may be subject to false or fraudulent claim laws. There
are numerous federal and state laws that forbid submission of
false information or the failure to disclose information in con-
nection 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 regula-
tions 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, re-
search and development and other resources to address the
failure. Errors by us or our systems with respect to entry, format-
ting, 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 cli-
ent 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 cal-
culate charges for our RCM services based on a percentage
of the collections that our clients receive as a result of our ser-
vices. 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 fraudu-
lent 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 fre-
quent basis, federal and state legislators are proposing laws
and regulations that apply to Internet commerce and communi-
cations. Areas being affected by these regulations include user
privacy, pricing, content, taxation, copyright protection, distribu-
tion, 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 per-
formance, 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 prop-
erly reported. However, there continue to be issued interpreta-
tions and guidance for applying the relevant standards to a
wide range of sales and licensing contract terms and business
arrangements that are prevalent in the software industry.
Future interpretations or changes by the regulators of existing
accounting standards or changes in our business practices
could result in changes in our revenue recognition and/or
other accounting policies and practices that could adversely
affect our business, financial condition, cash flows, revenue
and results of operations.
If material weaknesses in our internal controls are identi-
fied by us or our independent registered public accountants,
our per share price may be adversely affected. Any material
weaknesses identified in our internal controls as part of the
ongoing evaluation being undertaken by us and our indepen-
dent registered public accountants pursuant to Section 404
of the Sarbanes-Oxley Act of 2002 could have an adverse
effect on the price at which our stock trades.
No evaluation process can provide complete assurance
that our internal controls will detect and correct all failures
within our company to disclose material information otherwise
required to be reported. The effectiveness of our controls and
procedures could also be limited by simple errors or faulty
judgments. In addition, if we continue to expand, through
either organic growth or through acquisitions (or both), the
challenges involved in implementing appropriate controls will
increase and may require that we evolve some or all of our
internal control processes.
It is also possible that the overall scope of Section 404 of
the Sarbanes-Oxley Act of 2002 may be revised in the future,
thereby causing our auditors and ourselves to review, revise or
reevaluate our internal control processes which may result in
the expenditure of additional human and financial resources.
Continuing worldwide political and economic uncertainties
may adversely affect our revenue and profitability. The last
several years have been periodically marked by concerns
including but not limited to inflation, decreased consumer con-
fidence, the lingering effects of international conflicts, energy
costs and terrorist and military activities. These conditions can
make it extremely difficult for our customers, our vendors and
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.
Our future policy concerning stock splits is uncertain. While
we effected a 2:1 split of our stock in March 2005 and a
second 2:1 stock split in March 2006, there can be no assur-
ance that another stock split will occur in the future. Unfulfilled
expectations to the contrary could adversely affect the price
of our stock.
Our future policy concerning the payment of dividends is un-
certain, which could adversely affect the price of our stock.
We have announced our intention to pay a quarterly dividend
commencing with the conclusion of our first fiscal quarter of
2008 (June 30, 2007) and pursuant to this policy our Board
has declared a quarterly cash dividend ranging from $0.25
to its most recent level of $0.30 per share on our outstanding
shares of common stock, each quarter thereafter. We antici-
pate that future quarterly dividends, if and when declared by
our Board pursuant to this policy, would likely be distributable
on or about the fifth day of each of the months of October,
January, April and July. There can be no guarantees that we
will have the financial wherewithal to fund this dividend in
perpetuity or to pay it at historic rates. Further, our Board may
decide not to pay the dividend at some future time for financial
or non-financial reasons. Unfulfilled expectations regarding
future dividends could adversely affect the price of our stock.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our principal administrative, accounting, QSI Division opera-
tions and NextGen training operations are located in Irvine,
California, under a lease for 24,000 square feet that com-
menced in October 2007. This lease expires in May 2013.
We lease approximately 78,000 square feet of space
for the principal office of our NextGen Division in Horsham,
Pennsylvania. This lease expires in March 2011. In January
2007, we executed a new lease for approximately 35,000
square feet of space for the NextGen Division in Atlanta,
Georgia. This lease expires in October 2011. In May 2006,
we executed a lease for approximately 3,000 square feet of
space in Dallas, Texas for NextGen staff and a new NextGen
19
training facility. In addition, we lease approximately 6,000
square feet of space in Santa Ana, California, to house our
assembly and warehouse operations of the QSI Division. We
also have an aggregate of approximately 3,000 square feet
of space in Minnesota, Utah, Wisconsin, and Washington
to house additional sales, training, development and service
operations. These leases, excluding options, have expiration
dates ranging from month-to-month to October 2011. Should
we continue to grow, we may be required to lease additional
space. We believe that suitable additional or substitute space
is available, if needed, at market rates.
As a result of our acquisition of HSI on May 20, 2008,
we lease approximately 46,400 square feet for our HSI
operations in St. Louis, Missouri under leases that expire in
November 2010.
As a result of our acquisition of PMP on October 28, 2008,
we lease approximately 40,500 square feet for our PMP op-
erations in Hunt Valley, Maryland under various leases which
will expire in July 2010.
ITEM 3. Legal Proceedings
In the normal course of business, we are involved in various
claims and legal proceedings. While the ultimate resolution
of these currently pending matters has yet to be determined,
we do not presently believe that their outcome will adversely
affect our financial position, results of operations or liquidity.
ITEM 4. Submission of Matters
to a Vote of Security Holders
No matter was submitted to a vote of security holders during
the fourth quarter of fiscal year 2009.
Part II
ITEM 5. Market For Registrant’s
Common Stock, Related Shareholder
Matters and Issuer Purchases of
Equity Securities
Market Price and Holders
Our common stock is traded on the NASDAQ Global Select
Market under the symbol “QSII.” The following table sets forth
for the quarters indicated the high and low sales prices for
each period indicated as reported on the NASDAQ Global
Select Market and reflects all stock splits effected.
Quarter Ended
June 30, 2007
High
Low
$42.44
$36.96
September 30, 2007
$45.35
$32.37
December 31, 2007
$38.99
$26.08
March 31, 2008
$36.30
$26.90
June 30, 2008
$35.97
$29.00
September 30, 2008
$47.94
$27.34
December 31, 2008
$44.98
$25.70
March 31, 2009
$48.46
$34.26
At May 22, 2009, there were approximately 103 holders of
record of our common stock.
Dividends
On May 27, 2009, our Board approved a quarterly cash
dividend of $0.30 per share on our outstanding shares of
common stock, payable to shareholders of record as of June
12, 2009 with an expected distribution date on or about
July 6, 2009.
On January 28, 2009, our Board approved a quar-
terly cash dividend of $0.30 per share on our outstanding
shares of common stock, payable to shareholders of record
as of March 11, 2009 with a distribution date on or about
April 3, 2009.
On October 30, 2008, our Board approved a quar-
terly cash dividend of $0.30 per share on our outstanding
shares of common stock, payable to shareholders of record as
of December 15, 2008 with a distribution date on or about
January 5, 2009.
On August 4, 2008, our Board approved a quarterly
cash dividend of $0.30 per share on our outstanding shares
of common stock, payable to shareholders of record as of
September 15, 2008 with a distribution date on or about
October 1, 2008.
On May 29, 2008, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of June
15, 2008 with a distribution date on or about July 2, 2008.
On January 30, 2008, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
March 14, 2008 and was distributed to shareholders on or
about April 7, 2008.
On October 25, 2007, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
December 14, 2007 and was distributed to shareholders on
or about January 7, 2008.
20
On July 31, 2007, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
September 14, 2007 and was distributed to shareholders on
or about October 5, 2007.
On May 31, 2007, our Board declared a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
June 15, 2007 and was distributed to shareholders on July
5, 2007.
In February 2007, we paid a $1.00 per share cash divi-
dend on shares of our common stock. The record date for the
dividend was February 13, 2007.
In January 2007, our Board adopted a policy whereby
we intend to pay a regular quarterly dividend of $0.25 per
share on our outstanding common stock commencing with
conclusion of our first fiscal quarter of 2008 (June 30, 2007)
and continuing each fiscal quarter thereafter, subject to further
Board review and approval and establishment of record and
distribution dates by our Board prior to the declaration of each
such quarterly dividend. In August 2008, our Board increased
the quarterly dividend to $0.30 per share. We anticipate that
future quarterly dividends, if and when declared by our Board
pursuant to this policy, would likely be distributable on or
about the fifth day of each of the months of October, January,
April and July.
Payment of future dividends, if any, will be at the discre-
tion of our Board after taking into account various factors,
including without limitation, our financial condition, operat-
ing results, current and anticipated cash needs and plans
for expansion.
Performance Graph
The following graph compares the cumulative total returns of our common stock, the NASDAQ Composite Index, and the
NASDAQ Computer & Data Processing Services Stock Index over the five-year period ended March 31, 2009 assuming $100
was invested on March 31, 2004 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
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
3/04
3/05
3/06
3/07
3/08
3/09
Quality Systems, Inc.
NASDAQ Composite
NASDAQ Computer & Data Processing
*$100 invested on 3/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.
21
Graph produced by Research Data Group, Inc.
5/20/2009
The last trade price of our common stock on each of
March 31, 2005, 2006, 2007, 2008 and 2009 was pub-
lished by NASDAQ and, accordingly for the periods ended
March 31, 2005, 2006, 2007, 2008 and 2009 the report-
ed 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 share-
holder returns.
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, 2009 and the
Consolidated Balance Sheet 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 con-
junction with our Consolidated Financial Statements and the
related notes thereto and “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations”
included elsewhere herein. All share prices in the table be-
low have been retroactively adjusted to reflect the fiscal year
2006 and 2005 stock splits.
Consolidated Financial Data (In Thousands, Except for Share Data)
Statements of Income Data:
Revenue
Cost of revenue
Gross profit
Selling, general and administrative
expenses
Research and development costs
Income from operations
Interest income
Other income (expense)
Income before provision for income
taxes
Provision for income taxes
Year ended March 31,
2009
2008
2007
2006
2005
$ 245,515
$ 186,500
$ 157,165
$ 119,287
$ 88,961
88,890
62,501
50,784
156,625
123,999
106,381
39,828
79,459
32,669
56,292
70,445
13,777
72,403
1,203
(279)
53,260
11,350
59,389
2,661
953
45,337
10,166
50,878
3,306
-
35,554
24,776
8,087
6,903
35,818
24,613
2,108
-
876
-
73,327
27,208
63,003
22,925
54,184
20,952
37,926
14,604
25,489
9,380
Net income
$ 46,119
$ 40,078
$ 33,232
$ 23,322
$ 16,109
Basic net income per share
$ 1.65
$ 1.47
$ 1.24
$ 0.88
$ 0.63
Diluted net income per share
$ 1.62
$ 1.44
$ 1.21
$ 0.85
$ 0.61
Basic weighted average shares
outstanding
Diluted weighted average shares
outstanding
Balance Sheet Data (at end of year):
28,031
27,298
26,882
26,413
25,744
28,396
27,770
27,550
27,356
26,406
Cash and cash equivalents
$ 70,180
$ 59,046
$ 60,028
$ 57,255
$ 51,157
Working capital
Total assets
Total liabilities
$ 98,980
$ 79,932
$ 76,616
$ 61,724
$ 55,111
$ 242,101
$ 187,908
$ 150,681
$ 122,247
$ 99,442
$ 86,534
$ 74,203
$ 59,435
$ 49,838
$ 36,711
Total shareholders’ equity
$ 155,567
$ 113,705
$ 91,246
$ 72,409
$ 62,731
22
ITEM 7. Management’s Discussion
and Analysis of Financial Condition and
Results of Operations
Except for the historical information contained herein, the mat-
ters discussed in this management’s discussion and analysis of
financial condition and results of operations, or 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 techno-
logical evolution, consolidation, and competition from larger, bet-
ter capitalized competitors. Many other economic, competitive,
governmental and technological factors could affect our ability to
achieve our goals, and interested persons are urged to review the
risks described in “Item 1A. Risk Factors” as set forth above, as well
as in our other public disclosures and filings with the Commission.
Overview
This MD&A is provided as a supplement to the Consolidated
Financial Statements and notes thereto included in this Report,
in order to enhance your understanding of our results of opera-
tions and financial condition and the following discussion should
be read in conjunction with, and is qualified in its entirety by,
the Consolidated Financial Statements and related notes thereto
included elsewhere in this Report. Historical results of operations,
percentage margin fluctuations and any trends that may be in-
ferred 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 de-
scription of our Company and operating segments, a discus-
sion 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 dis-
cusses those accounting policies that are considered impor-
tant 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 esti-
mates and assumptions. In addition, all of our significant ac-
counting policies, including our critical accounting policies,
are summarized in Note 2 to the Consolidated Financial
Statements included in this Report.
• 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 operations, 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, 2009.
• Recent Accounting Pronouncements. This section provides
a summary of the most recent authoritative accounting stan-
dards and guidance that have either been recently adopted
by our Company or may be adopted in the future.
Management Overview
Our Company is comprised of the QSI Division, the NextGen
Division, HSI and PMP. We primarily derive revenue by develop-
ing and marketing healthcare information systems that automate
certain aspects of medical and dental practices, networks of
practices such as PHOs and MSOs, ambulatory care centers,
community health centers, and medical and dental schools. We
also provide RCM services through our Practice Solutions divi-
sion of NextGen which consists primarily of billing and collection
services for medical practices.
The turbulence in the worldwide economy has impacted al-
most 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. We continue to
see organizations that are doing fairly well operationally, how-
ever, some organizations with a large dependency on Medicaid
populations are being impacted by the challenging financial
condition of the many state governments in whose jurisdictions
they conduct business. A positive factor for U.S. healthcare is
the fact that the Obama administration is pursuing broad health-
care reform aimed at improving issues surrounding healthcare.
The ARRA, which became law on February 17, 2009, includes
more than $20 billion to help healthcare organizations modern-
ize operations through the acquisition of health care information
technology. While we are unsure of the immediate impact from
the ARRA, the long-term potential could be significant.
On May 20, 2008, we acquired HSI, a full-service
healthcare RCM company. HSI operates under the umbrella of
NextGen Practice Solutions. Founded in 1996, HSI currently
provides RCM services to providers including health systems,
hospitals, and physicians in private practice with an in-house
team of more than 200 employees including specialists in medi-
cal billing, coding and compliance, payor credentialing, and
information technology.
On October 28, 2008, we acquired PMP, a full-service
healthcare RCM company. This acquisition is also part of our
growth strategy for NextGen Practice Solutions. Similar to HSI,
PMP operates under the umbrella of NextGen Practice Solutions.
23
Founded in 2001, PMP provides physician billing and technol-
ogy management services to healthcare providers, primarily in
the Mid-Atlantic region.
Our strategy is, at present, to focus on providing soft-
ware and services to medical and dental practices. The key
elements of this strategy are to continue development and
enhancement of select software solutions in target markets,
to continue investments in our infrastructure including but not
limited to product development, sales, marketing, implementa-
tion, and support, to continue efforts to make infrastructure in-
vestments within an overall context of maintaining reasonable
expense discipline, to add new customers through maintaining
and expanding sales, marketing and product development ac-
tivities, and to expand our relationship with existing customers
through delivery of new products and services.
Critical Accounting Policies and Estimates
The discussion and analysis of our consolidated financial
statements and results of operations is based upon our con-
solidated financial statements which have been prepared in
accordance with accounting principles generally accepted in
the United States of America. The preparation of these con-
solidated 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, valuation of marketable securities, ARS
put option rights, uncollectible accounts receivable, intangible
assets, software development cost, and income taxes for rea-
sonableness. We base our estimates on historical experience
and on various other assumptions that management believes
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values
of assets and liabilities that may not be readily apparent from
other sources. Actual results may differ from these estimates
under different assumptions or conditions.
We believe revenue recognition, valuation of marketable
securities and ARS put option rights, the allowance for doubtful
accounts, capitalized software costs, share-based compensa-
tion, income taxes and business combinations are among the
most critical accounting policies that affect our consolidated fi-
nancial statements. We believe that significant accounting pol-
icies, as described in Note 2 of our Consolidated Financial
Statements, “Summary of Significant Accounting Policies”,
should be read in conjunction with Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Revenue Recognition. We currently recognize system sales rev-
enue pursuant to SOP 97-2, as amended by SOP 98-9. We
generate revenue from the sale of licensing rights to use our
software products sold directly to end-users and value-added
24
resellers, or VARs. We also generate revenue from sales of
hardware and third party software, implementation, training,
software customization, EDI, post-contract support (mainte-
nance) and other services, including RCM services, performed
for customers who license our products.
A typical system contract contains multiple elements of
the above items. SOP 97-2, as amended, requires revenue
earned on software arrangements involving multiple elements
to be allocated to each element based on the relative fair
values of those elements. The fair value of an element must
be based on vendor specific objective evidence (“VSOE”).
We limit our assessment of VSOE for each element to either
the price charged when the same element is sold separately
or the price established by management having the relevant
authority to do so, for an element not yet sold separately.
VSOE calculations are updated and reviewed at the end of
each quarter or annually depending on the nature of the prod-
uct or service. We have established VSOE for the related
undelivered elements based on the bell-shaped curve method.
Maintenance VSOE for our largest customers is based on stat-
ed renewal rates only if the rate is determined to be substan-
tive and falls within our customary pricing practices.
When evidence of fair value exists for the undelivered
elements only, the residual method, provided for under SOP
98-9, is used. Under the residual method, we defer revenue
related to the undelivered elements in a system sale based on
VSOE of fair value of each of the undelivered elements, and al-
locate the remainder of the contract price net of all discounts to
revenue recognized from the delivered elements. Undelivered
elements of a system sale may include implementation and
training services, hardware and third party software, mainte-
nance, future purchase discounts, or other services. If VSOE
of fair value of any undelivered element does not exist, all
revenue is deferred until VSOE of fair value of the undelivered
element is established or the element has been delivered.
We bill for the entire system sales contract amount upon
contract execution, except for maintenance which is billed sep-
arately. Amounts billed in excess of the amounts contractually
due are recorded in accounts receivable as advance billings.
Amounts are contractually due when services are performed
or in accordance with contractually specified payment dates.
Provided the fees are fixed and determinable and collection is
considered probable, revenue from licensing rights and sales
of hardware and third party software is generally recognized
upon shipment and transfer of title. In certain transactions
whose collections risk is high, the cash basis method is used
to recognize revenue. If the fee is not fixed or determinable,
then the revenue recognized in each period (subject to appli-
cation of other revenue recognition criteria) will be the lesser of
the aggregate of amounts due and payable or the amount of
the arrangement fee that would have been recognized if the
fees were being recognized using the residual method. Fees
which are considered fixed or determinable at the inception
of our arrangements must include the following characteristics:
• The fee must be negotiated at the outset of an arrange-
ment, 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
• Payment terms must not be considered extended. If a sig-
nificant portion of the fee is due more than 12 months after
delivery or after the expiration of the license, the fee is
presumed not fixed and determinable.
Revenue from implementation and training services is
recognized as the corresponding services are performed.
Maintenance revenue is recognized ratably over the contrac-
tual maintenance period.
Contract accounting is applied where services in-
clude significant software modification, development or
customization. In such instances, the arrangement fee is ac-
counted for in accordance with SOP 81-1 “Accounting for
Performance of Construction-Type and Certain Production-
Type Contracts.”
Pursuant to SOP 81-1, we use the percentage of comple-
tion method provided all of the following conditions exist:
• The contract includes provisions that clearly specify the
enforceable rights regarding goods or services to be pro-
vided and received by the parties, the consideration to be
exchanged, and the manner and terms of settlement;
• The customer can be expected to satisfy its obligations
under the contract;
• We can be expected to perform our contractual obliga-
tions; and
• Reliable estimates of progress towards completion can
be made.
We measure completion using labor input hours. Costs
of providing services, including services accounted for in ac-
cordance with SOP 81-1, are expensed as incurred.
If a situation occurs in which a contract is so short term that
the consolidated financial statements would not vary materially
from using the percentage-of-completion method or in which we
are unable to make reliable estimates of progress of completion
of the contract, the completed contract method is utilized.
Product returns are estimated in accordance with
Statement of Financial Accounting Standards (“SFAS”) No.
48, “Revenue Recognition When Right of Return Exists”. The
Company also ensures that the other criteria in SFAS 48 have
been met prior to recognition of revenue:
• The price is fixed or determinable;
• The customer is obligated to pay and there are no contin-
gencies surrounding the obligation or the payment;
• The customer’s obligation would not change in the event of
theft or damage to the product;
• The customer has economic substance;
• The amount of returns can be reasonably estimated; and
• We do not have significant obligations for future perfor-
mance in order to bring about resale of the product by the
customer.
We have historically offered short-term rights of return
of less than thirty days in certain sales arrangements. If we
are able to estimate returns for these types of arrangements,
revenue is recognized and these arrangements are recorded
in the consolidated financial statements. If we are unable to
estimate returns for these types of arrangements, revenue is not
recognized in our consolidated financial statements until the
rights of return expire.
Revenue related to sales arrangements which include
the right to use software stored on the Company’s hardware
are accounted for under the Emerging Issues Task Force Issue
(“EITF”) No. 00-3 “Application of AICPA Statement of Position
97-2 to arrangements that include the right to use software
stored on another entity’s hardware”. EITF No. 00-3 requires
that for software licenses and related implementation services
to continue to fall under SOP No. 97-2, the customer must
have the contractual right to take possession of the software
without incurring a significant penalty and it must be feasi-
ble for the customer to either host the software themselves or
through another third party. If an arrangement is not deemed
to be accounted for under SOP 97-2, the entire arrangement
is accounted for as a service contract in accordance with
EITF Issue No. 00-21 “Revenue Arrangements with Multiple
Deliverables”. In that instance, the entire arrangement would
be recognized as the hosting services are being performed.
RCM revenue is derived from services fees, which in-
clude amounts charged for ongoing billing and other related
services and are generally billed to the customer as a percent-
age of total collections. We do not recognize revenue for
services fees until these collections are made as the services
fees are not fixed and determinable until such time.
From time to time, we offer future purchase discounts on
our products and services as part of our sales arrangements.
Pursuant to AICPA TPA 5100.51, discounts which are incre-
mental to the range of discounts reflected in the pricing of the
other elements of the arrangement, which are incremental to
the range of discounts typically given in comparable transac-
tions, and which are significant, are treated as an additional el-
ement of the contract to be deferred. Amounts deferred related
25
to future purchase options are not recognized until either the
customer exercises the discount offer or the offer expires.
Revenue is divided into two categories, “system sales”
and “maintenance, EDI, RCM and other services”. Revenue
in the system sales category includes software license fees,
third party hardware and software, and implementation and
training services related to purchase of the Company’s soft-
ware systems. The majority of the revenue in the system sales
category is related to the sale of software. Revenue in the
maintenance, EDI, RCM and other services category includes,
maintenance, EDI, RCM, follow on training and implementa-
tion services, annual third party license fees, hosting services
and other revenue.
Valuation of marketable securities and ARS put option rights.
Marketable securities are recorded at fair value, based on
quoted market rates or on valuation analysis when appro-
priate. The cost of marketable securities sold is based upon
the specific identification method. In addition, the Company
classifies marketable securities as current or non-current based
upon whether such assets are reasonably expected to be real-
ized in cash or sold or consumed during the normal operating
cycle of the business. Realized gains or losses and other-than-
temporary declines in the fair value of marketable securities
are determined on a specific identification basis and reported
in interest and other income, net, as incurred.
The fair value of our marketable securities has been
estimated by management based on certain assumptions
of what market participants would use in pricing the as-
set in a current transaction, or level 3 – unobservable in-
puts in accordance with SFAS 157 (see Note 4 of our
Notes to the Consolidated Financial Statements: “Fair Value
Measurements”). Management used a model to estimate the
fair value of these securities that included certain level 2 inputs
as well as assumptions, including a liquidity discount, based
on management’s judgment, which are highly subjective and
therefore considered level 3 inputs in the fair value hierarchy.
The estimate of the fair value of the marketable securities could
change based on market conditions.
Our ARS are managed by UBS Financial Services Inc.
(“UBS”). On November 13, 2008, we entered into an Auction
Rate Security Rights Agreement (the Rights Agreement) with
UBS, whereby we accepted UBS’ offer to purchase our ARS
investments at any time during the period of June 30, 2010
through July 2, 2012. As a result we had obtained an asset,
ARS put option rights, whereby we have a right to “put” the
ARS back to UBS. We expect to exercise our ARS put option
rights and put our ARS back to UBS on June 30, 2010, the
earliest date allowable under the Rights Agreement.
As we will be permitted to put the ARS back to UBS at
par value, we have accounted for the ARS put option rights
26
as a separate asset that was initially measured and will con-
tinue to be measured at its fair value. We are required to
assess the fair value of these two individual assets and to
record corresponding changes in fair value in each reporting
period through the Consolidated Statements of Operations
until the ARS put option rights are exercised and the ARS are
redeemed or sold. Since the ARS put option rights represent
the right to sell the securities back to UBS at par, we will be
required to periodically assess the economic ability of UBS to
meet that obligation in assessing the fair value of the ARS put
options rights.
Allowance for Doubtful Accounts. We maintain allowances
for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. We
perform credit evaluations of our customers and maintain re-
serves for estimated credit losses. Reserves for potential credit
losses are determined by establishing both specific and gen-
eral 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 his-
torical experience of bad debt expense and the aging of our
accounts receivable balances net of deferred revenue and
specifically reserved accounts. If the financial condition of our
customers were to deteriorate resulting in an impairment of
their ability to make payments, additional allowances would
be required.
Software Development Costs. Development costs incurred in
the research and development of new software products and
enhancements to existing software products are expensed as
incurred until technological feasibility has been established.
After technological feasibility is established with the comple-
tion of a working model of the enhancement or product, any
additional development costs are capitalized in accordance
with SFAS 86, “Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed.” Such capitalized
costs are amortized on a straight line basis over the estimated
economic life of the related product, which is generally three
years. We perform an annual review of the recoverability of
such capitalized software costs. At the time a determination is
made that capitalized amounts are not recoverable based on
the estimated cash flows to be generated from the applicable
software, any remaining capitalized amounts are written off.
Share-Based Compensation. We apply the provisions of
SFAS 123R, “Share-Based Payment,” which requires the mea-
surement and recognition of compensation expense for all
share-based payment awards made to employees and direc-
tors based on estimated fair values. SFAS 123R requires us
to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. During fiscal
year 2009, we estimate the expected term of the option us-
ing historical exercise experience. Prior to fiscal year 2009
we used the simplified method to estimate the expected term
of an option. We estimate volatility by using the weighted
average historical volatility of our common stock, which we
believe approximates expected volatility. The risk free rate is
the implied yield available on the U.S Treasury zero-coupon
issues with remaining terms equal to the expected term. The
expected dividend yield is the average dividend rate during a
period equal to the expected term of the option. Those inputs
are then entered into the Black Scholes model to determine the
estimated fair value. The value of the portion of the award that
is expected to vest is recognized as expense over the requisite
service period in our consolidated statement of income.
Research and Development Tax Credits. Management’s treat-
ment of research and development tax credits represented a
significant estimate which affected the effective income tax
rate for us for the years ended March 31, 2009, 2008 and
2007. Research and development credits taken by us involve
certain assumptions and judgments regarding qualified ex-
penses under Internal Revenue Code (“IRC”) Section 41. These
credits are subject to examination by the federal and state
taxing authorities.
During each of the years ended March 31, 2009, 2008
and 2007, we recognized approximately $1.0 million, $0.8
million and $0.8 million in credits, respectively, related to re-
search and development. We expect to capture this benefit
on our federal tax returns.
Qualified Production Activities Deduction. Management’s
treatment of this deduction represented an estimate that af-
fected the effective income tax rate for us for the years ended
March 31, 2009, 2008 and 2007. The deduction taken
by us involved certain assumptions and judgments regarding
the allocation of indirect expenses as prescribed under IRC
Section 199.
During the years ended March 31, 2009, 2008 and
2007, we recognized approximately $2.7 million, $3.1 million
and $1.5 million, respectively, in deductions related to the qual-
ified production activities deduction (“QPAD”) under IRC. The
QPAD calculation was determined using interim guidance pro-
vided by proposed Internal Revenue Service regulations and
notices. We expect to capture this benefit on our tax returns.
Business Combinations.
In accordance with business
combination accounting under SFAS No. 141, “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. Such al-
locations require management to make significant estimates
and assumptions, especially with respect to intangible assets
acquired. Management’s estimates of fair value are based
upon assumptions believed to be reasonable. These estimates
are based on information obtained from management of the
acquired companies and are inherently uncertain. Critical es-
timates in valuing certain of the intangible assets include, but
are not limited to:
• Future expected cash flows from acquired businesses; and
• The acquired company’s brand and market position.
Unanticipated events and circumstances may occur
which may affect the accuracy or validity of such assumptions,
estimates or actual results and we will continue to evaluate
events and circumstances on an ongoing basis.
Overview of Our Results
• Our total revenue increased 31.6% and income from op-
erations grew 21.9% on a consolidated basis for the year
ended March 31, 2009. This performance was driven by
growth in our NextGen Division, offset by decreases in
revenue and operating income in our QSI Division and
higher corporate expenses.
• Our year over year growth in revenue and operating in-
come during the year ended March 31, 2009 was par-
tially attributable to the HSI and PMP acquisitions. HSI and
PMP generated $15.6 million of revenue for the period
May 21, 2008 to March 31, 2009 and $8.6 million of
revenue for the period October 29, 2008 to March 31,
2009, respectively.
• Operating income was positively impacted by an increase
in revenue offset by a shift in revenue mix with an increased
share of hardware, EDI, and RCM revenue resulting in a
decline in our gross profit margin. We also experienced
higher selling, general and administrative expenses. Higher
selling, general and administrative expenses were impact-
ed negatively by approximately $1.5 million of expenses
incurred in conjunction with the proxy contest involving our
election of directors at our 2008 Annual Shareholder’s
Meeting and higher than usual legal expenses, primarily
as a result of our contested proxy election and certain
legal matters related to intellectual property infringement
claims in the NextGen Division.
• We do not believe the revenue mix changes noted above
represent a change in the overall purchasing environment.
On top of the potential benefits from the recently enacted
ARRA, we have benefited and hope to continue to benefit
from the increased demands on healthcare providers for
greater efficiency and lower costs, as well as increased
adoption rates for electronic medical records and other
technology in the healthcare arena.
27
• While the Company expects to benefit from the increasing
demands for greater efficiency as well as government sup-
port for increased adoption of electronic medical records,
the current economic environment combined with unpre-
dictability of the federal government’s plans to promote in-
creased adoption of electronic medical records negatively
impacted the Company’s fourth quarter results and makes
the near term achievement of such benefits and, ultimately,
their impact on system sales, uncertain.
NextGen Division
• NextGen Division revenue increased 34.7% in the year
ended March 31, 2009 and income from operations
increased 25.9% from the year ended March 31, 2008.
Organic revenue and operating income growth in the
NextGen Division not including acquisitions was 20.5%
and 21.3% for the years ended March 31, 2009 and
2008, respectively.
• The Divisions’ year over year growth in revenue and op-
erating income for the Company during the year ended
March 31, 2009 was partially attributable to the HSI and
PMP acquisitions.
• HSI contributed $15.6 million to NextGen’s revenue from
the date of its acquisition on May 20, 2008 to March
31, 2009. HSI’s operating income added $0.7 million
to NextGen’s operating income during the year ended
March 31, 2009.
• PMP contributed $8.6 million to NextGen’s revenue from
the date of its acquisition on October 28, 2008 to March
31, 2009. PMP’s operating income added $2.5 million
to NextGen’s operating income during the year ended
March 31, 2009.
• During the year ended March 31, 2009, we added staff-
ing resources to most of our client-interfacing departments,
and intend to continue doing so in future periods. Such
divisional headcount additions caused selling, general
and administrative expenses to increase.
• Our goals include taking maximum advantage of future
benefits related to the ARRA and continuing to further en-
hance and expand the marketing and sales of our ex-
isting products, developing new products for targeted
markets, continuing to add new customers, selling additional
software and services to existing customers, expanding
penetration of connectivity and other services to new and
existing customers, and capitalizing on growth and cross
selling opportunities within the Practice Solutions arena.
QSI Division
• QSI Division revenue decreased 1.2% in the year ended
March 31, 2009 and Divisional operating loss decreased
7.6% (excluding unallocated corporate expenses) from the
year ended March 31, 2008. Divisional revenue and op-
erating income performance for the Division, while below
fiscal year 2008 levels, were within the Division’s historical
performance range.
• A drop in annual revenue, slight changes in the Division’s
sales mix in favor of lower margin hardware and EDI prod-
ucts, and an increase in selling, general and administra-
tive expenses were the chief contributors to the operating
income decline.
• Our goals for the QSI Division include maximizing profit
performance given the constraints represented by a rela-
tively weak purchasing environment in the dental group
practice market. The QSI division also intends to leverage
the NextGen sales force to sell its dental EMR software to
practices that provide both medical and dental services
such as Federal Qualified Health Centers.
28
The following table sets forth for the periods indicated the percentage of net revenue represented by each item in our
consolidated statements of income.
(Unaudited)
Revenues:
Software, hardware and supplies
Implementation and training services
System sales
Maintenance
Electronic data interchange services
Revenue cycle management
Other services
Maintenance, EDI, RCM and other services
Total revenue
Cost of revenue:
Software, hardware and supplies
Implementation and training services
Total cost of system sales
Maintenance
Electronic data interchange services
Revenue cycle management
Other services
Total cost of maintenance, EDI, RCM and other services
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Income from operations
Interest income
Other income (expense)
Income before provision for income taxes
Provision for income taxes
Net income
* does not foot due to rounding
Year Ended March 31,
2009
2008
2007
34.8%
40.9%
43.8%
5.4
40.2
29.7
12.0
8.7
9.3
59.8*
100.0
5.4
4.2
9.6
4.8
8.7
6.0
7.1
26.6
36.2
63.8*
28.7
5.6
29.5*
0.5
(0.1)
29.9*
11.1
7.2
48.1
30.3
12.0
0.5
9.1
51.9
100.0
5.8
5.5
11.3
6.7
8.5
0.3
6.7
22.2
33.5
66.5
28.6
6.1
31.8
1.4
0.5
33.7
12.3
7.8
51.6
26.7
10.8
0.3
10.6
48.4
100.0
5.4
5.5
10.9
7.5
7.7
0.2
6.0
21.4
32.3
67.7
28.8
6.5
32.4
2.1
0.0
34.5
13.3
18.8%*
21.4%
21.1%*
29
Comparison of Fiscal Years Ended
March 31, 2009 and March 31, 2008
For the year ended March 31, 2009, our net income was
$46.1 million or $1.65 per share on a basic and $1.62 per
share on a fully diluted basis. In comparison, we earned
$40.1 million or $1.47 per share on a basic and $1.44 per
share on a fully diluted basis in the year ended March 31,
2008. The increase in net income for the year ended March
31, 2009 was achieved primarily through the following:
• A 31.6% increase in consolidated revenue, including $21.4
million in RCM revenue from our recently acquired entities;
• A 34.7% increase in NextGen Division revenue which ac-
counted for 93.5% of consolidated revenue;
• A shift in revenue mix with increased maintenance, EDI
and RCM revenue resulting in a decline in our gross profit
margin;
• An increase in selling, general and administrative expens-
es as a percentage of revenue related to higher than usual
legal expenses, primarily as a result of certain legal matters
related to intellectual property infringement claims in the
NextGen Division and a proxy contest; and
• A decrease in interest income primarily due a greater pro-
portion of funds invested in short-term U.S Treasuries and
tax free money market accounts which returned significant-
ly lower interest rates as compared to the prior year.
Revenue. Revenue for the year ended March 31, 2009 in-
creased 31.6% to $245.5 million from $186.5 million for the
year ended March 31, 2008. NextGen Division revenue in-
creased 34.7% to $229.7 million from $170.5 million in the
year ended March 31, 2008, while QSI Division revenue
decreased by 1.2% during that same period, to $15.9 million
from $16.0 million. NextGen revenue is inclusive of approxi-
mately $15.6 million in revenue from HSI and $8.6 million in
revenue from PMP, our two recent RCM acquisitions.
We divide revenue into two categories, “system sales”
and “maintenance, EDI, RCM and other services.” Revenue in
the system sales category includes software license fees, third
party hardware and software, and implementation and train-
ing services related to purchase of our software systems. The
majority of the revenue in the system sales category is related
to the sale of software. Revenue in the maintenance, EDI, RCM
and other services category includes maintenance, EDI, RCM,
follow-on training and implementation services, annual third
party license fees, hosting and other revenue. Maintenance
revenue includes amounts initially deferred in conjunction with
new customer arrangements and subsequently amortized and
billings to existing customers.
System Sales. Revenue earned from Company-wide sales of
systems for the year ended March 31, 2009 increased 10.0%
to $98.8 million from $89.8 million in the prior year.
Our increase in revenue from sales of systems was prin-
cipally the result of a 9.9% increase in category revenue at
our NextGen Division whose sales in this category grew
from $87.1 million during the year ended March 31, 2008 to
$95.7 million during the year ended March 31, 2009. This
increase was driven by higher sales of NextGen EHR and
NextGen EPM software to both new and existing clients, as
well as increases in sales of hardware, third party software
and supplies and implementation and training services.
Systems sales revenue in the QSI Division increased to
approximately $3.0 million in the year ended March 31,
2009 from $2.6 million in the year ended March 31, 2008.
The following table breaks down our reported system sales into software, hardware, third party software, supplies, and
implementation and training services components by division:
Software
Hardware, Third Party
Software and Supplies
Implementation
and Training Services
Total System Sales
$
915
76,525
$ 77,440
$
360
69,276
$ 69,636
$ 1,171
6,775
$ 7,946
$ 1,134
5,593
$ 6,727
$
938
12,437
$ 13,375
$ 1,154
12,252
$ 13,406
$ 3,024
95,737
$ 98,761
$ 2,648
87,121
$ 89,769
Year ended March 31, 2009
QSI Division
NextGen Division
Consolidated
Year ended March 31, 2008
QSI Division
NextGen Division
Consolidated
30
NextGen Division software license revenue increased
10.5% between the year ended March 31, 2008 and the
year ended March 31, 2009. The Division’s software revenue
accounted for 79.9% of divisional system sales revenue during
the year ended March 31, 2009, compared to 79.5% during
the year ended March 31, 2008. Software license revenue
growth continues to be an area of primary emphasis for the
NextGen Division.
During the year ended March 31, 2009, 7.1% of
NextGen’s system sales revenue was represented by hard-
ware and third party software compared to 6.4% during the
year ended March 31, 2008. The number of customers who
purchase hardware and third party software and the dollar
amount of hardware and third party software revenue fluctu-
ates each quarter depending on the needs of customers. The
inclusion of hardware and third party software in the Division’s
sales arrangements is typically at the request of the customer
and is not a priority focus for us.
Implementation and training revenue related to system
sales at the NextGen Division increased 1.5% in the year
ended March 31, 2009 compared to the year ended March
31, 2008. The amount of implementation and training services
revenue is dependent on several factors, including timing of
customer implementations, the availability of qualified staff, and
the mix of services being rendered. The number of implementa-
tion and training staff increased during the year ended March
31, 2009 versus 2008 in order to accommodate the increased
amount of implementation services sold in conjunction with in-
creased software sales. In order to achieve growth in this area,
additional staffing increases and additional training facilities are
anticipated, though actual future increases in revenue and staff
will depend upon the availability of qualified staff, business mix
and conditions, and our ability to retain current staff members.
The NextGen Division’s growth has come in part from in-
vestments in sales and marketing activities including a revamped
NextGen.com Web site, new NextGen logo, new marketing
campaigns, trade show attendance, and other expanded adver-
tising and marketing expenditures. We have also benefited from
winning numerous industry awards for the NextGen Division’s
flagship NextGen EHR and NextGen EPM software products
and the apparent increasing acceptance of electronic medical
records technology in the healthcare industry.
For the QSI Division, total system sales increased 14.2% in
the year ended March 31, 2009 compared to the year ended
March 31, 2008. We do not presently foresee any material
changes in the business environment for the Division with re-
spect to the weak purchasing environment in the dental group
practice market that has existed for the past several years.
Maintenance, EDI, Revenue Cycle Management and Other
Services. For the year ended March 31, 2009, Company-
wide revenue from maintenance, EDI, RCM and other services
grew 51.7% to $146.8 million from $96.7 million for the year
ended March 31, 2008. The increase in this category re-
sulted from an increase in maintenance, EDI, RCM and other
services revenue from the NextGen Division. Total NextGen
Division maintenance revenue for the year ended March 31,
2009 grew 33.3% to $65.7 million from $49.3 million in
the prior year, while EDI revenue grew 38.4% to $24.8 mil-
lion compared to $17.9 million in the prior year. RCM grew
to $21.4 million primarily as a result of the HSI and PMP
acquisitions. Other services revenue for the NextGen Division,
which consists primarily of third party annual software license
renewals, consulting services and hosting services increased
43.9% to $22.0 million from $15.3 million a year ago. QSI
Division maintenance, EDI and other revenue decreased 4.2%
to $12.8 million for the year ended March 31, 2009 com-
pared to $13.4 million in the prior year.
The following table details maintenance, EDI, RCM, and other revenue by category for the years ended March 31, 2009
and 2008:
Year ended March 31, 2009
QSI Division
NextGen Division
Consolidated
Year ended March 31, 2008
QSI Division
NextGen Division
Consolidated
Maintenance
Revenue Cycle
Management
EDI
Other
Total
$ 7,167
$ 4,766
$
-
$
894
$ 12,827
65,695
24,756
21,431
22,045
133,927
$ 72,862
$ 29,522
$ 21,431
$ 22,939
$ 146,754
$ 7,186
$ 4,564
$
-
$ 1,639
$ 13,389
49,269
17,886
871
15,316
83,342
$ 56,455
$ 22,450
$
871
$ 16,955
$ 96,731
31
The growth in maintenance revenue for the NextGen
Division has come from new customers that have been added
each quarter, existing customers who have purchased addi-
tional licenses, and our relative success in retaining existing
maintenance customers. NextGen’s EDI revenue growth has
come from new customers and from further penetration of the
Division’s existing customer base. The growth in RCM is a
result of the HSI and PMP acquisitions and future growth is ex-
pected from cross selling opportunities between the customer
bases. We intend to continue to promote maintenance, EDI
and RCM services to both new and existing customers.
The following table provides the number of billing sites which were receiving maintenance services as of the last business
day of the year ended March 31, 2009 and 2008 respectively, as well as the number of billing sites receiving EDI services
during the last month of each respective period at each division of the Company. The table presents summary information only
and includes billing entities added and removed for any reason. Note also that a single client may include one or multiple bill-
ing sites, and changes in billing protocols for certain clients can cause period to period changes in the number of billing sites.
During the year ended March 31, 2009, a higher than usual fluctuation in the billing sites removed resulted primarily from a
change in classification for billing sites.
March 31, 2008
Billing sites added
Billing sites removed
March 31, 2009
NextGen
QSI
Consolidated
Maintenance
EDI
Maintenance
EDI
Maintenance
EDI
1,129
246
(15)
993
533
(258)
251
165
1,380
14
(14)
39
(44)
260
(29)
1,158
572
(302)
1,360
1,268
251
160
1,611
1,428
Cost of Revenue. Cost of revenue for the year ended March
31, 2009 increased 42.2% to $88.9 million from $62.5 mil-
lion for the year ended March 31, 2008 and the cost of
revenue as a percentage of revenue increased to 36.2% from
33.5% due to the fact that the rate of growth in cost of revenue
grew faster than the aggregate revenue growth rate for the
Company.
The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March
31, 2009 and 2008:
Year Ended March 31,
2009
%
2008
%
$ 15,852
7,582
$ 8,270
$ 229,663
81,308
$ 148,355
$ 245,515
88,890
$ 156,625
100.0%
47.8%
52.2%
100.0%
35.4%
64.6%
100.0%
36.2%
63.8%
$ 16,037
7,545
$ 8,492
$ 170,463
54,956
$ 115,507
$ 186,500
62,501
$ 123,999
100.0%
47.0%
53.0%
100.0%
32.2%
67.8%
100.0%
33.5%
66.5%
QSI Division
Revenue
Cost of revenue
Gross profit
NextGen Division
Revenue
Cost of revenue
Gross profit
Consolidated
Revenue
Cost of revenue
Gross profit
32
Gross profit margins at the NextGen Division for the
year ended March 31, 2009 decreased to 64.6% from
67.8% from the year ended March 31, 2008. Gross profit
margins at the QSI Division for the year ended March 31,
2009 decreased to 52.2% from 53.0% for the year ended
March 31, 2008.
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, 2009 and 2008.
Hardware, Third
Party Software
Payroll and
Related Benefits
EDI
Other
Total Cost
of Revenue Gross Profit
Year ended March 31, 2009
QSI Division
NextGen Division
Consolidated
Year ended March 31, 2008
QSI Division
NextGen Division
Consolidated
7.6%
3.5%
3.7%
8.0%
3.8%
4.2%
19.8%
14.8%
15.1%
19.1%
11.2%
11.8%
17.1%
7.8%
8.4%
15.7%
7.5%
8.2%
3.3%
9.3%
9.0%
4.2%
9.7%
9.3%
47.8%
35.4%
36.2%
47.0%
32.2%
33.5%
52.2%
64.6%
63.8%
53.0%
67.8%
66.5%
of the PMP acquisition. In addition, related headcount, payroll
and benefits expense associated with delivering products and
services in the NextGen Division increased by $6.1 million in
the year ended March 31, 2009 to $25.1 million from $19.0
million in the year ended March 31, 2008. Payroll and ben-
efits expense associated with delivering products and services
in the QSI Division remained consistent at $3.1 million in the
year ended March 31, 2009 and 2008, respectively. The
application of SFAS 123R added approximately $0.2 million
and $0.5 million in compensation expense to cost of revenue
in the years ended March 31, 2009 and 2008, respectively.
As a result of the foregoing events and activities, the
gross profit percentage for the Company and both our divi-
sions decreased for the year ended March 31, 2009 versus
the prior year.
We anticipate continued additions to headcount in the
NextGen Division in areas related to delivering products and
services in future periods but due to the uncertainties in the
timing of our sales arrangements, our sales mix, the acquisi-
tion and training of qualified personnel, and other issues, we
cannot accurately predict if related headcount expense as a
percentage of revenue will increase or decrease in the future.
We do not currently intend to make any significant addi-
tions to related headcount at the QSI Division.
The increase in our consolidated cost of revenue as a
percentage of revenue between the year ended March 31,
2009 and the year ended March 31, 2008 is primarily at-
tributable to an increase in RCM revenue, which carries higher
payroll and related benefits as a percentage of revenue and
higher EDI costs in both divisions, offset by a decrease in
hardware and third party software, and other expense as a
percentage of revenue. Other expense, which consists of out-
side service costs, amortization of software development costs
and other costs, decreased to 9.0% of total revenue during
the year ended March 31, 2009 from 9.3% of total revenue
during the year ended March 31, 2008.
During the year ended March 31, 2009, hardware and
third party software constituted a smaller portion of consoli-
dated cost of revenue compared to the prior year period in the
NextGen Division. The number of customers who purchase
hardware and third party software and the dollar amount of
hardware and third party software purchased fluctuates each
quarter depending on the needs of the customers and is not a
priority focus for us.
Our payroll and benefits expense associated with deliver-
ing our products and services increased to 15.1% of consolidat-
ed revenue in the year ended March 31, 2009 compared to
11.8% during the year ended March 31, 2008 primarily due
to the acquisition of HSI and PMP which as service businesses
have an inherently higher percentage of payroll costs as a per-
centage of revenue. The absolute level of consolidated payroll
and benefit expenses grew from $22.1 million in the year end-
ed March 31, 2008 to $37.1 million in the year ended March
31, 2009, an increase of 67.9% or approximately $15.0 mil-
lion. Of the $15.0 million increase, approximately $4.8 million
was a result of the HSI acquisition and $3.9 million was a result
33
Selling, General and Administrative Expenses. Selling, gen-
eral and administrative expenses for the year ended March
31, 2009 increased 32.3% to $70.4 million as compared
to $53.3 million for the year ended March 31, 2008. The
increase in these expenses resulted from a:
• $2.7 million increase in legal expenses in the NextGen
Division;
• $1.7 million increase in compensation expense in the
NextGen Division;
• $1.2 million increase in outside services and consulting ser-
vices in the NextGen Division;
• $0.9 million increase in advertising in the NextGen Division;
• $6.7 million increase in other selling, general and adminis-
compensation expense to research and development costs
net of amounts capitalized as software development in those
fiscal years. Additions to capitalized software costs offset re-
search and development costs. For the year ended March
31, 2009, $5.9 million was added to capitalized software
costs while $6.0 million was capitalized during the year end-
ed March 31, 2008. Research and development costs as a
percentage of revenue decreased to 5.6% in the year ended
March 31, 2009 from 6.1% in the year ended March 31,
2008. Research and development expenses are expected to
continue at or above current dollar levels.
Interest Income. Interest income for the year ended March 31,
2009 decreased to $1.2 million compared to $2.7 million in
the year ended March 31, 2008 primarily due to:
trative expenses in the NextGen Division; and
• A lower amount of investments held in ARS when com-
• $3.9 million increase in corporate related expenses.
Approximately $1.5 million of the year over year increase
in corporate related expense was related to expenses asso-
ciated with the proxy contest which occurred in conjunction
with the 2008 Annual Shareholders’ Meeting. Amortization of
identifiable intangibles related to the HSI and PMP acquisitions
of approximately $1.0 million and an increase in corporate
salaries and related benefits of $0.7 million also contributed
to the year over year corporate increase.
The application of SFAS 123R added approximately
$1.5 million and $2.5 million in compensation expense to sell-
ing, general and administrative expenses for the year ended
March 31, 2009 and 2008, respectively, and is included in
the aforementioned amounts. Selling, general and administra-
tive expenses as a percentage of revenue increased slightly
from 28.6% in the year ended March 31, 2008 to 28.7% in
the year ended March 31, 2009.
We anticipate increased expenditures for trade shows,
advertising and the employment of additional sales and ad-
ministrative staff at the NextGen Division. We also anticipate
future increases in corporate expenditures being made in a
wide range of areas including professional services. While
we expect selling, general and administrative expenses to in-
crease on an absolute basis, we cannot accurately predict the
impact these additional expenditures will have on selling, gen-
eral, and administrative expenses as a percentage of revenue.
Research and Development Costs. Research and development
costs for the years ended March 31, 2009 and 2008 were
$13.8 million and $11.4 million, respectively. The increases in
research and development expenses were due in part to in-
creased investment in the NextGen product line. Additionally,
the application of SFAS 123R in fiscal year 2009 and 2008
added approximately $0.2 million and $0.8 million in the
years ended March 31, 2009 and 2008, respectively, in
pared to the prior year;
• Larger amounts invested in money market accounts which
earned significantly lower interest rates as compared to the
prior year; and
• Overall comparatively lower amounts of funds available
for investment during the year due to payments of $8.2
million and $17.0 million, respectively, for the Company’s
acquisitions of HSI and PMP and increased quarterly divi-
dend payments.
Our investment policy is determined by our Board. We
currently maintain our cash in very liquid short term assets
including tax exempt and taxable money market funds and
short-term U.S. Treasuries. We owned approximately $7.4 mil-
lion in ARS as of March 31, 2009, which are illiquid due to
the auction failure in the ARS market. Our Board continues to
review alternate uses for our cash including, but not limited to,
payment of a special dividend, initiation of a stock buy back
program, an expansion of our investment policy to include
investments with longer maturities of greater than 90 days, or
other items. Additionally, it is possible that we will utilize some
or all of our cash to fund acquisitions or other similar business
activities. Any or all of these programs could significantly im-
pact our investment income in future periods.
Other Income (Expense). Other income (expense) for the year
ended March 31, 2009 consists of gains and losses in fair
value recorded on our ARS investments as well as on our ARS
Put Option Rights. We recognized a pre-tax unrealized loss
on our ARS of approximately $0.7 million. At the same time,
we estimated the fair value of our ARS Put Option Rights at
approximately $0.4 million.
Included in other income for the year ended March 31,
2008 was approximately $1.0 million, resulting from a gain
on life insurance proceeds due to the passing of Gregory
Flynn, Executive Vice President and General Manager of the
34
The above increases to net income were offset by a
decline in gross profit margin resulting from a greater pro-
portion of revenue being derived from hardware and EDI
revenue which have relatively lower gross margin percent-
ages. The gross profit margin declined to 66.5% in the year
ended March 31, 2008 versus 67.7% in the prior year period.
Revenue. Revenue for the year ended March 31, 2008 in-
creased 18.7% to $186.5 million from $157.2 million for the
year ended March 31, 2007. NextGen Division revenue in-
creased 21.3% from $140.6 million to approximately $170.5
million in the period ended March 31, 2008, while QSI
Division revenue decreased by 3.3% during that same period,
from $16.6 million to $16.0 million.
We divide revenue into two categories, “system sales”
and “maintenance, EDI, RCM and other services”. Revenue in
the system sales category includes software license fees, third
party hardware and software, and implementation and train-
ing services related to purchase of our software systems. The
majority of the revenue in the system sales category is related
to the sale of software. Revenue in the maintenance, EDI, RCM
and other services category includes maintenance, EDI, RCM,
follow-on training and implementation services, annual third
party license fees, hosting and other revenue. Maintenance
revenue includes amounts initially deferred in conjunction with
new customer arrangements and subsequently amortized and
billings to existing customers.
System Sales. Revenue earned from Company-wide sales of
systems for the year ended March 31, 2008 increased 10.8%
to $89.8 million from $81.0 million in the prior year.
Our increase in revenue from sales of systems was prin-
cipally the result of a 12.2% increase in category revenue
at our NextGen Division whose sales in this category grew
from $77.7 million during the year ended March 31, 2007
to $87.1 million during the year ended March 31, 2008. This
increase was driven primarily by higher sales of NextGen
EHR and NextGen EPM software to both new and existing
clients, as well as an increase in the delivery of related imple-
mentation services offset by a decline in the sale of related
hardware, third party software and supplies.
Systems sales revenue in the QSI Division decreased
to approximately $2.6 million in the year ended March 31,
2008 from $3.4 million in the year ended March 31, 2007.
QSI Division. Mr. Flynn participated in our deferred compen-
sation plan which is funded through the purchase of life insur-
ance policies with the Company named as beneficiary. There
was no gain or loss recorded on investment securities during
the year ended March 31, 2008.
Provision for Income Taxes. The provision for income taxes for
the year ended March 31, 2009 was approximately $27.2
million as compared to approximately $22.9 million for the
prior year. The effective tax rates for fiscal 2009 and 2008
were 37.1% and 36.4%, respectively. The provision for income
taxes for the years ended March 31, 2009 and 2008 differs
from the combined statutory rates primarily due to the impact
of varying state income tax rates, research and development
tax credits, the qualified production activities deduction, and
exclusions for company-owned life insurance proceeds and
tax-exempt interest income. The change in the effective rate
for the year ended March 31, 2009 includes an increase in
the benefit from research and development credits, which was
mostly offset by a decrease in qualified production activities
deduction and an increase in state income tax expense.
During the year ended March 31, 2009 and 2008, we
claimed research and development tax credits of approximate-
ly $1.0 million and $0.8 million, respectively. The Company
also claimed the qualified production activities deduction un-
der Section 199 of the IRC of approximately $2.7 million and
$3.1 million during the years ended March 31, 2009 and
2008, respectively. Research and development credits and
the qualified production activities income deduction taken by
us involve certain assumptions and judgments regarding quali-
fication of expenses under the relevant tax code provision.
Comparison of Fiscal Years Ended March 31,
2008 and March 31, 2007
For the year ended March 31, 2008, our net income was
$40.1 million or $1.47 per share on a basic and $1.44
per share on a fully diluted basis. In comparison, we earned
$33.2 million or $1.24 per share on a basic and $1.21 per
share on a fully diluted basis in the year ended March 31,
2007. The increase in net income for the year ended March
31, 2008 was achieved primarily through the following:
• A 18.7% increase in consolidated revenue;
• A 21.3% increase in NextGen Division revenue which ac-
counted for 91.4% of consolidated revenue; and
• Approximately $1.0 million gain on life insurance proceeds
the Company recorded, which was offset by additional
compensation expense of approximately $0.2 million.
The additional compensation expense was recorded in
Selling, General and Administrative Expenses and the in-
surance proceeds were recorded as Other Income in the
Consolidated Statement of Income.
35
The following table breaks down our reported system sales into software, hardware, third party software, supplies, and
implementation and training services components by division:
Software
Hardware, Third Party
Software and Supplies
Implementation and
Training Services
Total System Sales
Year ended March 31, 2008
QSI Division
NextGen Division
Consolidated
Year ended March 31, 2007
QSI Division
NextGen Division
Consolidated
$
360
69,276
$ 69,636
$
355
62,957
$ 63,312
$ 1,134
5,593
$ 6,727
$ 2,356
3,203
$ 5,559
$ 1,154
12,252
$ 13,406
$
655
11,522
$ 12,177
$ 2,648
87,121
$ 89,769
$ 3,366
77,682
$ 81,048
NextGen Division software revenue increased 10.0% be-
tween the year ended March 31, 2007 and the year ended
March 31, 2008. The Division’s software revenue accounted
for 79.5% of Divisional system sales revenue during the year
ended March 31, 2008, a decrease from 81.0% in the prior
year period.
During the year ended March 31, 2008, 6.4% of the
NextGen Division’s system sales revenue was represented by
hardware and third party software compared to 4.1% in the
prior year. The number of customers who purchase hardware
and third party software and the dollar amount of hardware
and third party software revenue fluctuates each quarter and
year depending on the needs of customers. The inclusion of
hardware and third party software in the Division’s sales ar-
rangements is typically at the request of the customer and is
not a priority focus for us.
Implementation and training revenue at the NextGen
Division increased 6.3% in the year ended March 31, 2008
compared to the year ended March 31, 2007. The growth in
implementation and training revenue is the result of increases in
the amount of implementation and training services rendered
to our new customers. Implementation and training revenue at
the NextGen Division decreased its share of divisional system
sales revenue to 14.0% in the year ended March 31, 2008
from 14.8% in the year ended March 31, 2007. The amount
of implementation and training services revenue in any given
quarter is dependent on several factors, including timing of
customer implementations, the availability of qualified staff,
and the mix of services being rendered. The number of imple-
mentation and training staff increased during the year ended
March 31, 2008 versus 2007 in order to accommodate the
increased amount of implementation services sold in conjunc-
tion with increased software sales. In order to achieve growth
in this area, additional staffing increases and additional train-
ing 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 cur-
rent staff members.
The NextGen Division’s growth has come in part from
investments in sales and marketing activities including hiring
additional sales representatives, trade show attendance, and
advertising expenditures. We have also benefited from win-
ning numerous industry awards for the NextGen Division’s
flagship NextGen EHR and NextGen EPM software products
and the apparent increasing acceptance of electronic medical
records technology in the healthcare industry.
For the QSI Division, total system sales decreased by
approximately $0.7 million in the year ended March 31,
2008 compared to the year ended March 31, 2007. We
do not presently foresee any material changes in the business
environment for the QSI Division with respect to the constrained
environment that has been in place for the past several years.
Maintenance, EDI, Revenue Cycle Management and Other
Services. Company-wide revenue from maintenance, EDI,
RCM and other services grew 27.1% to $96.7 million for the
year ended March 31, 2008 from $76.1 million for the year
ended March 31, 2007. The increase in this category resulted
principally from an increase in maintenance and EDI and to
a lesser extent due to an increase in RCM and other ser-
vices revenue generated from the NextGen Division’s client
base. Total NextGen Division maintenance revenue for the
year ended March 31, 2008 grew 41.3% to $49.3 million
from $34.9 million in the prior year, while EDI revenue grew
42.9% to $17.9 million for the year ended March 31, 2008
compared to $12.5 million in the prior year. Other services
revenue, excluding RCM, for the NextGen Division, which
consists primarily of third party license renewals, time and ma-
terials billings, travel reimbursements, and other services grew
3.5% to $16.1 million for the year ended March 31, 2008
compared to $15.5 million a year ago. QSI Division main-
tenance revenue increased 1.5% to $7.2 million for the year
ended March 31, 2007 compared to $7.1 million in the prior
36
year while divisional EDI revenue increased by approximately
1.0% to $4.6 million for the year ended March 31, 2008
compared to $4.5 million in the prior year. Other revenue for
the QSI Division was essentially flat for the year ended March
31, 2008 compared to a year ago.
The following table details maintenance, EDI, RCM and other revenue by category for the years ended March 31, 2008
and 2007:
Year ended March 31, 2008
QSI Division
NextGen Division
Consolidated
Year ended March 31, 2007
QSI Division
NextGen Division
Consolidated
Maintenance
EDI
Revenue Cycle
Management
Other
Total
$ 7,186
49,269
$ 56,455
$ 4,564
17,886
$ 22,450
$ 7,081
34,867
$ 41,948
$ 4,529
12,520
$ 17,049
$
-
871
$ 871
$
-
534
$ 534
$ 1,639
15,316
$ 16,955
$ 13,389
83,342
$ 96,731
$ 1,615
14,971
$ 16,586
$ 13,225
62,892
$ 76,117
The following table provides the number of billing sites which were receiving maintenance services as of the last business
day of the year ended March 31, 2008 and 2007 respectively, as well as the number of billing sites receiving EDI services
during the last month of each respective period at each division of our company. The table presents summary information only
and includes billing entities added and removed for any reason. Note also that a single client may include one or multiple
billing sites.
NextGen
QSI
Consolidated
Maintenance
EDI
Maintenance
EDI
Maintenance
March 31, 2007
Billing sites added
Billing sites removed
March 31, 2008
982
194
(47)
1,129
769
289
(65)
993
257
9
(15)
251
173
29
(37)
165
1,239
203
(62)
EDI
942
318
(102)
1,380
1,158
Cost of revenue. Cost of revenue for the year ended March
31, 2008 increased 23.1% to $62.5 million from $50.8 mil-
lion for the year ended March 31, 2007, while the cost of rev-
enue as a percentage of net revenue increased to 33.5% from
32.3%. Our consolidated gross profit is affected by the level
of hardware content included in system sales, the percentage
of EDI revenue in our overall sales mix, and certain headcount
expenses directly related to the cost of delivering our products
and services. Consolidated gross profit for fiscal year 2008
was impacted by the decline in gross profit percentage at the
NextGen Division, offset by a slight increase in gross profit
percentage at the QSI Division.
37
The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March
31, 2008 and 2007:
QSI Division
Revenue
Cost of revenue
Gross profit
NextGen Division
Revenue
Cost of revenue
Gross profit
Consolidated
Revenue
Cost of revenue
Gross profit
2008
%
2007
%
Year Ended March 31,
$ 16,037
7,545
$
8,492
$ 170,463
54,956
$ 115,507
$ 186,500
62,501
$ 123,999
100.0%
47.0%
53.0%
100.0%
32.2%
67.8%
100.0%
33.5%
66.5%
$ 16,589
7,847
$
8,742
$ 140,576
42,937
$ 97,639
$ 157,165
50,784
$ 106,381
100.0%
47.3%
52.7%
100.0%
30.5%
69.5%
100.0%
32.3%
67.7%
Gross profit margins at the NextGen Division for the year
ended March 31, 2008 decreased to 67.8% from 69.5%
primarily due to an increase in the proportionate level of hard-
ware and third party software content included in revenue.
The QSI Division’s gross profit margin increased to 53.0% from
52.7% between the years ended March 31, 2008 and 2007
primarily due to a decrease in the level of hardware and third
party software content included in revenue.
The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue
for our entire Company and our two divisions:
Hardware, Third
Party Software
Payroll and
Related Benefits
EDI
Other
Total Cost
of Revenue Gross Profit
Year ended March 31, 2008
QSI Division
NextGen Division
Consolidated
Year ended March 31, 2007
QSI Division
NextGen Division
Consolidated
8.0%
3.8%
4.2%
10.0%
3.1%
3.8%
19.1%
11.2%
11.8%
17.3%
11.9%
12.4%
15.7%
7.5%
8.2%
15.1%
6.4%
7.4%
4.2%
9.7%
9.3%
4.9%
9.1%
8.7%
47.0%
32.2%
33.5%
47.3%
30.5%
32.3%
53.0%
67.8%
66.5%
52.7%
69.5%
67.7%
During the year ended March 31, 2008, hardware and
third party software constituted a larger portion of consolidat-
ed cost of revenue compared to the prior year period. The
number of customers who purchase hardware and third party
software and the dollar amount of hardware and third party
software purchased fluctuates each quarter depending on the
needs of the customers and is not a priority focus for us.
Our payroll and benefits expense associated with deliver-
ing our products and services decreased to 11.8% of consoli-
dated revenue for the year ended March 31, 2008 compared
to 12.4% during the prior year ended March 31, 2007. The
absolute level of consolidated payroll and benefit expenses
grew from $19.6 million in the year ended March 31, 2007 to
$22.1 million in the year ended March 31, 2008, an increase
of 13% or $2.5 million, primarily due to additions to related
headcount, payroll and benefits expense associated with de-
livering products and services in the NextGen Division. Payroll
and benefits expense associated with delivering products and
services in the QSI Division increased on a percentage of rev-
enue basis. The application of SFAS 123R in fiscal year 2008
and 2007 added approximately $0.5 million in compensation
to consolidated cost of revenue in both fiscal years.
38
We anticipate continued additions to headcount in the
NextGen Division in areas related to delivering products and
services in future periods, but due to the uncertainties in the
timing of our sales arrangements, our sales mix, the acquisi-
tion and training of qualified personnel, and other issues, we
cannot accurately predict if related headcount expense as a
percentage of revenue will increase or decrease in the future.
We do not currently intend to make any significant
changes to related headcount at the QSI Division.
“Other,” which consists of outside service costs, amortiza-
tion of software development costs, hosting service costs and
other service costs, increased to 17.5% of revenue during the
year ended March 31, 2008 from 16.1% during the year
ended March 31, 2007.
Should the NextGen Division continue to represent a ma-
jor and or increasing share of our revenue, our consolidated
gross margin percentages should move in concert with those
of the NextGen Division.
Selling, General and Administrative Expenses. Selling, gen-
eral and administrative expenses for the year ended March
31, 2008 increased 17.5% to $53.3 million as compared
to $45.3 million for the year ended March 31, 2007. The
increase in the amount of such expenses resulted primarily
from increases of $3.6 million in salaries, commissions, and
related benefits in the NextGen Division, $1.7 million in sell-
ing related expenses in the NextGen Division, $1.0 million in
travel related costs in the NextGen Division, $0.8 million in
other general expenses in the NextGen Division and $0.9 mil-
lion in increased corporate related expenses. The increase in
corporate expenses was primarily composed of salaries and
related benefits. Selling, general and administrative expenses
as a percentage of revenue decreased from 28.9% in the year
ended March 31, 2007 to 28.6% in the year ended March
31, 2008 due in to the fact that revenue grew faster than
selling, general and administrative expense for the Company.
The application of SFAS 123R in fiscal year 2008 and
2007 added approximately $2.5 million in compensation
expense to consolidated selling, general and administrative
expenses and is included in the aforementioned amounts.
We anticipate increased expenditures for trade shows,
advertising and the employment of additional sales and admin-
istrative staff at the NextGen Division. We also anticipate future
increases in corporate expenditures being made in areas includ-
ing but not limited to staffing and professional services. While
we expect selling, general and administrative expenses to in-
crease on an absolute basis, we cannot accurately predict the
impact these additional expenditures will have on selling, gen-
eral, and administrative expenses as a percentage of revenue.
Research and Development Costs. Research and development
costs for the years ended March 31, 2008 and 2007 were
$11.4 million and $10.2 million, respectively. The increase
in research and development costs was primarily due to in-
creased investment in the NextGen product line. Additionally,
the application of SFAS 123R in fiscal year 2008 and 2007
added approximately $0.8 million in both periods, in com-
pensation expense to research and development costs net of
amounts capitalized as software development in those fiscal
years. Additions to capitalized software costs offset research
and development costs. For the year ended March 31, 2008,
$6.0 million was added to capitalized software costs while
$5.0 million was capitalized during the year ended March
31, 2007. Research and development costs as a percentage
of net revenue decreased to 6.1% in the year ended March
31, 2008 from 6.5% in the year ended March 31, 2007
primarily due to revenue growing at a faster rate than the
increase in research and development costs. Research and
development costs are expected to continue at or above
current levels.
Interest Income. Interest income for the year ended March
31, 2008 decreased to $2.7 million compared to $3.3 mil-
lion in the year ended March 31, 2007. Interest income in
the year ended March 31, 2008 decreased primarily due to
(i) a greater proportion of funds invested in tax favored ARS
which offer lower interest rates but higher after-tax yields com-
pared to money market or short term U.S. Treasuries, and (ii)
comparatively lower short term interest rates in the year ended
March 31, 2008 versus 2007.
Our investment policy is determined by our Board. We
currently maintain our cash in very liquid short term assets in-
cluding money market funds, 30-60 day treasury bills as well
as ARS.
Other Income. Other income for the year ended March 31,
2008 was approximately $1.0 million. There was no other
income recorded for the year ended March 31, 2007. We
recorded a gain on life insurance proceeds as a result of
the passing of Gregory Flynn, Executive Vice President and
General Manager of the QSI Division. Mr. Flynn participated
in our deferred compensation plan which is funded through
the purchase of life insurance policies with the Company
named as beneficiary.
Provision for Income Taxes. The provision for income taxes
for the year ended March 31, 2008 was approximately
$22.9 million as compared to approximately $21.0 million
for the prior year. The effective tax rates for fiscal 2008 and
2007 were 36.4% and 38.7%, respectively. The provision
for income taxes for the years ended March 31, 2008 and
2007 differs from the combined statutory rates primarily due
to the impact of varying state income tax rates, research and
39
development tax credits, the qualified production activities
deduction, and exclusions for company-owned life insurance
proceeds and tax-exempt interest income. The effective rate for
the year ended March 31, 2008 also includes an increase
in benefit from the qualified production activities deduction,
which was mostly offset by non-deductible option expense
related to incentive stock options.
During the year ended March 31, 2008 and 2007, we
claimed research and development tax credits of approximately
$0.8 million in both years. We also claimed the qualified pro-
duction activities deduction under Section 199 of the IRC, of
approximately $3.1 million and $1.5 million during the years
ended March 31, 2008 and 2007, respectively. Research
and development credits and the qualified production activi-
ties income deduction taken 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 each of the years ended March 31, 2009, 2008
and 2007:
Cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Net income
Net cash provided by operations during the year
Number of days of sales outstanding
Year Ended March 31,
2009
$ 70,180
$ 11,134
$ 46,119
$ 48,712
125
2008
$ 59,046
$
(982)
$ 40,078
$ 43,599
136
2007
$ 60,028
$ 2,803
$ 33,232
$ 29,570
129
Cash Flow from Operating Activities
Cash provided by operations has historically been our primary source of cash and has primarily been driven by our net income
and secondarily by non-cash expenses including depreciation, amortization of capitalized software and other intangible assets,
provisions for bad debts and inventory obsolescence, and stock option expenses.
The following table summarizes our statement of cash flows for the years ended March 31, 2009, 2008 and 2007:
Net income
Non-cash expenses
Gain on life insurance proceeds, net
Tax benefit from exercise of stock options, net
Change in deferred revenue
Change in accounts receivable
Change in other assets and liabilities
Year Ended March 31,
2009
$ 46,119
17,719
-
1
3,130
(11,369)
(6,888)
2008
$ 40,078
11,299
(755)
65
5,447
(13,811)
1,276
2007
$ 33,232
8,977
-
167
3,532
(20,760)
4,422
Net cash provided by operating activities
$ 48,712
$ 43,599
$ 29,570
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, 2009, 2008 and 2007. Our
NextGen Division’s contribution to net income has increased
each year due to that division’s operating income increasing
more quickly than our Company as a whole.
Non-Cash Expenses. Non-cash expenses include depre-
ciation, amortization of intangibles and capitalized software
costs, provisions for bad debts, inventory obsolescence, stock
option expenses, and deferred taxes. Total non-cash expenses
were $17.7 million, $11.3 million and $9.0 million for the years
ended March 31, 2009, 2008 and 2007, respectively. The
change for the year ended March 31, 2009 as compared
to the prior year is primarily related to approximately $1.0 mil-
lion of amortization of capitalized software costs, $1.0 million
of amortization of other intangibles due to the HSI and PMP
acquisitions, $1.0 million in the allowance for bad debt and
$4.7 million in deferred taxes, offset by a decrease of $1.8
million in share-based compensation.
40
Tax Benefits From Stock Options. Although the value of stock
options exercised by employees grew in the years ended
March 31, 2009, March 31, 2008 and 2007, our applica-
tion of SFAS 123R required excess tax benefits of $3.4 million,
$1.3 million and $2.5 million, respectively, to be reclassed
to financing activities, resulting in a net decrease in the years
ended March 31, 2009, 2008 and 2007.
Deferred Revenue. Cash from operations benefited signifi-
cantly from increases in deferred revenue primarily due to an
increase in the volume of implementation and maintenance
services invoiced by the NextGen Division which had not yet
been rendered or recognized as revenue. This benefit is offset
by the increase in unpaid deferred revenue. Deferred revenue
grew by approximately $3.1 million for the year ended March
31, 2009 versus growth of $5.4 million and $3.5 million for
the years ended March 31, 2008 and 2007, resulting in in-
creases to cash provided by operating activities for the respec-
tive periods.
Accounts Receivable. Accounts receivable grew by approxi-
mately $11.4 million, $13.8 million and $20.8 million for the
years ended March 31, 2009, 2008 and 2007, respectively.
The increase in accounts receivable in the periods is due to
the following factors:
• NextGen Division revenue grew 34.7%, 21.3% and
35.5% for the years ended March 31, 2009, 2008 and
2007, respectively;
• The NextGen Division constituted a larger percentage of
our receivables at March 31, 2009 compared to March
31, 2008. Turnover of accounts receivable in the NextGen
Division, not including HSI and PMP, slowed partly due to
payment terms offered by the Division;
• Turnover of accounts receivable is also slower than the
QSI Division due to the fact that the majority of the QSI
Division’s revenue is derived from maintenance and EDI
services which typically have shorter payment terms than
systems sales related revenue which historically have ac-
counted for a major portion of NextGen Division sales;
• The HSI and PMP acquisitions added approximately $4.5
million of accounts receivable as of March 31, 2009; and
• We experienced an increase in the volume of undelivered
services billed in advance by the NextGen Division which
were unpaid as of the end of each period and included in
accounts receivable. This resulted in an increase in both de-
ferred revenue and accounts receivable of approximately
$1.2 million, $4.9 million and $6.4 million for the years
ended March 31, 2009, 2008 and 2007, respectively.
The turnover of accounts receivable measured in terms of
days sales outstanding (DSO) fluctuated during the year and
decreased to 125 days from 136 days during the year ended
March 31, 2009 compared to the prior year, primarily due
to an increase in RCM revenue, which has a faster turnover of
accounts receivable compared to system sales, and the above
mentioned factors.
If amounts included in both accounts receivable and de-
ferred revenue were netted, our turnover of accounts receiv-
able expressed as DSO would be 83 days as of March 31,
2009 and 85 days as of March 31, 2008. Provided turnover
of accounts receivable, deferred revenue, and profitability re-
main consistent with the year ended March 31, 2009, we
anticipate being able to continue to generate cash from op-
erations during fiscal 2010 primarily from our net income.
Cash flows from investing activities
Net cash used in investing activities for the years ended March
31, 2009, 2008 and 2007 was $19.4 million, $30.2 mil-
lion and $8.3 million, respectively. The decrease in cash used
in investing activities for the year ended March 31, 2009 is
mainly due to the fact that we did not make any additional in-
vestments in marketable securities in fiscal year 2009, but rath-
er sold marketable securities for proceeds of approximately
$14.8 million. Whereas for the year ended March 31, 2008,
we had, net of proceeds received, investments in marketable
securities of $22.8 million. Other net cash outflows during the
year ended March 31, 2009 include our acquisitions of HSI
and PMP of approximately $8.2 million and $17.0 million,
respectively, as well as additions to equipment and improve-
ments and capitalized software costs.
Cash flows from financing activities
Net cash used in financing activities for the year ended March
31, 2009 was $18.1 million and consisted of a dividend
paid to shareholders of approximately $30.8 million offset by
$12.5 million of proceeds from the exercise of stock options.
We recorded a reduction in income tax liability of $3.4 mil-
lion related to excess tax deductions received from employee
stock option exercises. The benefit was recorded as additional
paid in capital.
Cash and cash equivalents and
marketable securities
At March 31, 2009, we had cash and cash equivalents of
$70.2 million and marketable securities of $7.4 million. We
intend to expend some of these funds for the development of
products complementary to our existing product line as well as
new versions of certain of our products. These developments
are intended to take advantage of more powerful technolo-
gies and to increase the integration of our products. We have
no additional significant current capital commitments.
In January 2007, our Board adopted a policy whereby
we intend to pay a regular quarterly dividend of $0.25 per
share on our outstanding common stock commencing with
41
conclusion of our first fiscal quarter of 2008 (June 30, 2007)
and continuing each fiscal quarter thereafter, subject to further
Board review and approval and establishment of record and
distribution dates by our Board prior to the declaration of each
such quarterly dividend. In August 2008, our Board increased
the quarterly dividend to $0.30 per share. We anticipate that
future quarterly dividends, if and when declared by our Board
pursuant to this policy, would likely be distributable on or
about the fifth day of each of the months of October, January,
April and July.
On May 27, 2009, our Board approved a quarterly
cash dividend of $0.30 per share on our outstanding shares
of common stock, payable to shareholders of record as of
June 12, 2009 with an expected distribution date on or about
July 6, 2009.
On January 28, 2009, our Board approved a quarterly
cash dividend of $0.30 per share on our outstanding shares of
common stock, payable to shareholders of record as of March
11, 2009 with a distribution date on or about April 3, 2009.
On October 30, 2008, our Board approved a quarterly
cash dividend of $0.30 per share on our outstanding shares
of common stock, payable to shareholders of record as of
December 15, 2008 with a distribution date on or about
January 5, 2009.
On October 28, 2008, we acquired PMP. The pur-
chase price consisted of approximately $19.7 million, plus up
to $3.0 million in incentives tied to future performance. The
$19.7 million consisted of approximately $17.0 million in cash
and $2.75 million in shares of our common stock.
On August 4, 2008, our Board approved a quarterly
cash dividend of $0.30 per share on our outstanding shares
of common stock, payable to shareholders of record as of
September 15, 2008 with a distribution date on or about
October 1, 2008.
On May 29, 2008, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
June 15, 2008 with a distribution date on or about July 2,
2008.
On May 20, 2008, we acquired HSI. The purchase
price consisted of approximately $15.6 million, plus up to
approximately $1.7 million in incentives tied to future perfor-
mance. The $15.6 million consisted of cash and shares of
common stock.
On January 30, 2008, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
March 14, 2008 and was distributed to shareholders on or
about April 7, 2008.
42
On October 25, 2007, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
December 14, 2007 and was distributed to shareholders on
or about January 7, 2008.
On July 31, 2007, our Board approved a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
September 14, 2007 and was distributed to shareholders on
or about October 5, 2007.
On May 31, 2007, our Board declared a quarterly
cash dividend of $0.25 per share on our outstanding shares
of common stock, payable to shareholders of record as of
June 15, 2007 and was distributed to shareholders on July
5, 2007.
In February 2007, we paid a $1.00 per share cash divi-
dend on shares of our common stock. The record date for the
dividend was February 13, 2007.
Management believes that its cash and cash equivalents
on hand at March 31, 2009, together with its marketable
securities and cash flows from operations, if any, will be suf-
ficient to meet its working capital and capital expenditure
requirements as well as any dividends paid in the ordinary
course of business for the balance of fiscal 2010.
Contractual Obligations. The following table summarizes our
significant contractual obligations at March 31, 2009, and
the effect that such obligations are expected to have on our
liquidity and cash in future periods:
Non-cancelable lease obligations
Year Ending March 31,
2010
2011
2012
2013
2014
$ 4,475
4,311
2,439
985
135
$ 12,345
Recent Accounting Pronouncements
On April 9, 2009, the FASB issued three FSPs intended to
provide additional application guidance and enhanced dis-
closures regarding fair value measurements and other-than-
temporary impairments of securities.
FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That
Are Not Orderly,” provides guidelines for making fair value
measurements more consistent with the principles presented
in FASB Statement No. 157, “Fair Value Measurements.” FSP
FAS 157-4 must be applied prospectively and retrospective
application is not permitted. FSP FAS 157-4 is effective for
interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. An entity early adopting FSP FAS 157-4 must also early
adopt FSP FAS 115-2 and FAS 124-2.
FSP FAS 115-2 and FAS 124-2. “Recognition and
Presentation of Other-Than-Temporary Impairments,” provides
additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment
losses on debt securities. FSP FAS 115-2 and FAS 124-2 is
effective for interim and annual periods ending after June 15,
2009, with early adoption permitted for periods ending after
March 15, 2009. An entity may early adopt this FSP only if it
also elects to early adopt FSP FAS 157-4.
FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” enhances consistency in
financial reporting by increasing the frequency of fair value
disclosures. FSP 107-1 and APB 28-1 is effective for interim
periods ending after June 15, 2009, with early adoption per-
mitted for periods ending after March 15, 2009. However,
an entity may early adopt these interim fair value disclosure
requirements only if it also elects to early adopt FSP FAS 157-4
and FSP FAS 115-2 and FAS 124-2.
We are currently evaluating the impact, if any, that the
adoption of these FSPs will have on our consolidated financial
statements.
On April 1, 2009, the FASB issued FASB Staff Position
(FSP) FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise
from Contingencies.” The FSP amends the guidance in FASB
Statement No. 141 (Revised 2007), “Business Combinations,”
to: (i) require that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recog-
nized at fair value if fair value can be reasonably estimated.
If fair value of such an asset or liability cannot be reasonably
estimated, the asset or liability would generally be recognized
in accordance with FASB Statement No. 5, “Accounting for
Contingencies,” and FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss;” (ii) eliminate the require-
ment to disclose an estimate of the range of outcomes of rec-
ognized contingencies at the acquisition date. For unrecog-
nized contingencies, the FASB decided to require that entities
include only the disclosures required by Statement No. 5 and
that those disclosures be included in the business combination
footnote; and (iii) require that contingent consideration arrange-
ments of an acquiree assumed by the acquirer in a business
combination be treated as contingent consideration of the ac-
quirer and should be initially and subsequently measured at
fair value in accordance with Statement No. 141R. This FSP
is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period begin-
ning on or after December 15, 2008.
In November 2008, the FASB ratified Emerging Issues
Task Force (EITF) Issue No. 08-6, “Equity Method Investment
Accounting Considerations” or EITF 08-6. EITF 08-6 clarifies
the accounting for certain transactions and impairment con-
siderations involving equity method investments. EITF 08-6 is
effective for fiscal years beginning after December 15, 2008,
with early adoption prohibited. We do not currently have any
investments that are accounted for under the equity method
and therefore EITF 08-6 will not have a significant impact on
our consolidated financial statements.
In November 2008, the FASB ratified EITF Issue No. 08-
7, “Accounting for Defensive Intangible Assets” or EITF 08-7.
EITF 08-7 clarifies the accounting for certain separately iden-
tifiable intangible assets which an acquirer does not intend
to actively use but intends to hold to prevent its competitors
from obtaining access to them. EITF 08-7 requires an acquirer
in a business combination to account for a defensive intan-
gible asset as a separate unit of accounting which should be
amortized to expense over the period the asset diminishes in
value. EITF 08-7 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. We are
currently in the process of evaluating the impact the new EITF
will have on our consolidated financial statements.
In October 2008, the FASB issued FSP SFAS No. 157-3,
“Determining the Fair Value of a Financial Asset When The
Market for That Asset Is Not Active,” or FSP 157-3, to clarify
the application of the provisions of SFAS 157 in an inactive
market and how an entity would determine fair value in an
inactive market. FSP 157-3 was effective upon issuance. We
have considered the FSP in our determination of estimated fair
values of our ARS for fiscal year 2009.
In June 2008, the FASB issued FSP No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities.” FSP No.
EITF 03-6-1 concluded that unvested share-based payment
awards that contain nonforfeitable rights to dividends or divi-
dend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of basic
earnings per share (“EPS”) pursuant to the two-class method.
This FSP becomes effective on April 1, 2009. Early adoption
of the FSP is not permitted; however, it will apply retrospec-
tively to EPS data for all periods presented in the financial
statements or in financial data. We do not currently anticipate
that this FSP will have a material impact on our EPS data in
fiscal year 2010 or on EPS for any prior periods presented in
the financial data upon adoption.
43
In May 2008, the FASB issued SFAS 162 “The Hierarchy
of Generally Accepted Accounting Principles.” SFAS 162 de-
fines the order in which accounting principles that are gen-
erally accepted should be followed. SFAS 162 is effective
60 days following the Commission’s approval of the Public
Company Accounting Oversight Board (“PCAOB”) amend-
ments to AU Section 411 “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.”
We do not expect the adoption of SFAS 162 to have a mate-
rial impact on our consolidated financial statements.
In April 2008, the FASB finalized Staff Position (FSP) No.
142-3, “Determination of the Useful Life of Intangible Assets.”
The position amends the factors that should be considered in
developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under FASB SFAS
No. 142, “Goodwill and Other Intangible Assets.” The position
applies to intangible assets that are acquired individually or with
a group of other assets and both intangible assets acquired in
business combinations and asset acquisitions. FSP 142-3 is ef-
fective for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Management is
currently evaluating the impact of the pending adoption of FSP
142-3 on the consolidated financial statements.
In December 2007, the FASB issued SFAS 141 (Revised
2007) “Business Combinations.” SFAS 141(R) retains the
fundamental requirements of the original pronouncement
requiring that the purchase method be used for all business
combinations. SFAS 141(R) defines the acquirer as the entity
that obtains control of one or more businesses in the busi-
ness combination, establishes the acquisition date as the date
that the acquirer achieves control and requires the acquirer
to recognize the assets acquired, liabilities assumed and any
noncontrolling interest at their fair values as of the acquisition
date. In addition, SFAS 141(R) requires expensing of acqui-
sition-related and restructure-related costs, remeasurement of
earn out provisions at fair value, measurement of equity securi-
ties issued for purchase at the date of close of the transaction
and non-expensing of in-process research and development
related intangibles. SFAS 141(R) applies prospectively to busi-
ness combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning
on or after December 15, 2008. An entity may not apply it
before that date. This pronouncement will be applied by us
when it becomes effective and when or if the we effectuate
a business combination post adoption, otherwise there is no
impact on our consolidated financial statements.
ITEM 7A. Quantitative and
Qualitative Disclosures about
Market Risks
We maintain investments in tax exempt municipal ARS which
are classified as current and non-current marketable securities
on the Company’s Consolidated Balance Sheets. A small por-
tion of our portfolio is invested in closed-end funds which invest
in tax exempt municipal ARS. At March 31, 2009, we had ap-
proximately $7.4 million of ARS on our Consolidated Balance
Sheets. The ARS are rated by one or more national rating
agencies and have contractual terms of up to thirty years, but
generally have interest rate reset dates that occur every 7, 28
or 35 days.
Despite the underlying long-term maturity of ARS, such
securities were priced and subsequently traded as short-term
investments because of the interest rate reset feature. If there
are insufficient buyers, the auction is said to “fail” and the
holders are unable to liquidate the investments through auc-
tion. A failed auction does not result in a default of the debt
instrument. The securities will continue to accrue interest and
be auctioned until the auction succeeds, the issuer calls the
securities, or the securities mature. In February 2008, we
began to experience failed auctions on our ARS and auc-
tion rate preferred securities. To determine their estimated fair
values at March 31, 2009, factors including credit quality,
the likelihood of redemption, and yields or spreads of fixed
rate municipal bonds or other trading instruments issued by
the same or comparable issuers were considered. Based on
our ability to access our cash and other short-term investments,
our expected operating cash flows, and our other sources of
cash, we do not anticipate the current lack of liquidity on these
investments to have a material impact on our financial condi-
tion or results of operation.
ITEM 8. Financial Statements
and Supplementary Data
Our Consolidated Financial Statements identified in the Index
to Financial Statements appearing under “Item 15. Exhibits
and Financial Statement Schedules” of this Report are incorpo-
rated herein by reference to Item 15.
ITEM 9. Changes in and Disagreements
with Accountants on Accounting and
Financial Disclosure
None.
44
ITEM 9A. Controls and Procedures
Our internal control over financial reporting is supported
Evaluation of Disclosure Controls and
Procedures
Our Chief Executive Officer and Chief Financial Officer (our
principal executive officer and principal financial officer, re-
spectively) have concluded, based on their evaluation as of
March 31, 2009, that the design and operation of our “dis-
closure controls and procedures” (as defined in Rule 13a-15(e)
under the Exchange Act) are effective to provide reasonable
assurance that information required to be disclosed by us in
the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms,
including to ensure that information required to be disclosed
by us in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, includ-
ing our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding whether or not
disclosure is required.
Changes in Internal Control over
Financial Reporting
During the quarter ended March 31, 2009, there were no
changes in our “internal control over financial reporting” (as
defined in Rule 13a-15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s Report on Internal
Control over Financial Reporting
Our management is responsible for establishing and main-
taining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the Exchange Act. Under the
supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the frame-
work set forth in Internal Control — Integrated Framework is-
sued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, our man-
agement concluded that our internal control over financial re-
porting was effective as of March 31, 2009.
by written policies and procedures, that:
(1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dis-
positions of our assets;
(2) provide reasonable assurance that transactions are record-
ed as necessary to permit preparation of financial state-
ments in accordance with generally accepted accounting
principles, and that receipts and expenditures of our com-
pany are being made only in accordance with authoriza-
tions of our management and directors; and
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposi-
tion of our assets that could have a material effect on our
financial statements.
Because of inherent limitations in all control systems,
no matter how well designed, no evaluation of controls can
provide absolute assurance that all control issues within the
Company have been or will be detected. Also, projections
of any evaluation of effectiveness to future periods are subject
to the risks that controls may become inadequate because of
changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
Our independent registered public accounting firm has
audited the effectiveness of our internal control over financial
reporting as of March 31, 2009 as stated in their report that
is included herein.
ITEM 9B. Other Information
We have experienced legal claims by parties asserting that
we have infringed their intellectual property rights. We believe
that these claims are without merit and intend to defend them
vigorously; however, we could incur substantial costs and di-
version of management resources defending any infringement
claim – even if we are ultimately successful in the defense of
such matter. Litigation is inherently uncertain and always dif-
ficult to predict. We refer you to the discussion of infringement
and litigation risks in our Risk Factors section of this Report.
45
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 2009
Annual Shareholders’ Meeting to be filed with the Commission.
ITEM 13. Certain Relationships
and Related Transactions, and
Director Independence
The information required by Item 13 is incorporated herein
by reference from our definitive proxy statement for our 2009
Annual Shareholders’ Meeting to be filed with the Commission.
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated herein
by reference from our definitive proxy statement for our 2009
Annual Shareholders’ Meeting to be filed with the Commission.
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management
and Related Shareholder Matters
The information required by Item 12 is incorporated herein
by reference from our definitive proxy statement for our 2009
Annual Shareholders’ Meeting to be filed with the Commission.
ITEM 14. Principal Accountant
Fees and Services
The information required by Item 14 is incorporated herein
by reference from our definitive proxy statement for our 2009
Annual Shareholders’ Meeting to be filed with the Commission.
Part IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)
Index to Financial Statements:
(1)
• Report of Independent Registered Public Accounting Firm
• Report of Independent Registered Public Accounting Firm
• Consolidated Balance Sheets as of March 31, 2009 and March 31, 2008
• Consolidated Statements of Income — Years Ended
March 31, 2009, March 31, 2008 and March 31, 2007
• Consolidated Statements of Shareholders’ Equity — Years Ended
March 31, 2009, March 31, 2008 and March 31, 2007
• Consolidated Statements of Cash Flows — Years Ended
March 31, 2009, March 31, 2008 and March 31, 2007
• Notes to Consolidated Financial Statements
(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
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.
46
Page
51
52
53
54
55
56
58
81
Exhibit
Number Description
3.1
3.2
3.3
3.4
3.5
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11
10.12
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.
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.
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.
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.
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.
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.
Form of Incentive Stock Option Agreement for Amended and Restated 1998 Stock Option Plan is hereby incorpo-
rated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2004.
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.
2005 Stock Option and Incentive Plan is incorporated by reference to Exhibit 10.01 to the registrant’s Current
Report on Form 8-K filed October 5, 2005.
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.
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.
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.
1998 Employee Stock Contribution Plan is hereby incorporated by reference to Exhibit 4.1 to the registrant’s
Registration Statement on Form S-8 (Registration No. 333-63131).
Employment Agreement dated July 20, 2000 between Quality Systems, Inc. and Lou Silverman is hereby incor-
porated by reference to Exhibit 10.18 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.
Form of Indemnification Agreement for directors and executive officers authorized January 27, 2005 is hereby incor-
porated by reference to Exhibit 10.6.1 of the registrant’s Annual Report on Form 10-K for the year ended March 31,
2005.
Lease Agreement between Company and Tower Place, L.P. dated November 15, 2000, commencing February
5, 2001 is hereby incorporated by reference to Exhibit 10.14 to the registrant’s Annual Report on Form 10-K for
the year ended March 31, 2001.
Fourth Amendment to lease agreement between the Company and Tower Place, L.P. dated September 22, 2005
is incorporated by reference to Exhibit 10.24 to the registrant’s Annual Report on Form 10-K for the year ended
March 31, 2006.
47
Exhibit
Number Description
Fifth Amendment to lease agreement between the Company and Tower Place, L.P. dated January 31, 2007 is
incorporated by reference to Exhibit 10.13 to the registrant’s Annual Report on Form 10-K for the year ended March
31, 2007.
Lease Agreement between Company and Orangewood Business Center Inc. dated April 3, 2000, amended
February 22, 2001, is hereby incorporated by reference to Exhibit 10.15 to the registrant’s Annual Report on Form
10-K for the year ended March 31, 2001.
Lease Agreement between the Company and HUB Properties LLC dated May 8, 2002 is hereby incorporated
by reference to Exhibit 10.18 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2003.
Second Amendment to Office Lease agreement between the Company and HUB Properties LLC dated February
14, 2006 is incorporated by reference to Exhibit 10.25 to the registrant’s Annual Report on Form 10-K for the year
ended March 31, 2006.
Amended and Restated Second Amendment to Office Lease agreement between the Company and HUB
Properties LLC dated May 31, 2006 is incorporated by reference to Exhibit 10.17 to the registrant’s Annual Report
on Form 10-K for the year ended March 31, 2007.
Lease Agreement between the Company and LakeShore Towers Limited Partnership Phase IV, a California limited
partnership, dated September 15, 2004 is hereby incorporated by reference to Exhibit 10.19 of the registrant’s
Annual Report on Form 10-K for the year ended March 31, 2005.
Lease agreement between the Company and Von Karman Michelson Corporation dated September 6, 2005
is incorporated by reference to Exhibit 10.23 to the registrant’s Annual Report on Form 10-K for the year ended
March 31, 2006.
Office lease between the Company and SLTS Grand Avenue, L.P. dated May 3, 2006 is incorporated by refer-
ence to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2007.
Board Service Agreement between the Company and Lou Silverman is incorporated by reference to Exhibit
10.2.1 to the registrant’s Current Report on Form 8-K, dated May 31, 2005.
Board Service Agreement between the Company and Patrick Cline is incorporated by reference to Exhibit 10.2.1
to the registrant’s Current Report on Form 8-K dated May 31, 2005.
Director Compensation Program approved May 25, 2006 is incorporated by reference to Exhibit 10.1 to the
registrant’s Current Report on Form 8-K filed May 30, 2006.
Settlement Agreement dated as of August 8, 2006 between the registrant and Ahmed Hussein is incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed August 9, 2006.
Description of Compensation Program for Named Executive Officers for Fiscal Year Ended March 31, 2008 is
incorporated by reference to Exhibit 10.25 to the registrant’s Annual Report on Form 10-K for the year ended March
31, 2007.
Description of Compensation Program for Named Executive Officers for Fiscal Year Ending March 31, 2007 is
incorporated by reference to Exhibit 10.26 to the registrant’s Annual Report on Form 10-K for the year ended March
31, 2007.
Agreement and Plan of Merger dated May 16, 2008 by and among Quality Systems, Inc., Bud Merger Sub,
LLC and Lackland Acquisition II, LLC, is incorporated by reference to Exhibit 10.27 to the registrant’s Annual Report
on Form 10-K for the year ended March 31, 2008.
Office lease between the Company and Lakeshore Towers Limited Partnership Phase II, a California limited part-
nership, dated October 18, 2007, is incorporated by reference to Exhibit 10.28 to the registrant’s Annual Report
on Form 10-K for the year ended March 31, 2008.
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21*
10.22*
10.23*
10.24
10.25*
10.26*
10.27
10.28
48
Exhibit
Number Description
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
Standard Service Center Lease Agreement between the Lincoln National Life Insurance Company and Lackland
Acquisition II, LLC, dated November 28, 2001, is incorporated by reference to Exhibit 10.29 to the registrant’s
Annual Report on Form 10-K for the year ended March 31, 2008.
First Amendment to Standard Service Center Lease Agreement between the Lincoln National Life Insurance
Company and Lackland Acquisition II, LLC, dated August 17, 2005, is incorporated by reference to Exhibit 10.30
to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2008.
Standard Service Center Lease Agreement between the Lincoln National Life Insurance Company and InfoNow
Solutions of St. Louis, LLC, dated November 28, 2001, is incorporated by reference to Exhibit 10.31 to the regis-
trant’s Annual Report on Form 10-K for the year ended March 31, 2008.
Second Amendment to Service Center Lease Agreement between the TM Properties, LLC, successor to the Lincoln
National Life Insurance Company and Lackland Acquisition II, LLC, dated August 17, 2005, is incorporated by
reference to Exhibit 10.32 to the registrant’s Annual Report on Form 10-K for the year ended March 31, 2008.
Assignment of Lease between InfoNow Solutions of St. Louis, Lackland Acquisition II, LLC and TM Properties, LLC
dated August 17, 2005, is incorporated by reference to Exhibit 10.33 to the registrant’s Annual Report on Form
10-K for the year ended March 31, 2008.
Agreement and Plan of Merger dated October 15, 2008 by and among (i) Quality Systems, Inc. (ii) NextGen
Healthcare Information Systems, Inc. (iii) Ruth Merger Sub, Inc. (iv) Practice Management Partners, Inc. and (v) cer-
tain shareholders set forth therein, is incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report
on Form 10-Q for the quarter ended December 31, 2008.
First Amendment to Lease Agreement between Hill Management Services, Inc. and Practice Management
Partners, Inc., dated January 15, 2008, is incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly
Report on Form 10-Q for the quarter ended December 31, 2008.
First Amendment to Sublease Agreement between RehabCare Group, Inc. and Practice Management Partners
Inc., dated January 15 2008, is incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on
Form 10-Q for the quarter ended December 31, 2008.
Third Amendment to Lease Agreement between Pinecrest LLC and Practice Management Partners, Inc., dated April
30, 2007, is incorporated by reference to Exhibit 10.4 to the registrant’s Quarterly Report on Form 10-Q for the
quarter ended December 31, 2008.
10.38*
Employment Agreement dated August 11, 2008 between Quality Systems, Inc., and Steven Plochocki, is incor-
porated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on August 12, 2008.
21
23
31.1
31.2
32.1
List of subsidiaries**
Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP**
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**
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**
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
*This exhibit is a management contract or a compensatory plan or arrangement.
**Filed herewith.
49
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 2009
By: /s/ Steven Plochocki
Steven T. Plochocki
President and Chief Executive Officer
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
Chairman of the Board and Director
May 27, 2009
President and Chief Executive Officer (Principal Executive Officer) and Director
May 27, 2009
Chief Financial Officer (Principal Financial Officer) and Secretary
May 27, 2009
President, NextGen Healthcare Information Systems Division, and Director
May 27, 2009
/s/ Sheldon Razin
Sheldon Razin
/s/ Steven Plochocki
Steven T. Plochocki
/s/ Paul Holt
Paul A. Holt
/s/ Patrick Cline
Patrick B. Cline
/s/ Murray Brennan
Murray Brennan
/s/ George Bristol
George Bristol
/s/
Director
Director
Ahmed Hussein
Director
/s/ Philip Kaplan
Philip Kaplan
/s/ Vincent Love
Vincent J. Love
/s/ Russell Pflueger
Russell Pflueger
50
Director
Director
Director
May 27, 2009
May 27, 2009
May 27, 2009
May 27, 2009
May 27, 2009
Report Of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Quality Systems, Inc.
We have audited the accompanying consolidated balance sheets of Quality Systems, Inc. as of March 31, 2009 and 2008,
and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years ended
March 31, 2009. Our audits of the basic financial statements included the financial statement Schedule II listed in the index
appearing under Item 15 (a)(2). These consolidated financial statements and financial statement schedule are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedule based on our 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 audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signifi-
cant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial posi-
tion of Quality Systems, Inc. as of March 31, 2009 and 2008 and the results of its operations and its cash flows for each of
the three years ended March 31, 2009 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Quality Systems, Inc.’s internal control over financial reporting as of March 31, 2009, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated May 27, 2009, expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Irvine, California
May 27, 2009
51
Report Of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Quality Systems, Inc.
We have audited Quality Systems, Inc.’s internal control over financial reporting as of March 31, 2009, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Quality Systems, Inc.’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Quality Systems, Inc. Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an
opinion on Quality Systems, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of in-
ternal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reli-
ability of financial reporting and the preparation of financial statements for external purposes in accordance with generally ac-
cepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit prepara-
tion 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 (3)
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 consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projec-
tions 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. In our opinion, Quality
Systems, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2009, based
on criteria established in Internal Control – Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Quality Systems, Inc. as of March 31, 2009 and 2008, and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the three years ended March 31, 2009, and our report
dated May 27, 2009 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Irvine, California
May 27, 2009
52
Quality Systems, Inc.
Consolidated Balance Sheets
(in thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Marketable securities
Accounts receivable, net
Inventories, net
Income tax receivable
Net current deferred tax assets
Other current assets
Total current assets
Marketable securities
Equipment and improvements, net
Capitalized software costs, net
Intangibles, net
Goodwill
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Deferred revenue
Accrued compensation and related benefits
Income taxes payable
Dividends payable
Other current liabilities
Total current liabilities
Deferred revenue, net of current
Net deferred tax liabilities
Deferred compensation
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock
$0.01 par value; authorized 50,000 shares; issued and
outstanding 28,447 and 27,448 shares at March 31, 2009 and
March 31, 2008, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Total shareholders’ equity
March 31, 2009
March 31, 2008
$
70,180
1,303
-
90,070
1,125
5,605
3,994
6,312
178,589
7,395
6,756
9,552
8,403
28,731
2,675
$ 242,101
$
5,097
47,584
9,511
-
8,529
8,888
79,609
521
4,566
1,838
86,534
$
59,046
-
2,500
76,585
1,024
-
6,397
4,596
150,148
20,124
4,773
8,852
-
1,840
2,171
$ 187,908
$
4,685
44,389
8,346
1,541
6,861
4,394
70,216
506
1,575
1,906
74,203
284
103,524
51,759
-
155,567
274
75,556
38,071
(196)
113,705
Total liabilities and shareholders’ equity
$ 242,101
$ 187,908
The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.
53
Quality Systems, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Revenues:
Software, hardware and supplies
Implementation and training services
System sales
Maintenance
Electronic data interchange services
Revenue cycle management and related services
Other services
Maintenance, EDI, RCM and other services
Total revenue
Cost of revenue:
Software, hardware and supplies
Implementation and training services
Total cost of system sales
Maintenance
Electronic data interchange services
Revenue cycle management and related services
Other services
Total cost of maintenance, EDI, RCM and other services
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs
Total operating expenses
Income from operations
Interest income
Other (expense) income
Income before provision for income taxes
Provision for income taxes
Net income
Net income per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Dividends declared per common share
Fiscal Year Ended
March 31, 2009 March 31, 2008 March 31, 2007
$
$
$
$
$
85,386
13,375
98,761
72,862
29,522
21,431
22,939
146,754
245,515
13,184
10,286
23,470
11,859
21,374
14,674
17,513
65,420
88,890
$
76,363
13,406
89,769
56,455
22,450
871
16,955
96,731
$
68,871
12,177
81,048
41,948
17,049
534
16,586
76,117
186,500
157,165
10,887
10,341
21,228
12,446
15,776
558
12,493
41,273
62,501
8,453
8,535
16,988
11,834
12,181
341
9,440
33,796
50,784
156,625
123,999
106,381
70,445
13,777
84,222
53,260
11,350
64,610
45,337
10,166
55,503
72,403
59,389
50,878
1,203
(279)
73,327
27,208
46,119
1.65
1.62
28,031
28,396
1.15
2,661
953
63,003
22,925
40,078
1.47
1.44
27,298
27,770
1.00
$
$
$
$
3,306
-
54,184
20,952
33,232
1.24
1.21
26,882
27,550
1.00
$
$
$
$
The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.
54
Quality Systems, Inc.
Consolidated Statements of Shareholders’ Equity
(in thousands)
Common Stock
Shares
Amount
APIC
Retained
Earnings
Deferred
Compensation
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, March 31, 2006
26,711 $ 267
$ 53,675
$ 19,151
$ (684)
$ -
$ 72,409
Reclass of deferred
compensation upon adop-
tion of SFAS 123R
Exercise of stock options
Tax benefit resulting from
exercise of stock options
Stock based compensation
Dividends declared
Net income
-
412
-
-
-
-
-
4
-
-
-
-
Balance, March 31, 2007
27,123
271
Exercise of stock options
325
3
Tax benefit resulting from
exercise of stock options
Stock based compensation
Dividends declared
Net income
Unrealized loss on market-
able securities, net of tax
-
-
-
-
-
-
-
-
-
-
(684)
6,058
2,694
3,923
-
-
65,666
4,757
1,376
3,757
-
-
-
-
-
-
-
(27,074)
33,232
25,309
-
-
-
(27,316)
40,078
-
Balance, March 31, 2008
27,448
274
75,556
38,071
Exercise of stock options
697
7
12,512
Tax benefit resulting from
exercise of stock options
Stock based compensation
Common stock issued for
acquisitions
Dividends declared
Net income
Reclassification of unrealized
loss on marketable securi-
ties, net of tax
-
-
302
-
-
-
-
-
3
-
-
-
3,382
1,977
10,097
-
-
-
-
-
-
-
(32,431)
46,119
-
684
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(196)
(196)
-
-
-
-
-
-
-
6,062
2,694
3,923
(27,074)
33,232
91,246
4,760
1,376
3,757
(27,316)
40,078
(196)
113,705
12,519
3,382
1,977
10,100
(32,431)
46,119
196
196
Balance, March 31, 2009
28,447 $ 284
$ 103,524
$ 51,759
$ -
$ -
$ 155,567
The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.
55
Quality Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
March 31, 2009 March 31, 2008 March 31, 2007
$
46,119
$
40,078
$
33,232
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation
Amortization of capitalized software costs
Amortization of other intangibles
Gain on life insurance proceeds, net
Provision for bad debts
(Recovery)/provision for inventory obsolescense
Share-based compensation
Deferred income taxes
Tax benefit from exercise of stock options
Excess tax benefit from share-based compensation
Loss on disposal of equipment and improvements
Changes in assets and liabilities:
Accounts receivable
Inventories
Income tax receivable
Other current assets
Other assets
Accounts payable
Deferred revenue
Accrued compensation and related benefits
Income taxes payable
Other current liabilities
Deferred compensation
Net cash provided by operating
Cash flows from investing activities:
Additions to capitalized software costs
Additions to equipment and improvements
Proceeds from sale of marketable securities
Purchases of marketable securities
Proceeds from life insurance policy, net
Purchase of HSI, including direct transaction costs
Purchase of PMP, including direct transaction costs
Net cash used in investing
Cash flows from financing activities:
Excess tax benefit from share-based compensation
Proceeds from the exercise of stock options
Dividends paid
Loan repayment
Net cash used in financing
Net increase (decrease) in cash and cash equivalents
2,911
5,163
1,034
-
2,089
(13)
1,977
4,462
3,382
(3,381)
96
(11,369)
(88)
(5,433)
(1,202)
(448)
(299)
3,130
136
(1,541)
2,055
(68)
48,712
(5,863)
(3,218)
14,825
-
-
(8,241)
(16,950)
(19,447)
3,381
12,519
(30,763)
(3,268)
(18,131)
11,134
2,369
4,149
-
(755)
1,171
52
3,757
(199)
1,376
(1,311)
-
(13,811)
99
-
(89)
381
(561)
5,447
1,825
1,226
(1,232)
(373)
43,599
(6,019)
(2,113)
91,825
(114,645)
755
-
-
(30,197)
1,311
4,760
(20,455)
-
(14,384)
(982)
1,950
3,231
-
-
1,480
35
3,923
(1,642)
2,694
(2,527)
-
(20,760)
(649)
1,195
(1,595)
(594)
2,312
3,532
1,031
315
1,814
593
29,570
(5,042)
(3,240)
-
-
-
-
-
(8,282)
2,527
6,062
(27,074)
-
(18,485)
2,803
57,225
60,028
Cash and cash equivalents at beginning of year
59,046
60,028
Cash and cash equivalents at end of year
$
70,180
$
59,046
$
56
Quality Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
March 31, 2009 March 31, 2008 March 31, 2007
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes, net of refunds
Non-cash investing and financing activities:
Unrealized loss on marketable securities
Tax effect of unrealized loss on marketable securities
Reclassification of unrealized loss on marketable securities,
net of tax
Unrealized loss on marketable securities, net of tax...
Effective May 20, 2008, the Company acquired HSI in a
transaction summarized as follows:
Fair value of net assets assumed
Cash paid for HSI stock
Common stock issued for HSI stock
Liabilities assumed
Effective October 28, 2008, the Company acquired PMP in
a transaction summarized as follows:
Fair value of net assets assumed
Cash paid for PMP stock
Common stock issued for PMP stock
Liabilities assumed
$
$
$
$
$
$
$
26,455
$ 20,546
$
18,360
-
-
196
196
20,609
(8,241)
(7,350)
5,018
23,875
(16,950)
(2,750)
4,175
$
$
$
$
$
$
(326)
130
-
(196)
-
-
-
-
-
-
-
-
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
The accompanying notes to these consolidated financial statements are an integral part of these consolidated statements.
57
Quality Systems, Inc.
Notes to Consolidated Financial Statements
(Dollar And Share Amounts In Thousands, Except Per Share Amounts)
March 31, 2009 And 2008
1. Description of Business
Quality Systems Inc., comprised of the QSI Division (“QSI
subsidiaries, NextGen
Division”) and wholly-owned
Healthcare Information Systems, Inc. (“NextGen Division”),
Lackland Acquisition II, LLC dba Healthcare Strategic Initiatives
(“HSI”) and Practice Management Partners, Inc. (“PMP”) (col-
lectively, the Company) develops and markets healthcare infor-
mation systems that automate certain aspects of medical and
dental practices, networks of practices such as physician hos-
pital organizations (“PHOs”) and management service organi-
zations (“MSOs”), ambulatory care centers, community health
centers, and medical and dental schools. The Company also
provides revenue cycle management (“RCM”) services through
its Practice Solutions division of NextGen. Operationally, HSI
and PMP are administered as part of the NextGen Division.
The Company, a California corporation formed in 1974,
was founded with an early focus on providing information sys-
tems to dental group practices. In the mid-1980’s, we capital-
ized 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 acquisi-
tions that accelerated our penetration of the medical market.
These two acquisitions formed the basis for what is today the
NextGen Division. Today, we serve the medical and dental
markets through our two divisions.
The two divisions operate largely as stand-alone opera-
tions with each division maintaining its own distinct product
lines, product platforms, development, implementation and
support teams, sales staffing, and branding. The two divisions
share the resources of the “corporate office” which includes
a variety of accounting and other administrative functions.
Additionally, there are a small number of clients who are si-
multaneously utilizing software from each of our two divisions.
The QSI Division, co-located with our corporate head-
quarters in Irvine, California, currently focuses on developing,
marketing and supporting software suites sold to dental and
certain niche medical practices. In addition, the Division sup-
ports a number of medical clients that utilize the Division’s
UNIX based medical practice management software product.
The NextGen Division, with headquarters in Horsham,
Pennsylvania, and significant locations in Atlanta, Georgia, St.
Louis, Missouri and Hunt Valley, Maryland, focuses principally
on developing and marketing products and services for medi-
cal practices.
2. Summary of Significant
Accounting Policies
Principles of Consolidation. The consolidated financial state-
ments include the accounts of the Company and its wholly-
owned subsidiaries. On May 20, 2008, the Company
acquired HSI, a full-service healthcare RCM company. On
October 28, 2008, the Company acquired PMP, a full-
service healthcare RCM company. All significant intercompa-
ny accounts and transactions have been eliminated.
Basis of Presentation. The accompanying consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.
Certain prior year amounts have been reclassified to con-
form with fiscal year 2009 presentation.
References to dollar amounts in the consolidated financial
statement sections are in thousands, except per share data,
unless otherwise specified.
Revenue Recognition. The Company recognizes system sales
revenue pursuant to Statement of Position No. 97-2, “Software
Revenue Recognition” (SOP 97-2), as amended by Statement
of Position No. 98-9 “Modification of SOP 97-2, Software
Revenue Recognition” (SOP 98-9). The Company generates
revenue from the sale of licensing rights to its software prod-
ucts directly to end-users and value-added resellers, or VARs.
The Company also generates revenue from sales of hardware
and third party software, implementation, training, EDI, post-
contract support (maintenance), and other services, including
RCM, performed for customers who license its products.
A typical system contract contains multiple elements of the
above items. SOP 98-9 requires revenue earned on software
arrangements involving multiple elements to be allocated to
each element based on the relative fair values of those ele-
ments. The fair value of an element must be based on vendor
specific objective evidence (VSOE). The Company limits its as-
sessment of VSOE for each element to either the price charged
when the same element is sold separately or the price estab-
lished 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 es-
tablished VSOE for the related undelivered elements based
on the bell-shaped curve method. Maintenance VSOE for the
Company’s largest customers is based on stated renewal rates
only if the rate is determined to be substantive and falls within
the Company’s customary pricing practices.
58
When evidence of fair value exists for the delivered and
undelivered elements of a transaction, then discounts for indi-
vidual elements are aggregated and the total discount is allo-
cated to the individual elements in proportion to the elements’
fair value relative to the total contract fair value.
When evidence of fair value exists for the undelivered
elements only, the residual method, provided for under SOP
98-9, is used. Under the residual method, the Company de-
fers 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.
The Company bills for the entire system sales contract
amount upon contract execution except for maintenance which
is billed separately. Amounts billed in excess of the amounts
contractually due are recorded in accounts receivable as ad-
vance billings. Amounts are contractually due when services
are performed or in accordance with contractually specified
payment dates. Provided the fees are fixed and determinable
and collection is considered probable, revenue from licensing
rights and sales of hardware and third party software is gen-
erally recognized upon physical or electronic shipment and
transfer of title. In certain transactions where collections risk
is high, the cash basis method is used to recognize revenue.
If the fee is not fixed or determinable, then the revenue rec-
ognized in each period (subject to application of other rev-
enue 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 consid-
ered fixed or determinable at the inception of the Company’s
arrangements must include the following characteristics:
• The fee must be negotiated at the outset of an arrange-
ment, and generally be based on the specific volume of
products to be delivered without being subject to change
based on variable pricing mechanisms such as the number
of units copied or distributed or the expected number of
users.
• Payment terms must not be considered extended. If a sig-
nificant portion of the fee is due more than 12 months after
delivery or after the expiration of the license, the fee is
presumed not fixed and determinable.
Revenue from implementation and training services is
recognized as the corresponding services are performed.
Maintenance revenue is recognized ratably over the contrac-
tual maintenance period.
Contract accounting is applied where services include
significant software modification, development or customiza-
tion. In such instances, the arrangement fee is accounted for in
accordance with Statement of Position No. 81-1 “Accounting
for Performance of Construction-Type and Certain Production-
Type Contracts” (SOP 81-1). Pursuant to SOP 81-1, the
Company uses the percentage of completion method pro-
vided all of the following conditions exist:
• The contract includes provisions that clearly specify the
enforceable rights regarding goods or services to be pro-
vided and received by the parties, the consideration to be
exchanged, and the manner and terms of settlement;
• The customer can be expected to satisfy its obligations
under the contract;
• The Company can be expected to perform its contractual
obligations; and
• Reliable estimates of progress towards completion can
be made.
The Company measures completion using labor input
hours. Costs of providing services, including services account-
ed for in accordance with SOP 81-1, are expensed as incurred.
If a situation occurs in which a contract is so short term
that the financial statements would not vary materially from
using the percentage-of-completion method or in which the
Company is unable to make reliable estimates of progress of
completion of the contract, the completed contract method is
utilized.
Product returns are estimated in accordance with
Statement of Financial Accounting Standards No. 48,
“Revenue Recognition When Right of Return Exists” (SFAS 48).
The Company also ensures that the other criteria in SFAS 48
have been met prior to recognition of revenue:
• The price is fixed or determinable;
• The customer is obligated to pay and there are no contin-
gencies surrounding the obligation or the payment;
• The customer’s obligation would not change in the event of
theft or damage to the product;
• The customer has economic substance;
• The amount of returns can be reasonably estimated; and
• The Company does not have significant obligations for
future performance in order to bring about resale of the
product by the customer.
The Company has historically offered short-term rights of
return in certain sales arrangements. If the Company is able
to estimate returns for these types of arrangements, revenue
is recognized and these arrangements are recorded in the
59
consolidated financial statements. If the Company is unable to
estimate returns for these types of arrangements, revenue is not
recognized in the consolidated financial statements until the
rights of return expire.
Revenue related to sales arrangements which include the
right to use software stored on the Company’s hardware is ac-
counted for under the Emerging Issues Task Force Issue (EITF)
No. 00-3 “Application of AICPA Statement of Position 97-2 to
arrangements that include the right to use software stored on
another entity’s hardware.” EITF No. 00-3 requires that for
software licenses and related implementation services to con-
tinue to fall under SOP No. 97-2, the customer must have the
contractual right to take possession of the software without in-
curring a significant penalty and it must be feasible for the cus-
tomer to either host the software themselves or through another
third party. If an arrangement is not deemed to be accounted
for under SOP 97-2, the entire arrangement is accounted for
as a service contract in accordance with EITF Issue No. 00-21
“Revenue Arrangements with Multiple Deliverables.” In that
instance, the entire arrangement would be recognized as the
hosting services are being performed.
From time to time, the Company offers future purchase dis-
counts on its products and services as part of its sales arrange-
ments. Pursuant to AICPA TPA 5100.50, such discounts which
are incremental to the range of discounts reflected in the pricing
of the other elements of the arrangement, which are incremental
to the range of discounts typically given in comparable transac-
tions, and which are significant, are treated as an additional el-
ement of the contract to be deferred. Amounts deferred related
to future purchase options are not recognized until either the
customer exercises the discount offer or the offer expires.
RCM service revenue is derived from services fees, which
include amounts charged for ongoing billing and other related
services, and are generally billed to the customer as a percent-
age of total collections. The Company does not recognize rev-
enue for services fees until these collections are made, as the
services fees are not fixed and determinable until such time.
Revenue is divided into two categories, “system sales”
and “maintenance, EDI, RCM and other services”. Revenue
in the system sales category includes software license fees,
third party hardware and software, and implementation and
training services related to purchase of the Company’s soft-
ware systems. The majority of the revenue in the system sales
category is related to the sale of software. Revenue in the
maintenance, EDI, RCM and other services category includes
maintenance, EDI, RCM services, follow on training and im-
plementation services, annual third party license fees, hosting
services and other revenue.
Cash and Cash Equivalents. Cash and cash equivalents gen-
erally consist of cash, money market funds and short-term U.S.
60
Treasury securities with original maturities of less than 90 days.
The Company had cash deposits at U.S. banks and finan-
cial institutions at March 31, 2009 of which $76,364 was
in excess of the Federal Deposit Insurance Corporation insur-
ance limit of $250 per owner. The Company is exposed to
credit loss for amounts in excess of insured limits in the event
of non-performance by the institutions; however, the Company
does not anticipate non-performance by these institutions. The
money market fund in which the Company holds a portion of
its cash invests in only investment grade money market instru-
ments from a variety of industries, and therefore bears relatively
low market risk. The average maturity of the investments owned
by the money market fund is approximately two months.
Restricted Cash. Restricted cash consists of cash which is being
held by HSI acting as agent for the disbursement of certain state
social services programs. The Company records an offsetting
“Care Services liability” (see also Note 9) when it initially re-
ceives such cash from the government social service programs
and relieves both restricted cash and the Care Services liability
when amounts are disbursed. HSI earns an administrative fee
which is based on a percentage of funds disbursed on behalf
of certain government social service programs.
Marketable Securities and ARS Put Option Rights. Marketable
securities are recorded at fair value, based on quoted mar-
ket rates or valuation analysis when appropriate. In addition,
the Company classifies marketable securities as current or
non-current based upon whether such assets are reasonably
expected to be realized in cash or sold or consumed during
the normal operating cycle of the business.
The Company’s investments at March 31, 2009 and
2008 are in tax exempt municipal Auction Rate Securities
(ARS) which are classified as either current or non-current mar-
ketable securities on the Company’s Consolidated Balance
Sheets, depending on the liquidity and timing of expected
realization of such securities. The ARS are rated by one or
more national rating agencies and have contractual terms of
up to thirty years, but generally have interest rate reset dates
that occur every 7, 28 or 35 days. Despite the underlying
long-term maturity of ARS, such securities were priced and
subsequently traded as short-term investments because of the
interest rate reset feature. If there are insufficient buyers, the
auction is said to “fail” and the holders are unable to liquidate
the investments through auction. A failed auction does not
result in a default of the debt instrument. Under their respec-
tive terms, the securities will continue to accrue interest and
be auctioned until the auction succeeds, the issuer calls the
securities or the securities mature.
In February 2008, the Company began to experience
failed auctions on its ARS. To determine their estimated fair
values at March 31, 2009 and 2008, factors including
credit quality, assumptions about the likelihood of redemption,
observable market data such as yields or spreads of fixed rate
municipal bonds and other trading instruments issued by the
same or comparable issuers were considered.
The Company’s ARS are managed by UBS Financial
Services Inc. (UBS). On November 13, 2008, the Company
entered into an Auction Rate Security Rights Agreement (the
Rights Agreement) with UBS, whereby the Company accepted
UBS’ offer to purchase the Company’s ARS investments at any
time during the period of June 30, 2010 through July 2, 2012.
As a result, the Company has obtained an asset, ARS put op-
tion rights, whereby the Company has a right to “put” the ARS
back to UBS. The Company expects to exercise its ARS put
option rights and put its ARS back to UBS on June 30, 2010,
the earliest date allowable under the Rights Agreement.
As of September 30, 2008, the Company had the in-
tent and ability to hold these securities until anticipated recov-
ery. As a result, the Company recognized the unrealized loss
through September 30, 2008 as a temporary impairment in
other comprehensive income within shareholders’ equity.
By accepting the Rights Agreement, the Company can
no longer assert that it has the intent to hold the auction rate
securities until anticipated recovery and has elected to reclas-
sify its investments in ARS as trading securities, as defined by
SFAS No. 115 “Accounting in Certain Investments in Debt and
Equity Securities”, on the date of Company’s acceptance of
the Rights Agreement. As trading securities, the ARS are car-
ried at fair value with changes recorded through earnings.
At March 31, 2009, the Company held ARS with a par val-
ue of $8,125. In the fourth quarter of fiscal year 2009, the
Company recognized a pre-tax unrealized loss of approxi-
mately $730 through its earnings. The charge was measured
as the approximate midpoint between various losses in values.
As the Company will be permitted to put the ARS back
to UBS at par value, the Company accounted for the ARS put
option rights as a separate asset that was measured at its fair
value with changes recorded through earnings. The Company
has valued the ARS put option right as the approximate mid-
point between various fair values, measured as the difference
between the par value of the ARS and the fair value of the
securities, discounted by the credit risk of the broker and other
factors such as the Company’s historical experience to sell
ARS at par. The estimated fair value of the ARS put option
rights as of March 31, 2009 was determined to be $468.
The Company is required to assess the fair value of these
two individual assets and to record corresponding changes in
fair value in each reporting period through the Consolidated
Statements of Income until the ARS put option rights are exer-
cised and the ARS are redeemed or sold. The Company ex-
pects that the fair value movements in the ARS will be largely
offset by the future changes in the fair value of the ARS put
option rights. Since the ARS put option rights represent the right
to sell the securities back to UBS at par, the Company will be
required to periodically assess the economic ability of UBS to
meet that obligation in assessing the fair value of the ARS put
option rights. The Company will continue to classify the ARS
as long-term investments until June 30, 2009, one year prior
to the expected settlement.
Allowance for Doubtful Accounts. The Company provides
credit terms typically ranging from thirty days to less than
twelve months for most system and maintenance contract sales
and generally does not require collateral. The Company per-
forms credit evaluations of its customers and maintains reserves
for estimated credit losses. Reserves for potential credit losses
are determined by establishing both specific and general re-
serves. Specific reserves are based on management’s estimate
of the probability of collection for certain troubled accounts.
General reserves are established based on the Company’s
historical experience of bad debt expense and the aging of
the Company’s accounts receivable balances net of deferred
revenues and specifically reserved accounts. Accounts are
written off as uncollectible only after the Company has ex-
pended extensive collection efforts.
Included in accounts receivable are amounts related to
maintenance and services which were billed, but which had
not yet been rendered as of the end of the period. Undelivered
maintenance and services are included on the accompanying
Consolidated Balance Sheets in deferred revenue (see also
Note 9).
Inventories. Inventories consist of hardware for specific cus-
tomer orders and spare parts, and are valued at lower of cost
(first-in, first-out) or market. Management provides a reserve to
reduce inventory to its net realizable value.
Equipment and Improvements. Equipment and improvements
are stated at cost less accumulated depreciation and amorti-
zation. Depreciation and amortization of equipment and im-
provements are provided over the estimated useful lives of the
assets, or the related lease terms if shorter, by the straight-line
method. Useful lives range as follows:
• Computers and electronic
test equipment
• Furniture and fixtures
• Leasehold improvements
3-5 years
5-7 years
lesser of lease term or
estimated useful life
Software Development Costs. Development costs incurred in
the research and development of new software products and
enhancements to existing software products are expensed as
incurred until technological feasibility has been established.
After technological feasibility is established, any additional
development costs are capitalized in accordance with SFAS
No. 86, “Accounting for the Costs of Computer Software to
61
be Sold, Leased or Otherwise Marketed” (SFAS 86). Such
capitalized costs are amortized on a straight-line basis over the
estimated economic life of the related product of three years.
The Company provides support services on the current and
prior two versions of its software. Management performs an
annual review of the estimated economic life and the recover-
ability 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.
Goodwill and Intangible Assets. The Company follows SFAS
No. 142, “Goodwill and Other Intangible Assets” (SFAS
142). Goodwill is related to the NextGen Division and the
HSI and PMP acquisitions, which closed on May 20, 2008
and October 28, 2008, respectively (see Notes 5, 6 and
7). Under SFAS 142, management is required to perform an
annual assessment of the implied fair value of goodwill and
intangible assets with indefinite lives for impairment. Relating to
NextGen Division’s goodwill, the Company compared the fair
value of the NextGen Division with the carrying amount of its
assets and determined that none of the goodwill recorded was
impaired as of June 30, 2008 (the date of the Company’s last
annual impairment test). The fair value of the NextGen Division
was determined using an estimate of future cash flows for the
NextGen Division over 10 years and risk adjusted discount
rates of between 15 and 25 percent to compute a net present
value of future cash flows. The Company will perform its initial
impairment test on HSI and PMP as of June 30, 2009.
Long-Lived Assets. The Company follows SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived
Assets” (SFAS 144). Management periodically reviews the
carrying value of long-lived assets to determine whether or not
impairment to such value has occurred and has determined
that there was no impairment at March 31, 2009.
Income Taxes. Income taxes are provided based on current
taxable income and the future tax consequences of temporary
differences between the basis of assets and liabilities for finan-
cial and tax reporting. The deferred income tax assets and
liabilities represent the future state and federal tax return conse-
quences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or set-
tled. Deferred income taxes are also recognized for operating
losses that are available to offset future taxable income and
tax credits that are available to offset future income taxes. At
each reporting period, management assesses the realizable
value of deferred tax assets based on, among other things,
estimates of future taxable income, and adjusts the related valu-
ation allowance as necessary. In June 2006, the FASB issued
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of SFAS No. 109” (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes rec-
ognized in an enterprise’s financial statements in accordance
with SFAS No. 109, “Accounting for Income Taxes.” FIN 48
prescribes a recognition threshold of more-likely-than-not and
measurement of a tax position taken or expected to be taken
in an enterprise’s tax return. Management makes a number
of assumptions and estimates in determining the appropriate
amount of expense to record for income taxes. These assump-
tions and estimates consider the taxing jurisdiction in which the
Company operates as well as current tax regulations. Accruals
are established for estimates of tax effects for certain transac-
tions and future projected profitability of the Company’s busi-
nesses based on management’s interpretation of existing facts
and circumstances. The Company adopted FIN 48 effective
April 1, 2007. See Note 12.
Advertising Costs. Advertising costs are charged to opera-
tions as incurred. The Company does not have any direct-
response advertising. Advertising costs, which includes trade
shows and conventions, were approximately $3,459, $2,580
and $2,159 for the years ended March 31, 2009, 2008
and 2007, respectively, and were included in selling, general
and administrative expenses in the Consolidated Statements
of Income.
Marketing Assistance Agreements. The Company has entered
into marketing assistance agreements with certain existing us-
ers of the Company’s products which provide the opportunity
for those users to earn commissions if and only if they host
specific site visits upon the Company’s request for prospective
customers which directly result in a purchase of the Company’s
software by the visiting prospects. Amounts earned by existing
users under this program are treated as a selling expense in
the period when earned.
Other Comprehensive Income. Comprehensive income in-
cludes all changes in Shareholders’ Equity during a period
except those resulting from investments by owners and dis-
tributions to owners. The components of accumulated other
comprehensive income (loss), net of income tax, consist of un-
realized losses on marketable securities of $(196) as of March
31, 2008. There were no other comprehensive income items
for the years ended March 31, 2009 or 2007.
62
Net income
Other comprehensive income:
Year Ended March 31,
2009
2008
2007
$ 46,119
$ 40,078
$ 33,232
Unrealized gain (loss) on marketable securities, net of tax
-
(196)
-
Comprehensive income
$ 46,119
$ 39,882
$ 33,232
Earnings per Share. Pursuant to SFAS No. 128, “Earnings Per
Share” (SFAS 128), the Company provides dual presentation
of “basic” and “diluted” earnings per share (EPS).
common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects
the potential dilution from common stock equivalents.
Basic EPS excludes dilution from common stock equiv-
alents and is computed by dividing income available to
The following table reconciles the weighted average shares outstanding for basic and diluted net income per share for the
periods presented.
Net income
Basic net income per common share:
Year ended March 31,
2009
2008
2007
$ 46,119
$ 40,078
$ 33,232
Weighted average of common shares outstanding
28,031
27,298
26,882
Basic net income per common share
$
1.65
$
1.47
$
1.24
Net income
$ 46,119
$ 40,078
$ 33,232
Diluted net income per common share:
Weighted average of common shares outstanding
Effect of potentially dilutive securities (options)
Weighted average of common shares outstanding - diluted
28,031
365
28,396
27,298
472
27,770
26,882
668
27,550
Diluted net income per common share
$
1.62
$
1.44
$
1.21
The computation of diluted net income per share does
not include 440,338, 279,752 and 92,500 options for the
years ended March 31, 2009, 2008 and 2007, respectively,
because their inclusion would have an anti-dilutive effect on
earnings per share.
Share-Based Compensation. On April 1, 2006, the
Company adopted SFAS No. 123R, “Share-Based Payment”
(SFAS 123R) which requires the measurement and recogni-
tion of compensation expense for all share-based payment
awards made to employees and directors based on estimated
fair values. SFAS 123R supersedes the Company’s previous
accounting under Accounting Principles Board Opinion (APB)
No. 25, “Accounting for Stock Issued to Employees” (APB 25).
The Company adopted SFAS 123R using the modi-
fied prospective transition method, which requires the appli-
cation of the accounting standard as of April 1, 2006, the
first day of the Company’s fiscal year 2007. The Company’s
Consolidated Statements of Income for the years ended
March 31, 2009, 2008 and 2007 reflect the impact of SFAS
123R. Share-based compensation expense recognized under
SFAS 123R for the years ended March 31, 2009, 2008 and
2007 was $1,977, $3,757 and $3,923, respectively, which
consisted of stock-based compensation expense related to
employee and director stock options and included $430 ex-
pensed under APB 25 for “in the money” options issued prior
to the adoption of SFAS 123R. Excess tax benefits from share-
based compensation are presented as cash outflows from
operating activities and cash inflows from financing activities.
The Company has elected to adopt the alternative transition
method provided in FASB Staff Position No. SFAS 123R-3 (FSP
123(R)-3) for calculating the tax effects of share-based com-
pensation pursuant to SFAS 123R. The alternative transition
method includes a simplified method to establish the begin-
ning balance of the additional paid-in capital (APIC pool) re-
lated to the tax effects of employee and director stock-based
compensation, and to determine the subsequent impact on the
APIC pool and the consolidated statement of cash flows of the
tax effects of employee and director share-based awards that
were outstanding upon adoption of SFAS 123R.
63
SFAS 123R requires companies to estimate 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.
The following table shows total stock-based compensation expense included in the Consolidated Statements of Income for
years ended March 31, 2009, 2008 and 2007, respectively.
Costs and expenses:
Cost of revenue
Research and development
Selling, general and administrative
Total share-based compensation
Year ended March 31,
2009
2008
2007
$
195
242
1,540
$
496
800
2,461
$
524
870
2,529
$ 1,977
$ 3,757
$ 3,923
Amounts capitalized in software development costs
(21)
(39)
(38)
Amounts charged against earnings, before income tax benefit
$ 1,956
$ 3,718
$ 3,885
Amount of related income tax benefit recognized
$
549
$
969
$
910
Sales Taxes. In accordance with the guidance of EITF Issue
No. 06-3, “How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in
the Income Statement” (EITF 06-3), the Company accounts for
sales taxes imposed on its goods and services on a net basis
in the Consolidated Statements of Income.
Use of Estimates. The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles in the United States of America (GAAP) requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the finan-
cial statements, and the reported amounts of revenue and
expenses during the reporting period. On an on-going basis,
the Company evaluates its estimates, including those related to
uncollectible receivables, vendor specific objective evidence,
valuation of marketable securities and ARS put option rights,
and income taxes and related credits and deductions. The
Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
New Accounting Pronouncements. On April 9, 2009, the
FASB issued three FSPs intended to provide additional ap-
plication guidance and enhanced disclosures regarding fair
value measurements and other-than-temporary impairments
of securities.
FSP FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,”
provides guidelines for making fair value measurements more
consistent with the principles presented in FASB Statement No.
157, “Fair Value Measurements.” FSP FAS 157-4 must be
applied prospectively and retrospective application is not
permitted. FSP FAS 157-4 is effective for interim and annual
periods ending after June 15, 2009, with early adoption per-
mitted for periods ending after March 15, 2009. An entity
early adopting FSP FAS 157-4 must also early adopt FSP FAS
115-2 and FAS 124-2.
FSP FAS 115-2 and FAS 124-2. “Recognition and Pres-
entation of Other-Than-Temporary Impairments,” provides ad-
ditional guidance designed to create greater clarity and con-
sistency in accounting for and presenting impairment losses on
debt securities. FSP FAS 115-2 and FAS 124-2 is effective for
interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009. An entity may early adopt this FSP only if it also elects
to early adopt FSP FAS 157-4.
64
FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments,” enhances consistency in
financial reporting by increasing the frequency of fair value
disclosures. FSP 107-1 and APB 28-1 is effective for interim
periods ending after June 15, 2009, with early adoption per-
mitted for periods ending after March 15, 2009. However,
an entity may early adopt these interim fair value disclosure
requirements only if it also elects to early adopt FSP FAS 157-4
and FSP FAS 115-2 and FAS 124-2.
The Company is currently evaluating the impact, if any,
that the adoption of these FSPs will have on its consolidated
financial statements.
On April 1, 2009, the FASB issued FASB Staff Position
(FSP) FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise
from Contingencies.” The FSP amends the guidance in FASB
Statement No. 141 (Revised 2007), “Business Combinations,”
to: (i) require that assets acquired and liabilities assumed in a
business combination that arise from contingencies be recog-
nized at fair value if fair value can be reasonably estimated.
If fair value of such an asset or liability cannot be reasonably
estimated, the asset or liability would generally be recognized
in accordance with FASB Statement No. 5, “Accounting for
Contingencies,” and FASB Interpretation No. 14, “Reasonable
Estimation of the Amount of a Loss;” (ii) eliminate the require-
ment to disclose an estimate of the range of outcomes of
recognized contingencies at the acquisition date. For unrecog-
nized contingencies, the FASB decided to require that entities
include only the disclosures required by Statement No. 5 and
that those disclosures be included in the business combination
footnote; and (iii) require that contingent consideration arrange-
ments of an acquiree assumed by the acquirer in a business
combination be treated as contingent consideration of the ac-
quirer and should be initially and subsequently measured at
fair value in accordance with Statement No. 141R. This FSP
is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period begin-
ning on or after December 15, 2008.
In November 2008, the FASB ratified EITF Issue No.
08-6, “Equity Method Investment Accounting Considerations”
(EITF 08-6). EITF 08-6 clarifies the accounting for certain trans-
actions and impairment considerations involving equity meth-
od investments. EITF 08-6 is effective for fiscal years beginning
after December 15, 2008, with early adoption prohibited.
The Company does not currently have any investments that
are accounted for under the equity method and therefore EITF
08-6 will not have a significant impact on the Company’s
consolidated financial statements.
08-7 clarifies the accounting for certain separately identifiable
intangible assets which an acquirer does not intend to actively
use but intends to hold to prevent its competitors from obtaining
access to them. EITF 08-7 requires an acquirer in a business
combination to account for a defensive intangible asset as
a separate unit of accounting which should be amortized to
expense over the period the asset diminishes in value. EITF
08-7 is effective for fiscal years beginning after December
15, 2008, with early adoption prohibited. The Company is
currently in the process of evaluating the impact the new EITF
will have on its consolidated financial statements.
In October 2008, the FASB issued Staff Position (FSP) FAS
157-3, “Determining the Fair Value of a Financial Asset When
The Market for That Asset Is Not Active” (FSP FAS 157-3), to
clarify the application of the provisions of SFAS No. 157, “Fair
Value Measurements,” in an inactive market and how an entity
would determine fair value in an inactive market. FSP FAS 157-3
was effective upon issuance. The Company has considered
the FSP in its determination of estimated fair values of its ARS
for the fiscal year 2009. The Company does not currently
have any assets that are inactive and therefore FAS 157-3 will
not have a significant impact on the Company’s consolidated
financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities” (FSP EITF
03-6-1). FSP EITF 03-6-1 concluded that unvested share-based
payment awards that contain nonforfeitable rights to dividends
or dividend equivalents (whether paid or unpaid) are partici-
pating securities and shall be included in the computation
of basic earnings per share (“EPS”) pursuant to the two-class
method. This FSP becomes effective on April 1, 2009. Early
adoption of the FSP is not permitted; however, it will apply
retrospectively to EPS data for all periods presented in the
financial statements or in financial data. We do not currently
anticipate that this FSP will have a material impact on the
Company’s EPS data in fiscal year 2010 or on EPS for any
prior periods presented in the financial data upon adoption.
In May 2008, the FASB issued SFAS No. 162, “The
Hierarchy of Generally Accepted Accounting Principles”
(SFAS 162). SFAS 162 defines the order in which accounting
principles that are generally accepted should be followed.
SFAS 162 is effective 60 days following the Securities and
Exchange Commission’s approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles”. We do not
expect the adoption of SFAS 162 to have a material impact
on the Company’s consolidated financial statements.
In November 2008, the FASB ratified EITF Issue No. 08-
7, “Accounting for Defensive Intangible Assets” (EITF 08-7). EITF
In April 2008, the FASB finalized FSP FAS No. 142-3,
“Determination of the Useful Life of Intangible Assets” (FSP
65
FAS 142-3). The position amends the factors that should be
considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible
asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The position applies to intangible assets that are ac-
quired individually or with a group of other assets and both
intangible assets acquired in business combinations and asset
acquisitions. FSP 142-3 is effective for fiscal years beginning
after December 15, 2008, and interim periods within those
fiscal years. Management is currently evaluating the impact of
the pending adoption of FSP FAS 142-3 on the consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 141
(Revised 2007), “Business Combinations” (SFAS 141(R)). SFAS
141(R) retains the fundamental requirements of the original pro-
nouncement requiring that the purchase method be used for
all business combinations. SFAS 141(R) defines the acquirer
as the entity that obtains control of one or more businesses in
the business combination, establishes the acquisition date as
the date that the acquirer achieves control and requires the
acquirer to recognize the assets acquired, liabilities assumed
and any noncontrolling interest at their fair values as of the
acquisition date. In addition, SFAS 141(R) requires expensing of
acquisition-related and restructure-related costs, remeasurement
of earn out provisions at fair value, measurement of equity secu-
rities issued for purchase at the date of close of the transaction
and non-expensing of in-process research and development
related intangibles. SFAS 141(R) applies prospectively to busi-
ness combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on
or after December 15, 2008. An entity may not apply it before
that date. This pronouncement will be applied by the Company
when it becomes effective and when or if the Company effec-
tuates a business combination, otherwise there is no impact on
the Company’s consolidated financial statements.
3. Cash and Cash Equivalents
At March 31, 2009 and 2008, the Company had cash and
cash equivalents of $70,180 and $59,046, respectively.
Cash and cash equivalents consist of cash, money market
funds and short-term U.S. Treasury securities with original
maturities of less than 90 days. The money market fund in
which the Company holds a portion of its cash invests in only
investment grade money market instruments from a variety of
industries, and therefore bears relatively low market risk. The
average maturity of the investments owned by the money mar-
ket fund is approximately two months.
4. Fair Value Measurements
Effective April 1, 2008, the Company implemented the re-
quirements of SFAS No. 157, “Fair Value Measurements”
(SFAS 157) for its financial assets and liabilities. SFAS 157
refines the definition of fair value, expands disclosure require-
ments about fair value measurements and establishes specific
requirements as well as guidelines for a consistent framework
to measure fair value. SFAS 157 defines fair value as the price
that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants.
Further, SFAS 157 requires the Company to maximize the use
of observable market inputs, minimize the use of unobservable
market inputs and disclose in the form of an outlined hierarchy
the details of such fair value measurements. SFAS 157 speci-
fies a hierarchy of valuation techniques based on whether
the inputs to a fair value measurement are considered to be
observable or unobservable in a marketplace. Observable
inputs reflect market data obtained from independent sources,
while unobservable inputs reflect the Company’s market as-
sumptions. This hierarchy requires the use of observable market
data when available. These two types of inputs have created
the following fair value hierarchy:
Level 1 Quoted market prices in active markets for identical
assets or liabilities;
Level 2 Observable inputs other than those included in
Level 1. For example, quoted prices for similar as-
sets in active markets or quoted prices for identical
assets in inactive markets; and
Level 3 Unobservable inputs reflecting management’s own
assumptions about the inputs used in estimating the
value of the asset.
The adoption of SFAS 157 did not have a material
impact on the Company’s consolidated financial position or
results of operations.
On February 12, 2008, the FASB amended the imple-
mentation of SFAS 157 related to non-financial assets and
liabilities until fiscal periods beginning after November 15,
2008. As a result, the Company has not applied the above
fair value procedures to its goodwill and long-lived asset
impairment analyses during the current year. The Company
believes that the adoption of SFAS 157 for non-financial as-
sets and liabilities will not have a material impact on its con-
solidated financial position or results of operations.
66
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis in accordance
with SFAS 157 as of March 31, 2009 and March 31, 2008:
Cash and cash equivalents
$ 70,180
$ 70,180
$ -
$ -
Balance as of
March 31, 2009
Quoted Prices in Active
Markets For Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Restricted cash
Marketable securities(1)
ARS put option rights
1,303
7,395
468
1,303
-
-
-
-
-
-
7,395
468
$ 79,346
$ 71,483
$ -
$ 7,863
Balance as of
March 31, 2008
Quoted Prices in Active
Markets For Identical
Assets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Cash and cash equivalents
$ 59,046
$ 59,046
$ -
$ -
Restricted cash
Marketable securities(1)
(1) Marketable securities consist of ARS.
-
22,624
$ 81,670
-
-
-
-
-
22,624
$ 59,046
$ -
$ 22,624
The fair value of the Company’s ARS, including the
Company’s ARS put option rights has been estimated by
management based on its assumptions of what market partici-
pants would use in pricing the asset in a current transaction, or
level 3 - unobservable inputs in accordance with SFAS 157,
and represents $7,863 and $22,624 or 9.9% and 27.7%,
of total financial assets measured at fair value in accordance
with SFAS 157 at March 31, 2009 and 2008, respectively.
Management used a model to estimate the fair value of these
securities that included certain level 2 inputs as well as as-
sumptions, such as a liquidity discount, credit rating of the is-
suers, based on management’s judgment, which are highly
subjective and therefore considered level 3 inputs in the fair
value hierarchy. The estimate of the fair value of the ARS could
change based on market conditions. For additional informa-
tion on cash and cash equivalents, restricted cash or market-
able securities, see Note 2.
The following table presents activity in the Company’s
assets measured at fair value using significant unobservable
inputs (Level 3) as defined by SFAS 157 as of and for the year
ended March 31, 2009:
Balance at March 31, 2008
$ 22,624
Transfer in/(out) of Level 3
Proceeds from sales (at par)
Unrealized loss, net of tax
Recognition of ARS put option rights
-
(14,825)
(404)
468
Balance at March 31, 2009
$
7,863
Upon execution of the Rights Agreement (see Note 2),
the Company elected to fair value the ARS put option rights un-
der SFAS No. 159, “The Fair Value Option for Financial Assets
and Liabilities”. The Company fair valued the ARS put option
rights at the inception of the Rights Agreement and is required
to do so each reporting period, with corresponding changes
in fair value being reported through earnings. The Company’s
valuation resulted in an estimated fair value of $468 for the
ARS put option rights as of March 31, 2009, which was rec-
ognized in other (expense) income within the Consolidated
Statement of Income for the year ended March 31, 2009 and
is included in other assets on the Balance Sheet as of March
31, 2009.
Interest income related to cash and cash equivalents and
marketable securities for each of the three years ended March
31, 2009 is as follows:
Year ended March 31,
2009
2008
2007
Interest income
$ 1,203
$ 2,661
$ 3,306
5. Business Combinations
Acquisition of Healthcare Strategic Initiatives
On May 20, 2008, the Company acquired HSI, a full-service
healthcare RCM company, resulting in HSI becoming a whol-
ly-owned subsidiary of QSI. HSI’s results of operations have
been included in the consolidated financial statements since
the date of acquisition.
67
This acquisition is a part of the Company’s growth strat-
egy for NextGen Practice Solutions. HSI operates under the
umbrella of NextGen Practice Solutions. Founded in 1996,
HSI currently provides RCM services to providers including
health systems, hospitals, and physicians in private practice
with an in-house team of employees including specialists in
medical billing, coding and compliance, payor credentialing,
and information technology. The Company intends to cross
sell both software and RCM services to the acquired customer
base of HSI and NextGen.
The purchase price totaled approximately $15,591 plus
up to approximately $1,650 in incentives tied to future perfor-
mance. The purchase price consisted of cash and restricted
QSI common stock, subject to restrictions on resale lapsing
over a two year period, and transaction related costs. The
value of the 232,081 shares of common stock issued was
determined based on a formula which took the average of
the closing price of QSI’s common shares during the 45 day
trading period ending on May 19, 2008. The total purchase
price for HSI is as follows:
Cash
Common stock
Direct transaction costs
Total purchase price
$
8,000
7,350
241
$ 15,591
The acquisition of HSI was accounted for as a purchase
business combination as defined in Statement of Financial
Accounting Standards No. 141, “Business Combinations”
(SFAS 141). Under the purchase method of accounting, the
purchase price was allocated to HSI’s tangible and intangi-
ble assets acquired and liabilities assumed based on their
estimated fair values as of May 20, 2008. The fair value
of the assets acquired and liabilities assumed represent man-
agement’s estimate of fair value. The Company is amortizing
the customer relationships intangible asset over six years and
the trade name over four years. The $10,839 assigned to
goodwill is expected to be deductible for tax purposes. See
Notes 6 and 7 for a discussion of goodwill and intangibles
acquired. As stated above, the Company has agreed to pay
additional consideration in future periods, based upon the at-
tainment by the acquired entity of defined operating objec-
tives. In accordance with SFAS 141, the Company does not
accrue contingent consideration obligations prior to attainment
of these objectives. At March 31, 2009, the maximum poten-
tial future consideration pursuant to such arrangements, to be
resolved over the following two years, is $1,650. Any such
payments would result in increases in goodwill.
68
The following table summarizes the allocation of the pur-
chase price:
Current assets (including restricted
cash of $1,470 and accounts receivable
of $2,176)
Equipment and improvements and other
long-term assets
Total tangible assets acquired
Customer relationships
Trade name
Goodwill
Current liabilities, including long-term debt
due within one year
Long-term debt
Net assets acquired
$
3,808
342
4,150
5,241
379
10,839
(4,369)
(649)
$ 15,591
The pro forma effects of this acquisition would not have
been material to the Company’s results of operations for the
year ended March 31, 2009 and therefore is not presented.
Acquisition of Practice Management Partners, Inc.
On October 28, 2008, the Company, through its NextGen
subsidiary, acquired PMP, a full-service healthcare RCM com-
pany, resulting in PMP becoming a wholly-owned subsidiary
of NextGen and, ultimately QSI. PMP’s results of operations
have been included in the consolidated financial statements
since the date of acquisition.
This acquisition is also part of the Company’s growth
strategy for NextGen Practice Solutions. Similar to HSI, PMP
operates under the umbrella of NextGen Practice Solutions.
Founded in 2001, PMP provides physician billing and technol-
ogy management services to healthcare providers, primarily
in the Mid-Atlantic region. The Company intends to cross sell
both software and RCM services to the acquired customer
base of PMP and NextGen.
The purchase price totaled approximately $19,700 plus
up to approximately $3,000 in incentives tied to future per-
formance. The purchase price consisted of $16,950 in cash,
including direct transaction costs and $2,750 in restricted QSI
common stock, subject to restrictions on resale lapsing over a
two year period, and transaction related costs. The value of
the 67,733 shares of common stock issued was determined
based on a formula which took the average of the closing
price of QSI’s common shares during the 45 day trading pe-
riod ending on October 27, 2008. The total purchase price
for PMP is as follows:
Cash
Common stock
Direct transaction costs
Total purchase price
$ 16,622
2,750
328
$ 19,700
The acquisition of PMP was accounted for as a pur-
chase business combination as defined in SFAS 141. Under
the purchase method of accounting, the purchase price was
allocated to PMP’s tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values as
of October 28, 2008. The fair value of the assets acquired
and liabilities assumed represent management’s estimate of
fair value. The Company is amortizing the customer relation-
ships intangible asset over nine years and the trade name
over four years. The $16,052 assigned to goodwill is not ex-
pected to be deductible for tax purposes. See Notes 6 and
7 for a discussion of goodwill and intangibles acquired. As
stated above, the Company has agreed to pay additional
consideration in future periods, based upon the attainment by
the acquired entity of defined operating objectives. In accor-
dance with SFAS 141, the Company does not accrue con-
tingent consideration obligations prior to attainment of these
objectives. At March 31, 2009, the maximum potential future
consideration pursuant to such arrangements, to be resolved
over the following two years, is $3,000. Any such payments
would result in increases in goodwill.
The following table summarizes the allocation of the pur-
chase price:
Current assets (including restricted
cash of $125 and accounts receivable
of $2,029)
Equipment and improvements and other
long-term assets
Total tangible assets acquired
Customer relationships
Trade name
Goodwill
Current liabilities, including long-term debt
due within one year
Long-term debt
Net assets acquired
$
2,518
1,485
4,003
3,559
259
16,052
(1,882)
(2,291)
$ 19,700
The pro forma effects of this acquisition would not have
been material to the Company’s results of operations for the
year ended March 31, 2009 and therefore is not presented.
6. Goodwill
In accordance with SFAS 142, the Company does not amor-
tize goodwill as the goodwill has been determined to have
indefinite useful life.
Goodwill consists of the following:
NextGen Healthcare Information Systems, Inc.
$ 1,840
March 31, 2009
Healthcare Strategic Initiatives
Practice Management Partners
Total
10,839
16,052
$ 28,731
7. Intangible Assets – Customer
Relationships and Trade Name
The Company had the following intangible assets, other than
capitalized software development costs, with determinable
lives as of March 31, 2009:
Customer
Relationships
Trade Name
Total
Balance as of
April 1, 2008
Acquisition
Amortization
Balance as of
March 31, 2009
$
-
$
-
$
-
8,800
(923)
637
(111)
9,437
(1,034)
$ 7,877
$ 526
$ 8,403
The following table represents the remaining estimated
amortization of intangible assets with determinable lives as of
March 31, 2009:
Year ending March 31,
2010
2011
2012
2013
2014
2015 and beyond
Total
$
1,428
1,428
1,428
1,317
1,269
1,533
$ 8,403
69
8. Capitalized Software Costs
As of March 31, 2009 and 2008, the Company had the following amounts related to capitalized software costs:
Gross carrying amount
Accumulated amortization
Net capitalized software costs
Aggregate amortization expense during the year
March 31, 2009
March 31, 2008
$
33,508
$
27,645
(23,956)
(18,793)
$
$
9,552
5,163
$
$
8,852
4,149
Activity related to net capitalized software costs for the years ended March 31, 2009 and 2008 is as follows:
Beginning of the year
Capitalization
Amortization
End of the year
March 31, 2009
March 31, 2008
$
8,852
$
6,982
5,863
(5,163)
6,019
(4,149)
$
9,552
$
8,852
The following table represents the remaining estimated amortization of capitalized software costs as of March 31, 2009:
Year ending March 31,
2010
2011
2012
Total
$
5,165
3,213
1,174
$
9,552
9. Composition of Certain Financial Statement Captions
Accounts receivable include amounts related to maintenance and services which were billed but not yet rendered as of the end
of the year. Undelivered maintenance and services are included on the accompanying Consolidated Balance Sheets as part
of the deferred revenue balance.
Accounts receivable, excluding undelivered software, maintenance and services
$ 64,003
$ 50,417
March 31, 2009
March 31, 2008
Undelivered software, maintenance and implementation services billed in
advance, included in deferred revenue
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
Inventories are summarized as follows:
Computer systems and components, net of reserve for obsolescence of
$210 and $223, respectively
Miscellaneous parts and supplies
Inventories, net
29,944
93,947
(3,877)
28,696
79,113
(2,528)
$ 90,070
$ 76,585
March 31, 2009
March 31, 2008
$
1,105
$
20
992
32
$
1,125
$
1,024
70
Equipment and improvements are summarized as follows:
Computer and electronic test equipment
Furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
Equipment and improvements, net
Accrued compensation and related benefits are summarized as follows:
Payroll, bonus and commission
Vacation
Accrued compensation and related benefits
Short and long-term deferred revenue are summarized as follows:
Maintenance
Implementation services
Annual license services
Undelivered software and other
Deferred Revenue
Other current liabilities are summarized as follows:
Care services liabilities
Accrued EDI expenses
Accrued royalties
Deferred rent
Customer deposits
Sales tax payable
Professional fees
Commission payable
Other accrued expenses
Other current liabilities
March 31, 2009 March 31, 2008
$ 15,384
$ 11,454
3,520
1,595
20,499
2,975
1,259
15,688
(13,743)
(10,915)
$
6,756
$
4,773
March 31, 2009
March 31, 2008
$
5,768
$
5,443
3,743
2,903
$
9,511
$
8,346
March 31, 2009
March 31, 2008
$
9,083
$ 10,175
28,655
8,176
2,191
25,929
6,532
2,259
$ 48,105
$ 44,895
March 31, 2009
March 31, 2008
$
1,303
$
1,258
933
782
674
602
409
385
-
-
216
607
621
765
600
346
2,542
1,239
$
8,888
$
4,394
10. Other Expense
Other expense for the year ended March 31, 2009 consisted
of impairment losses related to the fair value of the Company’s
ARS investments as well as gains recorded on its ARS Put
Option Rights. The Company recognized a pre-tax unrealized
impairment charge on its ARS of $730. At the same time, the
Company estimated the fair value of the ARS Put Option Rights
at $468. See Note 2.
11. Other Income – Gain from Life
Insurance Proceeds
On September 26, 2007, Mr. Gregory Flynn, Executive
Vice President and General Manager of the Company’s
QSI Division passed away. Mr. Flynn participated in the
Company’s deferred compensation plan which is funded
through the purchase of life insurance policies with the
Company named as beneficiary. As a result of Mr. Flynn’s
71
passing, for the year ended March 31, 2008 the Company
recorded additional compensation expense of $198 which
was offset by net insurance proceeds of $953. The additional
compensation expense was recorded in Selling, General and
Administrative Expenses and the insurance proceeds were re-
corded as Other Income in the Consolidated Statement of
Income during fiscal year 2008.
12. Income Taxes
During the years ended March 31, 2009, 2008 and 2007,
the Company claimed federal research and development tax
credits of $859, $779 and $787, respectively, and state re-
search and development tax credits of approximately $166,
$113 and $99, respectively. Due to the expiration of the
Internal Revenue Service statute related to research and de-
velopment credits on December 31, 2007, the Company’s
research and development credits for the year ended March
31, 2008 represent credits for the nine-month period from
April 1, 2007 through December 31, 2007. The Company
also claimed the qualified production activities deduction un-
der Section 199 of the Internal Revenue Code for $2,747,
$3,069 and $1,457 during the years ended March 31,
2009, 2008 and 2007, respectively. The research and devel-
opment credits and the qualified production activities income
deduction taken by the Company involve certain assumptions
and judgments regarding qualification of expenses under the
relevant tax code provisions.
The provision (benefit) for income taxes consists of the following components:
Current:
Federal taxes
State taxes
Total
Deferred:
Federal taxes
State taxes
Total
Total
Year ended March 31,
2009
2008
2007
$ 18,818
$ 18,120
$ 18,106
4,992
23,810
4,348
22,468
4,488
22,594
2,802
596
3,398
333
124
457
(1,347)
(295)
(1,642)
$ 27,208
$ 22,925
$ 20,952
The provision for income taxes differs from the amount computed at the federal statutory rate as follows:
Year ended March 31,
Current:
Federal income tax statutory rate
Increase (decrease) resulting from:
State income taxes, net of Federal benefit
Research and development tax credits
Qualified Production Activities Income Deduction
Other
Effective income tax rate
2009
35.0%
5.2
(1.3)
(1.4)
(0.4)
37.1%
2008
35.0%
4.8
(1.3)
(1.8)
(0.3)
36.4%
2007
35.0%
5.0
(1.7)
(0.9)
1.3
38.7%
72
The net deferred tax assets (liabilities) in the accompanying Consolidated Balance Sheets consist of the following:
March 31, 2009 March 31, 2008
Deferred tax assets:
Deferred revenue and allowance for doubtful accounts
$
3,271
$ 4,534
Inventory valuation
Purchased in-process research and development
Intangibles assets
Accrued compensation and benefits
Deferred compensation
State income taxes
Compensatory stock option expense
Unrealized loss on marketable securities
Other
Total deferred tax assets
Deferred tax liabilities:
Accelerated depreciation
Capitalized software
Intangibles assets
Prepaid expense
Total deferred tax liabilities
Deferred tax assets (liabilities), net
100
912
-
1,955
789
185
125
-
779
137
1,187
102
1,701
806
92
1,139
130
801
8,116
10,629
(1,114)
(4,126)
(1,412)
(2,036)
(8,688)
(545)
(3,746)
-
(1,516)
(5,807)
$
(572)
$ 4,822
The deferred tax assets and liabilities have been shown
net in the accompanying Consolidated Balance Sheets based
on the long-term or short-term nature of the items which give
rise to the deferred amount. No valuation allowance has been
made against the deferred tax assets as management expects
to receive the full benefit of the assets recorded.
On April 1, 2007, the Company adopted the provisions
of FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes (FIN 48) an interpretation of FASB Statement
No. 109 (SFAS 109).” The adoption of the provisions of
FIN 48 had no material effect on the consolidated financial
statements. As a result, there was no cumulative effect related
to adopting FIN 48. However, certain amounts have been
reclassified in the Company’s Consolidated Balance Sheets
in order to comply with the requirements of the statement.
At adoption, the Company had $394 of unrecognized tax
benefits, $89 of which would affect the Company’s effec-
tive tax rate if recognized in the future. A reconciliation of the
beginning and ending amount of unrecognized tax benefits,
which is recorded in income taxes payable in the Company’s
Consolidated Balance Sheet, is as follows:
Balance at April 1, 2008
Additions for prior year tax positions
Reductions for prior year tax positions
Balance at March 31, 2009
$ 613
15
(561)
$
67
The total amount of unrecognized tax benefit that, if rec-
ognized, would decrease the income tax provision is $67.
The Company’s continuing practice is to recognize esti-
mated interest and/or penalties related to income tax matters
in general and administrative expenses. The Company had
approximately $12 and $8 of accrued interest at March 31,
2009 and 2008, respectively. No penalties were accrued.
Uncertain tax positions
The Company’s income tax returns filed for tax years 2005
through 2007 and 2004 through 2007 are subject to ex-
amination by the federal and state taxing authorities, respec-
tively. The Company is currently not under examination by the
Internal Revenue Service (IRS). However, the Company is un-
der routine examination by three states. The Company does
not anticipate that total unrecognized tax benefits will signifi-
cantly change due to the settlement of audits or the expiration
of statute of limitations within the next twelve months.
13. Employee Benefit Plans
The Company has a 401(k) plan available to substantially all
of its employees. Participating employees may defer up to the
Internal Revenue Service limit based on the Internal Revenue
Code per year. The annual contribution is determined by a
formula set by the Company’s Board of Directors and may
73
include matching and/or discretionary contributions. The
amount of the Company match is discretionary and subject to
change. The retirement plans may be amended or discontin-
ued at the discretion of the Board of Directors. Contributions
of $357, $317 and $250 were made by the Company to
the 401(k) plan for the fiscal years ended March 31, 2009,
2008 and 2007, respectively.
The Company has a deferred compensation plan (the
Deferral Plan) for the benefit of those officers and employees
who qualify for inclusion. Participating employees may defer
up to 75% of their salary and 100% of their annual bonus for
a Deferral Plan year. In addition, the Company may, but is not
required to, make contributions into the Deferral Plan on behalf
of participating employees, and the amount of the Company
match is discretionary and subject to change. Each employee’s
deferrals together with earnings thereon are accrued as part of
the long-term liabilities of the Company. Investment decisions
are made by each participating employee from a family of
mutual funds (“insurance subaccounts”). Deferred compensa-
tion liability was $1,838 and $1,906 at March 31, 2009 and
2008, respectively. To offset this liability, the Company has
purchased life insurance policies on some of the participants.
The Company is the owner and beneficiary of the policies
and the cash values are intended to produce cash needed
to help make the benefit payments to employees when they
retire or otherwise leave the Company. The Company intends
to hold the life insurance policy until the death of the plan
participant. The net cash surrender value of the life insurance
policies for deferred compensation was $1,715 and $1,858
at March 31, 2009 and 2008, respectively. The values of the
life insurance policies and the related Company obligation are
included on the accompanying Consolidated Balance Sheets
in long-term other assets and long-term deferred compensa-
tion, respectively. The Company made contributions of $29 to
the Deferral Plan for each of the fiscal years ended March 31,
2009, 2008 and 2007, respectively.
The Company has a voluntary employee stock contribu-
tion plan for the benefit of full-time employees. The plan is
designed to allow certain employees to acquire shares of the
Company’s common stock through automatic payroll deduc-
tion. Each eligible employee may authorize the withholding
of up to 10% of his/her gross payroll each pay period to
be used to purchase shares on the open market by a bro-
ker designated by the Company. In addition, the Company
will match 5% of each employee’s contribution and will pay
all brokerage commissions and fees in connection with each
purchase. The amount of the Company match is discretionary
and subject to change. The plan is not intended to be an
employee benefit plan under the Employee Retirement Income
Security Act of 1974, and is therefore not required to comply
74
with that Act. Contributions of approximately $14, $28 and
$10 were made by the Company for the fiscal years ended
March 31, 2009, 2008 and 2007, respectively.
14. Employee Stock Option Plans
In September 1998, the Company’s shareholders approved a
stock option plan (the “1998 Plan”) under which 4,000,000
shares of Common Stock were reserved for the issuance of op-
tions. The 1998 Plan provides that employees, directors and
consultants of the Company, at the discretion of the Board of
Directors or a duly designated compensation committee, be
granted options to purchase shares of Common Stock. The
exercise price of each option granted shall be determined
by the Board of Directors at the date of grant, and options
under the 1998 Plan expire no later than ten years from the
grant date. Options granted will generally become exercis-
able in accordance with the terms of the agreement pursuant
to which they were granted. Certain option grants to direc-
tors became exercisable three months from the date of grant.
Upon an acquisition of the Company by merger or asset sale,
each outstanding option may be subject to accelerated vest-
ing under certain circumstances. The 1998 Plan terminated
on December 31, 2007. As of March 31, 2009, there were
496,751 outstanding options related to this Plan.
In October 2005, the Company’s shareholders ap-
proved a stock option and incentive plan (the “2005 Plan”)
under which 2,400,000 shares of Common Stock have been
reserved for the issuance of awards, including stock options,
incentive stock options and non-qualified stock options, stock
appreciation rights, restricted stock, unrestricted stock, restrict-
ed stock units, performance shares, performance units (includ-
ing performance options) and other share-based awards. The
2005 Plan provides that employees, directors and consultants
of the Company, at the discretion of the Board of Directors or a
duly designated compensation committee, be granted awards
to purchase shares of Common Stock. The exercise price of
each award granted shall be determined by the Board of
Directors at the date of grant in accordance with the terms of
the 2005 Plan, and under the 2005 Plan awards expire no
later than ten years from the grant date. Options granted will
generally become exercisable in accordance with the terms
of the agreement pursuant to which they were granted. Upon
an acquisition of the Company by merger or asset sale, each
outstanding award may be subject to accelerated vesting un-
der certain circumstances. The 2005 Plan terminates on May
25, 2015, unless terminated earlier by the Board. At March
31, 2009, 2,076,699 shares were available for future grant
under the 2005 Plan. As of March 31, 2009, there were
323,331 outstanding options related to this Plan.
A summary of stock option transactions during the years ended March 31, 2009, 2008 and 2007 is as follows:
Number of Shares
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Life
Aggregate Intrinsic Value
(in thousands)
Outstanding, March 31, 2006
1,798,372
Granted
Exercised
Forfeited/Canceled
75,000
(411,414)
(8)
Outstanding, March 31, 2007
1,461,950
Granted
Exercised
Forfeited/Canceled
225,500
(325,266)
(58,450)
Outstanding, March 31, 2008
1,303,734
Granted
Exercised
Forfeited/Canceled
298,331
(697,083)
(84,900)
Outstanding, March 31, 2009
820,082
$ 16.78
$ 38.36
$ 14.74
$
3.25
$ 18.46
$ 38.78
$ 14.64
$ 21.12
$ 22.81
$ 38.71
$ 17.96
$ 25.93
$ 32.39
-
-
-
-
-
4.31
2.48
3.33
3.40
4.62
2.27
2.89
3.63
-
-
$ 10,393
-
-
-
$
4,955
-
$ 12,220
-
$ 17,182
-
-
Vested and expected to vest,
March 31, 2009
811,056
$ 32.32
3.62
$ 10,496
Exercisable, March 31, 2007
Exercisable, March 31, 2008
Exercisable, March 31, 2009
520,650
654,298
354,737
$ 20.32
$ 19.90
$ 24.25
-
-
-
-
2.84
$
7,448
The Company continues to utilize the Black-Scholes valuation model for estimating the fair value of share-based compensa-
tion after the adoption of SFAS 123R with the following assumptions:
Expected life
Expected volatility
Expected dividends
Risk-free rate
Year Ended
March 31, 2009
4.01 years
42.00% - 46.70%
2.90% - 3.50%
1.07% - 3.40%
Year Ended
March 31, 2008
3.75 - 4.01 years
42.37% - 44.81%
2.67% - 3.38%
2.46% - 5.09%
Year Ended
March 31, 2007
3.75 - 4.75 years
47.70% - 48.50%
2.05% - 2.36%
4.53% - 5.09%
During the year ended March 31, 2009, 298,331
options were granted under the 2005 Plan and no options
were granted under the 1998 Plan. During the year ended
March 31, 2008, 25,000 options were granted under the
2005 Plan and 200,500 were granted under the 1998
Plan. The Company issues new shares to satisfy option exer-
cises. Based on historical experience of option cancellations,
the Company has estimated an annualized forfeiture rate of
1.94% for employee options and 0.0% for director options for
the year ended March 31, 2009. Based on historical expe-
rience of option cancellations, the Company has estimated
an annualized forfeiture rate ranging of 2.0% for employee
options and 0.0% for director options for the year ended
March 31, 2008. The weighted average grant date fair value
of stock options granted during the years ended March 31,
2009, 2008 and 2007 was $11.22, $12.41 and $14.33
per share, respectively. The expected dividend yield is the
average dividend rate during a period equal to the expected
life of the option.
On November 5, 2008, the Board of Directors grant-
ed a total of 80,141 options under the Company’s 2005
Plan to selected employees at an exercise price equal to the
market price of the Company’s common stock on the date of
grant ($42.20 per share). The options vest in four equal an-
nual installments beginning November 5, 2009 and expire
on November 5, 2013. The fair value of these options was
$12.48 per share.
On September 9, 2008, the Board of Directors granted
a total of 35,000 options under the Company’s 2005 Plan
to non-management directors pursuant to the Company’s pre-
viously announced compensation plan for non-management
75
directors, at an exercise price equal to the market price of the
Company’s common stock on the date of grant ($45.61 per
share). The options vest in four equal annual installments begin-
ning September 9, 2009 and expire on September 9, 2015.
The fair value of these options was $13.21 per share.
On August 18, 2008, the Board of Directors granted a
total of 50,000 options under the Company’s 2005 Plan to
an employee at an exercise price equal to the market price of
the Company’s common stock on the date of grant ($40.08
per share). The options vest in four equal annual installments
beginning August 18, 2009 and expire on August 18, 2013.
The fair value of these options was $11.72 per share.
On August 11, 2008, the Board of Directors granted a
total of 25,000 options under the Company’s 2005 Plan to se-
lected employees at an exercise price equal to the market price
of the Company’s common stock on the date of grant ($40.71
per share). The options vest in four equal annual installments
beginning August 11, 2009 and expire on August 11, 2013.
The fair value of these options was $11.96 per share.
On June 13, 2008, the Board of Directors granted a
total of 108,190 options under the Company’s 2005 Plan to
selected employees at an exercise price equal to the market
price of the Company’s common stock on the date of grant
($32.79 per share). The options vest in four equal annual in-
stallments beginning June 13, 2009 and expire on June 13,
2013. The fair value of these options was $9.24 per share.
On May 31, 2008, the Board of Directors approved a
performance-based equity incentive program for employees
to be awarded options to purchase the Company’s common
stock based on meeting certain target increases in earnings
per share performance and revenue growth during fiscal year
2009. Under the program, options may also be granted as
an incentive to prospective employees to join the Company.
If earned, 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 five years, vesting in
four equal installments commencing one year following the
date of grant. The maximum number of options available un-
der the performance-based equity incentive program plan is
285,000, of which 20,000 is reserved for new employees
(such new employee grants not being subject to the earnings
and revenue criteria set forth above). Based on performance
versus established plan targets, no expense related to the per-
formance plan was recorded for the year ended March 31,
2009 and no options were issued under the program in fiscal
year 2009.
On February 8, 2008, the Board of Directors granted
25,000 options under the Company’s 2005 Plan to selected
employees, at an exercise price equal to the market price of
the Company’s common stock on the date of grant ($33.51
per share). The options vest in four equal annual installments
beginning February 8, 2009 and expire on February 8,
2013. The fair value of these options was $9.42 per share.
On November 5, 2007, the Board of Directors granted
6,000 options under the Company’s 1998 Plan to an em-
ployee, at an exercise price equal to the market price of the
Company’s common stock on the date of grant ($33.25 per
share). The options vest in four equal annual installments begin-
ning November 5, 2008 and expire on November 5, 2012.
The fair value of these options was $9.69 per share.
On August 9, 2007, the Board of Directors granted a
total of 35,000 options under the Company’s 1998 Plan to
non-management directors pursuant to the Company’s previ-
ously announced compensation plan for non-management
directors, at an exercise price equal to the market price of the
Company’s common stock on the date of grant ($43.26 per
share). The options vest in four equal annual installments begin-
ning August 9, 2008 and expire on August 9, 2012. The fair
value of these options was $12.97 per share.
On June 12, 2007, the Board of Directors granted a
total of 159,500 options under a previously approved perfor-
mance-based equity incentive program for selected employ-
ees based on fiscal year 2007 performance. These shares
were issued under the Company’s 1998 Stock Option Plan at
an exercise price equal to the market price of the Company’s
common stock on the date of grant ($38.83 per share). The
options vest in four equal annual installments beginning June
12, 2008 and expire on June 12, 2012. The fair value of
these options was $12.86 per share.
On September 20, 2006, the Board of Directors granted
a total of 35,000 options under the Company’s 1998 Plan
to non-management directors pursuant to the Company’s pre-
viously announced compensation plan for non-management
directors, at an exercise price equal to the market price of the
Company’s common stock on the date of grant ($39.81 per
share). The options vest in four equal annual installments be-
ginning September 20, 2007 and expire on September 20,
2013. The fair value of these options was $15.52 per share.
On August 11, 2006, the Board of Directors granted a
total of 40,000 options under the Company’s 1998 Plan to
selected employees at an exercise price equal to the market
price of the Company’s common stock on the date of the
grant ($37.09 per share). The options vest in four equal an-
nual installments beginning August 11, 2007 and expire on
August 11, 2011. The fair value of these options was $13.29
per share.
76
at various dates through May 2013 with rent escalation
clauses. Rent expense related to these leases is recognized
on a straight-line basis over the lease terms. Rent expense for
the years ended March 31, 2009, 2008 and 2007 was
$3,560, $2,737 and $2,329, respectively. Rental commit-
ments under these agreements are as follows:
Year Ending March 31,
2010
2011
2012
2013
2014
$ 4,475
4,311
2,439
985
135
$ 12,345
Commitments and Guarantees. Software license agreements
in both the QSI and NextGen Divisions include a perfor-
mance guarantee that the Company’s software products will
substantially operate as described in the applicable program
documentation for a period of 365 days after delivery. To
date, the Company has not incurred any significant costs as-
sociated with these warranties and does not expect to incur
significant warranty costs in the future. Therefore, no accrual
has been made for potential costs associated with these war-
ranties. Certain arrangements also include performance guar-
antees related to response time, availability for operational
use, and other performance-related guarantees. Certain ar-
rangements also include penalties in the form of maintenance
credits should the performance of the software fail to meet
the performance guarantees. To date, the Company has not
incurred any significant costs associated with these warranties
and does not expect to incur significant warranty costs in the
future. Therefore, no accrual has been made for potential costs
associated with these warranties.
The Company has historically offered short-term rights of
return in certain sales arrangements. If the Company is able
to estimate returns for these types of arrangements and all
other criteria for revenue recognition have been met, revenue
is recognized and these arrangements are recorded in the
consolidated financial statements. If the Company is unable
to estimate returns for these types of arrangements, revenue is
not recognized in the consolidated financial statements until
the rights of return expire, provided also, that all other criteria
of revenue recognition have been met.
On July 25, 2006, the Board of Directors approved a
performance-based equity incentive program for employees
to be awarded options to purchase the Company’s common
stock based on meeting certain target increases in earnings
per share performance and revenue growth during fiscal
year 2007. 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 five years, vest in four
equal installments commencing one year following the date
of grant. The maximum number of options originally available
under the performance-based equity incentive program plan
was 115,000. On January 29, 2007, a committee comprised
of all the independent directors of the Board of Directors modi-
fied the Company’s previously approved performance based
equity incentive program for employees. Modifications to the
program included an increase in the maximum number of op-
tions available under the program from 115,000 to 290,000
and revisions to certain revenue targets. Compensation ex-
pense of $425 for these options was recorded in the year
ended March 31, 2007. A total of 159,500 options was
granted during the quarter ended June 30, 2007 based on
the achievement of certain fiscal 2007 revenue and earn-
ings per share performance targets included in the fiscal year
2007 equity incentive program.
Non-vested stock option award activity, including
awards for the year ended March 31, 2009, is summarized
as follows:
Weighted-
Average
Grant Date
Fair Value per
Share
Non-vested
Number of
Shares
Non-vested, March 31, 2008
649,436
$
9.57
Granted
Vested
298,331
$ 11.22
(397,522)
$
8.14
Forfeited/Canceled
(84,900)
$ 10.17
Non-vested, March 31, 2009
465,345
$ 11.74
As of March 31, 2009, $5,282 of total unrecognized
compensation costs related to stock options is expected to
be recognized over a weighted average period of 4.23
years. This amount does not include the cost of new options
that may be granted in future periods nor any changes in the
Company’s forfeiture percentage. The total fair value of shares
vested during the year ended March 31, 2009 was $3,236.
15. Commitments, Guarantees
and Contingencies
Rental Commitments. The Company leases facilities and of-
fices under irrevocable operating lease agreements expiring
77
The Company’s standard sales agreements in the
NextGen Division contain an indemnification provision pur-
suant to which it shall indemnify, hold harmless, and reim-
burse the indemnified party for losses suffered or incurred by
the indemnified party in connection with any United States
patent, any copyright or other intellectual property infringe-
ment claim by any third party with respect to its software.
The QSI Division arrangements occasionally utilize this type
of language as well. As the Company has not incurred any
significant costs to defend lawsuits or settle claims related to
these indemnification agreements, the Company believes that
its estimated exposure on these agreements is currently mini-
mal. Accordingly, the Company has no liabilities recorded for
these indemnification obligations.
From time to time, the Company offers future purchase
discounts on its products and services as part of its sales ar-
rangements. Discounts which are incremental to the range of
discounts reflected in the pricing of the other elements of the
arrangement, which are incremental to the range of discounts
typically given in comparable transactions, and which are sig-
nificant, are treated as an additional element of the contract
to be deferred. Amounts deferred related to future purchase
options are not recognized until either the customer exercises
the discount offer or the offer expires.
The Company has entered into marketing assistance agree-
ments with existing users of the Company’s products which pro-
vide the opportunity for those users to earn commissions if and
only if they host specific site visits upon the Company’s request
for prospective customers which directly result in a purchase
of the Company’s software by the visiting prospects. Amounts
earned by existing users under this program are treated as a
selling expense in the period when earned.
Litigation. The Company has experienced certain legal claims
by parties asserting that it has infringed certain intellectual
property rights. The Company believes that these claims are
without merit and the Company has defended them vigor-
ously. However, in order to avoid the further legal costs and
diversion of management resources it is reasonably possible
that a settlement may be reached which could result in a
liability to the Company. However, at this time it is not possible
to estimate with reasonable certainty what amount, if any, may
be incurred as a result of a settlement. Litigation is inherently
uncertain and always difficult to predict.
16. Operating Segment Information
The Company has prepared operating segment information in
accordance with SFAS 131 “Disclosures About Segments of
an Enterprise and Related Information,” to report components
that are evaluated regularly by its chief operating decision
maker, or decision making group in deciding how to allocate
resources and in assessing performance. Reportable oper-
ating segments include the NextGen Division and the QSI
Division. The results of operations related to the HSI and PMP
acquisitions are included in the NextGen Division.
The two divisions operate largely as stand-alone opera-
tions, with each division maintaining its own distinct product
lines, product platforms, development, implementation and
support teams, sales staffing, and branding. The two divisions
share the resources of the Company’s “corporate office” which
includes a variety of accounting and other administrative func-
tions. Additionally, there are a small number of clients who are
simultaneously utilizing software from each of the Company’s
two divisions.
The QSI Division, co-located with the Company’s
Corporate Headquarters in Irvine, California, currently focuses
on developing, marketing and supporting software suites sold
to dental and certain niche medical practices. In addition,
the division supports a number of medical clients that utilize
the division’s UNIX based medical practice management soft-
ware product. The NextGen Division, with headquarters in
Horsham, Pennsylvania, and significant locations in Atlanta,
Georgia, St. Louis, Missouri and Hunt Valley, Maryland,
focuses principally on developing and marketing products and
services for medical practices.
The accounting policies of the Company’s operating seg-
ments are the same as those described in Note 2 – Summary
of Significant Accounting Policies, except that the disaggre-
gated financial results of the segments reflect allocation of
certain functional expense categories consistent with the basis
and manner in which Company management internally disag-
gregates financial information for the purpose of assisting in
making internal operating decisions. Certain corporate over-
head costs, such as executive and accounting department
personnel-related expenses, are not allocated to the individual
segments by management. Management evaluates perfor-
mance based on stand-alone segment operating income.
Because the Company does not evaluate performance based
on return on assets at the operating segment level, assets are
not tracked internally by segment. Therefore, segment asset
information is not presented. All of the recorded goodwill at
March 31, 2009 relates to the Company’s NextGen Division
including HSI and PMP.
78
Operating segment data for the three years ended March 31 was as follows:
2009
Revenue
QSI Division
NextGen Division
Unallocated
Corporate
Expenses
Consolidated
$ 15,852
$ 229,663
$
-
$
245,515
Operating income (loss)
3,385
83,778
(14,760)
72,403
2008
Revenue
Operating income (loss)
2007
Revenue
Operating income (loss)
16,037
170,463
-
3,662
66,558
(10,831)
186,500
59,389
16,589
4,391
140,576
-
56,317
(9,830)
157,165
50,878
17. Subsequent Events
On May 27, 2009, the Board approved a quarterly cash
dividend of $0.30 per share on the Company’s outstanding
shares of common stock, payable to shareholders of record
as of June 12, 2009 with an expected distribution date on or
about July 6, 2009.
79
18. Selected Quarterly Operating Results (unaudited)
The following table presents quarterly unaudited consolidated financial information for the eight quarters in the period ended
March 31, 2009. Such information is presented on the same basis as the annual information presented in the accompanying
consolidated financial statements. In management’s opinion, this information reflects all adjustments that are necessary for a fair
presentation of the results for these periods.
06/30/07
09/30/07
12/31/07
03/31/08
06/30/08
09/30/08
12/31/08
03/31/09
Quarter Ended (Unaudited)
Revenues:
Software, hardware and supplies
Implementation and training services
System sales
Maintenance
Electronic data interchange services
RCM and related services
Other services
Maintenance, EDI, RCM and other
services
$ 16,739 $ 18,514 $ 20,591 $ 20,519 $ 21,369 $ 21,297 $ 22,336 $ 20,384
3,629
24,013
2,675
25,011
3,585
24,954
3,115
23,706
3,182
21,696
3,486
24,783
3,861
24,380
3,248
19,987
12,559
5,024
134
4,328
13,442
5,406
222
4,380
14,861
5,739
256
3,528
15,593
6,281
259
4,719
17,136
6,670
1,957
4,507
17,234
6,985
4,527
5,452
19,152
8,008
6,835
6,473
19,340
7,859
8,112
6,507
22,045
23,450
24,384
26,852
30,270
34,198
40,468
41,818
Total revenue
42,032
45,146
48,090
51,232
55,224
58,981
65,479
65,831
Cost of revenue:
Software, hardware and supplies
2,488
2,477
2,984
2,938
3,486
3,395
3,030
Implementation and training services
2,409
2,423
2,638
2,871
3,015
2,626
2,143
Total cost of system sales
4,897
4,900
5,622
5,809
6,501
6,021
5,173
Maintenance
Electronic data interchange services
RCM and related services
Other services
Total cost of maintenance, EDI, RCM
and other services
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs
Total operating expenses
Income from operations
Interest income
Other income (expense)
Income before provision for income
taxes
Provision for income taxes
Net income
Net income per share
Basic*
Diluted*
Weighted average shares outstanding:
Basic
Diluted
Dividends declared per common share
3,127
3,509
98
2,911
3,033
3,742
138
2,962
3,131
4,162
166
3,067
3,155
4,363
156
3,553
3,082
4,891
1,305
3,448
2,947
5,256
3,132
3,866
2,826
5,541
4,475
5,085
9,645
14,542
27,490
9,875
14,775
30,371
10,526
16,148
31,942
11,227
17,036
34,196
12,726
19,227
35,997
15,201
21,222
37,759
17,927
23,100
42,379
19,566
25,341
40,490
12,643
2,800
15,443
12,047
739
-
13,188
2,688
15,876
14,495
645
-
13,283
2,874
16,157
15,785
710
953
14,146
2,988
17,134
17,062
567
-
15,252
3,119
18,371
17,626
374
-
18,283
3,342
21,625
16,134
340
-
18,601
3,624
22,225
20,154
328
-
18,309
3,692
22,001
18,489
161
(279)
12,786
4,846
18,371
7,015
$ 7,940 $ 9,672 $ 11,214 $ 11,252 $ 11,114 $ 10,499 $ 13,150 $ 11,356
17,448
6,234
18,000
6,886
20,482
7,332
16,474
5,975
15,140
5,468
17,629
6,377
$ 0.29 $ 0.35 $ 0.41 $ 0.41 $ 0.40 $ 0.38 $ 0.46 $ 0.40
$ 0.29 $ 0.35 $ 0.40 $ 0.41 $ 0.40 $ 0.37 $ 0.46 $ 0.40
27,134
27,657
28,393
28,526
$ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.30 $ 0.30 $ 0.30
27,465
27,771
27,930
28,211
27,408
27,712
28,340
28,473
27,362
27,696
27,287
27,718
3,273
2,502
5,775
3,004
5,686
5,762
5,114
*Quarterly EPS will not sum to annual EPS due to rounding
80
Schedule II
Allowance For Doubtful Accounts
(in thousands)
Balance at
Beginning of Year
Additions Charged to
Costs and Expenses
$
$
$
2,528
2,438
2,556
$
$
$
2,089
1,171
1,480
Allowance For Inventory Obsolescence
(in thousands)
Balance at
Beginning of Year
Additions Charged to
Costs and Expenses
$
$
$
223
324
304
$
$
$
-
52
35
Deductions
$
(740)
$ (1,081)
$ (1,598)
Deductions
$
(13)
$ (153)
$
(15)
Balance at
End of Year
$
$
$
3,877
2,528
2,438
Balance at
End of Year
$
$
$
210
223
324
Index to Exhibits Attached to This Report
For the Year Ended
March 31, 2009
March 31, 2008
March 31, 2007
For the Year Ended
March 31, 2009
March 31, 2008
March 31, 2007
Exhibit
Number Description
21
23
31.1
31.2
32.1
List of Subsidiaries
Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP
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
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
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
Exhibit 21
Quality Systems, Inc. – List of Subsidiaries
1.
2.
3.
NextGen Healthcare Information Systems, Inc.
Lackland Acquisition II, LLC dba Healthcare Strategic Initiatives
Practice Management Partners, Inc.
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We have issued our reports dated May 27, 2009, with respect to the consolidated financial statements, schedule, and internal
control over financial reporting included in the Annual Report of Quality Systems, Inc. on Form 10-K for the year ended March
31, 2009. We hereby consent to the incorporation by reference of said reports in the Registration Statements of Quality Systems,
Inc. on (i) Forms S-8 (File No. 33-31949, effective November 6, 1989, File No. 33-63131, effective September 10, 1989, File
No. 333-67115, effective November 12, 1998 and File No. 333-129752, effective November 16, 2005) and (ii) Form S-3
(File No. 333-155489, effective December 4, 2008).
/s/ GRANT THORNTON LLP
Irvine, California
May 27, 2009
81
Exhibit 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
I, Steven T. Plochocki, certify that:
1.
2.
3.
4.
I have reviewed this Form 10-K of Quality Systems, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be de-
signed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: May 29, 2009
82
By: /s/ Steven Plochocki
Steven T. Plochocki,
Chief Executive Officer
(Principal Executive Officer)
Exhibit 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
I, Paul A. Holt, certify that:
1.
2.
3.
4.
I have reviewed this Form 10-K of Quality Systems, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be de-
signed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted account-
ing principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial report-
ing; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Date: May 29, 2009
By: /s/ Paul Holt
Paul A. Holt,
Chief Financial Officer
(Principal Accounting Officer)
83
Exhibit 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
In connection with the annual report on Form 10-K of Quality Systems, Inc. (the “Company”) for the year ended March 31,
2009 (the “Report”), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer
of the Company, respectively, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: May 29, 2009
Dated: May 29, 2009
By: /s/ Steven Plochocki
Steven T. Plochocki
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Paul Holt
Paul A. Holt
Chief Financial Officer
(Principal Accounting Officer)
84
C O M P A N Y P R O F I L E
C O R P O R A T E I N F O R M A T I O N
Quality Systems, Inc. (NASDAQ:QSII) and its NextGen Healthcare Information Systems
subsidiary develop and market computer-based practice management, electronic health records
and revenue cycle management applications as well as connectivity products and services for
medical and dental group practices.
F I N A N C I A L H I G H L I G H T S
Fiscal year ended March 31,
2009
2008
2007
2006
2005
Revenue
Net income
$245,515 $186,500 $157,165 $119,287
$88,961
46,119
40,078
33,232
23,322
16,109
Diluted earnings per share
$1.62
$1.44
$1.21
$0.85
$0.61
Cash dividends declared per share
$1.15
$1.00
$1.00
$0.875
$0.75
Total shareholders’ equity
$155,567 $113,705
$91,246
$72,409
$62,731
(in thousands, except per share amounts)
A B O U T T H E C O V E R
The front cover is a representation of a geometric shape known as a fractal. A fractal is divisible into parts, each of which
is a smaller copy of the whole. Similarly, Quality Systems’ computer-based solutions for the healthcare industry, such as
practice management, patient records and revenue cycle management applications, can be customized into parts to meet
the specifi c needs of a medical and/or dental practice. Currently used by more than 55,000 physicians and dentists
nationwide, Quality Systems’ solutions have been tested, trusted and proven and can be scaled to handle the impending
nationwide demand for a unifi ed transition to Electronic Health Records (EHR).
B O A R D O F D I R E C T O R S
Sheldon Razin
Chairman of the Board
L E G A L C O U N S E L
Rutan & Tucker, LLP
Costa Mesa, California
Steven T. Plochocki
President and Chief Executive Officer, Quality Systems, Inc.
I N D E P E N D E N T A U D I T O R S
Murray Brennan, MD
Emeritus Chairman, Memorial Sloan-Kettering
Cancer Center, Department of Surgery
George Bristol
Managing Director, Crowell Weedon & Co.
Patrick B. Cline
President, NextGen Healthcare Information Systems
Ahmed Hussein
Director
Cairo, Egypt
Philip N. Kaplan
Chief Executive Officer, Deer Valley Ventures, LLC
Vincent J. Love
Managing Director, Finance Scholars Group
Russell Pfl ueger
Chairman and CEO, Quiescence Medical, Inc.
O F F I C E R S O F T H E C O M P A N Y
Steven T. Plochocki
President and Chief Executive Officer
Patrick B. Cline
President, NextGen Healthcare Information Systems
Paul A. Holt
Chief Financial Officer and Secretary
Donn Neufeld
Senior Vice President and General Manager,
QSI Dental Division
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Irvine, California
S T O C K T R A N S F E R A G E N T &
R E G I S T R A R
Computershare
Glendale, California
A N N U A L M E E T I N G
The annual meeting of stockholders will be held on
Thursday, August 13, 2009 at 1:00 PM, Pacific Time at:
The Center Club
650 Town Center Drive
Costa Mesa, California 92626
F O R M 10 - K
A copy of the Company’s Annual Report on Form 10-K,
as filed with the Securities and Exchange Commission, is
available on the Company’s website at www.qsii.com or by
contacting the Company at:
18111 Von Karman Avenue, Suite 600
Irvine, California 92612
949.255.2600
:
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F O R W A R D - L O O K I N G S T A T E M E N T S
Statements made in this Annual Report to Shareholders and in our Annual Report on Form 10-K (“Form 10-K”) contained herein (collectively, this “Report”),
other reports and proxy statements fi led with the Securities and Exchange Commission (“Commission”), communications to shareholders, press releases
and oral statements made by our representatives that are not historical in nature, or that state our or management’s intentions, hopes, beliefs, expectations
or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934,
as amended. Forward-looking statements can often be identifi ed by the use of forward-looking terminology, such as “could,” “should,” “will,” “will be,”
“will lead,” “will assist,” “intended,” “continue,” “believe,” “may,” “expect,” “hope,” “anticipate,” “goal,” “forecast,” “plan,” “potentially” or “estimate” or
variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance. Forward-looking statements involve risks,
uncertainties and assumptions. It is important to note that any such performance and actual results, fi nancial condition or business, could differ materially
from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risk
factors discussed in Item 1A of our Form 10-K as well as factors discussed elsewhere in this and other reports and documents we fi le with the Commission.
Other unforeseen factors not identifi ed herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements
to refl ect changed assumptions, the occurrence of unanticipated events or changes in future operating results, fi nancial condition or business over time
unless required by law. Interested persons are urged to review the risks described under Item 1A, “Risk Factors” and in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in our Form 10-K, as well as in our other public disclosures and fi lings with the Commission.
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CORPORATE HEADQUARTERS/QSI DENTAL DIVISION LOCATION
18111 Von Karman Avenue, Suite 600
Irvine, California 92612
949.255.2600
www.qsii.com
NEXTGEN HEALTHCARE INFORMATION SYSTEMS LOCATIONS
795 Horsham Road
Horsham, Pennsylvania 19044
215.657.7010
3340 Peachtree Road NE, Suite 2700
Atlanta, Georgia 30326
404.467.1500
286 Grand Avenue
Southlake, Texas 76092
215.657.7010
1836 Lackland Hill Parkway
St. Louis, Missouri 63146
314.989.0300
11350 McCormick Road
Executive Plaza IV, Suite 600
Hunt Valley, Maryland 21031
443.933.4300
www.nextgen.com