Strategically
Positioned
for Growth
Q U A L I T Y S Y S T E M S, I N C .
2 0 1 0 A N N U A L R E P O R T
C O M P A N Y P R O F I L E
Quality Systems, Inc. (NASDAQ:QSII) and its NextGen Healthcare 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 and small hospitals.
F I N A N C I A L H I G H L I G H T S
Fiscal year ended March 31,
2010
2009
2008
2007
2006
Revenue
Net income
$291,811 $245,515 $186,500 $157,165 $119,287
48,379
46,119
40,078
33,232
23,322
Diluted earnings per share
$1.68
$1.62
$1.44
$1.21
$0.85
Cash dividends declared per share
$1.20
$1.15
$1.00
$1.00
$0.875
Total shareholders’ equity
$188,289 $155,567 $113,705
$91,246 $72,409
(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’ electronic-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 specific needs of medical, dental and ambulatory group practices as well as small hospitals. Currently used
by more than 60,000 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 unified transition to electronic health records.
L E T T E R T O S H A R E H O L D E R S
Quality Systems’ management team spent
fisfi caal l 202010 strategically positioning the Company
for growth.
As the Healthcare Information Technon logyy ((HIH T)T)
sector awaits final word from the U.S. governmeentn
Steven T. Plochocki
Chief Executive Officer
Sheldon Razin
ChaChairmirman an of of thethe Bo Boardard
andand Fo Foundunderer
on the rules and regulations associated with tthe 2200009 9 AmAmerican Reccovoverery y anand d ReReininveveststmementnt A Actct
(ARRA), regarding an electronic healalththcac re ssysy tem,, thehe CComompapanyny sseie zezed d ththe e chchanancece t to o prprepepararee
and position itself for this unique opportunity.
The Right Time
ThThe e ARARRARA, papasss ede into o law w byby C Conongrgresess s inin F Febebruruarary y 20200909,, isis a a c comompoponenentnt o of f ththe e ObObamama a
AdAdmiminin ststraratitionon’s’s o oveverarallll e ecocononomimic c ststimimululusus p plalan.n. L Lasast t yeyearar, , itit w wasas a annnnououncnceded tthahat t momorere t thahan n
$2$29 9 bibillllioion n hahad d bebeenen d dededicicatateded t to o ththe e HIHIT T sesectctoror, , pupursrsuauantnt t to o ththe e HeHealalthth I Infnforormamatitionon T Tecechnhnolologogy y
fofor r EcEcononomomicic a andnd C Clilininicacal l HeHealalthth A Actct ( (HIHITETECHCH),), w whihichch i is s papartrt o of f ththe e ARARRARA. . ThThee ARARRARA a allllococatateses
momorere t thahan n $1$19 9 bibillllioionn toto a aidid h heaealtlthchcarare e enentitititieses a ass ththeyey s strtrivive e toto a advdvanancece t heheirir oopeperaratitionons s ththrorougughh
ththe e imimplplememenentatatitionon o of f HIHIT T sosolulutitionons.s. A A p porortitionon o of f ththatat a amomoununt t – – $1$177.2 2 bibillllioion n – – haas s bebeenen a allllococatateded
toto HHITIT i infnfraraststruructcturure e rerelalatitingng t to o MeMedidicacarere/M/Mededicicaiaid d inincecentntiveses f foror p phyhysisicians s anand d hohospspitalals.s.
Q u a l i t y S y s t e m s , I n c . | 1
Time Frame for Five-year Stimulus Incentives for HITECH Adoption
75% of stimulus spent
in this time frame
Physicians
receive $12K
of stimulus
Physicians
receive $18K
of stimulus
Physicians
receive $8K
of stimulus
Physicians
receive $4K
of stimulus
Physicians
receive $2K
of stimulus
Medicare penalties from
non-compliant HIT adoption
begin (-1%)
February 17, 2009
Bill signed
2000 to Present – 20% adoption;
Present to 2015 – Remaining 80% needs to adopt
Medicare
penalties (-2%)
Medicare
penalties (-3%)
Medicare penalties
(-5%) cap
2009
2010
2011
2012
2013
2014
2015
20120 6
2017
2018
According to the ARRA, physicians are entitled to $44,000 each, which will be e didiviv deed d ininto five increments to be distributed
annually. Currently, only 20 percent of the nation’s healthcare systems have adoptteded EEHR. It is the U.S. government’s intent that
the remaining 80 percent operate on electronic medical platforms by 2015. Medicare reimbursement penalties for non-compliant
HIT adoption begin in 2015. The government believes 75 percent of the stimulus spending will occur between 2011-2013.
Thhe portions of the stimulus plan dedicated to Federally Qualified Healthcare Centers ($1.5
billion) and Indian Health Services ($85 million) commenced distribution during the second half
of 2009. Quality Systems is already experienced in these areeas, hahaviv ng served each for the past
16 years. The majority of the funds allocated under the stimulus plan tied into physician incentives
are slated to begin n in 2011 for those physicians that can demonstrate “meaningful use” of elec-
tronic healtlth h records (EHR) on a government-certified system. While the definition of “meaningful
usu e” and the standards for certification are yet to be finalized, we believe that the Company
is well-positioned to meet the expected requq irements. The definitions are expected to include,
among others: e-prescribing capabilityy;; ththe ability to electronically exchange health information
to improve quality and ppromote care coordination; and the ability to report on clinical quality
measures. These incentives will be offered to the medical community through 2015.
The Right Place
Quality Systems proved to be a bit of an anomaly in fiscal 2010. The Company actually
expanded its network with the hiring of additional employees to join its team of professionalsls, ,
despite the challenging economic times currently facing our nation.
2 | 2 0 1 0 A n n u a l R e p o r t
T O U C H E T T E & K E N N E T H H A L L R E G I O N A L H O S P I T A L S
Michael McManus
Chief Operating Officer
Touchette & Kenneth Hall Regional Hospitals
East St. Louis, IL
“Revenue cycle management work is
Touchette & Kenneth Hall Regional
extremely challenging and takes diligence to
Hospitals are a safety net hospital
succeed. NextGen digs into the detail
system catering to the underserved
to truly understand the issues and works
and uninsured, with both an inpatient
closely with us to optimize collections.
and outpatient medical and surgical
NextGen also provides value-added services,
services offering. The organization
works closely with NextGen Practice
Solutions to optimize Revenue Cycle
Management (RCM) for its employed
and contracted physicians. Recently,
Touchette & Kenneth Hall Regional
such as additional detailed analysis and
assistance with special projects. Whatever is
needed, we can count on NextGen to create
appropriate RCM solutions.”
Hospitals were recognized by the Healthcare Financial Management Association
(HFMA) for significant RCM successes in which NextGen Practice Solutions continues
to play a key role.
Q u a l i t y S y s t e m s , I n c . | 3
N A U T I L U S H E A L T H C A R E M A N A G E M E N T G R O U P, L L C
“My 16-year positive association with
Debra Spindel
Vice President of Physician Services
Nautilus Healthcare Management Group, LLC
Newport Beach, CA
QSI and NextGen is a testament to how
Nautilus Healthcare Management
well the organization values its clients,
Group’s Debra Spindel has worked
listens to feedback and stays at the forefront
collaboratively with QSI and NextGen
of changes in healthcare technology. As my
Healthcare since 1994, when the
company has changed and adapted over the
legacy QSI practice management
years, QSI and NextGen have not only
kept pace with technological innovations, but
also formed a constructive partnership that
helps us remain successful and competitive
in the evolving HIT environment.”
system was installed in the first
physician practice. Since then, she
has overseen the successful transition
to the NextGen full suite of products.
In addition, NextGen solutions have
aided Nautilus throughout its growth,
helping it expand into a healthcare
management services organization that now contracts with more than 175 physicians.
Nautilus also provides management services to two prestigious Southern California
IPAs, and its larger client, Greater Newport Physicians, has embraced NextGen as the
EHR solution for its network of 500 physicians.
4 | 2 0 1 0 A n n u a l R e p o r t
Over the years, NextGen Healthcare built a solid
reputation in the HIT sector and remains one of the leading
electronic medical solutions providers.
Throughout the year, the Company added staff in sales, marketing, implementation and training,
ending fiscal 2010 with nearly 1,500 full-time employees, up 244 people or 19 percent over the
prior year. It is important to note that 88 of these employees came to us from Opus Healthcare
Solutions, Inc., as result of our recent acquisition of this leading developer of clinical software and
services for the inpatient markeket.t
In addition to Opus, during fiscac l l 2010 we also acquired the assets of Sphere Health Systems,
Inc., an established provider of inpatient financial software. The expertise of both of these compa-
nies was consolidated into our newly formed acute business unit, NextGen Inpatient Solutions.
This business unit is focused on targeting the small hospital market – those with 100 beds or less ––
which we view as an untapped opportunity for our Company.
The Right People
In anticipation of the release of the government’s final regulations, ddurinng g fiscal 2010, we restruc-
tured the Company operationally, establishing clearly defined business units and appointing
experienced leadership to head them. These initiatives enable us to capitalize on what we exxpepect
to be a substantial opportunity for capturing addiitit onal market share in a growing electronic health-
care environment.
We promoted Patrick Cline, who served as president of our r NextGen Healthcare subsidiary
for 12 years, to president of Quality Systems, while Scott Decker, NextGen Healthcare’s former
senior vice president, became its president.
Our NextGen Healthcare business unit provides integrated EHR and practice manage-
ment (PM) systems, connectivity solutions, and billing services for medical practices of varying
sisizez s and specialties as well as small hospitals. Over the years, NextGen Healthcare built
a a sosolil d reputation in the HIT sector and remains one of the leading electronic medical
solulutitionons providers.
Q u a l i t y S y s t e m s , I n c . | 5
QSI Dental offers feature-rich, flexible software solutions
to large dental practices, enabling its customers to operate more
efficiently and cost effectively.
Monte Sandler was named executive vice president of NextGen Practice Solutions, respon-
sible for managing the Company’s RCM efforts. He initially joined the Company from Healthcare
Strategic Initiatives (HSI), a revenue cycle entity we acquired in 2008. HSI and Practice
Management Partners (PMP), also acquired in 2008, were both assimilated into our new RCM
division during fiscal 2010.
Additionally, Steven Puckett was named senior vice presiidedent of NeN xtGen Inpatient Solutions,
in charge of directing the acute business unit, which encompasses Opus and Sphere.
Donn Neufeld, a Quality Systems veteran who originally joined in 1980 and recently served
asas s senior vice president and general manager of QSI’s Dental unit, was named executive vice
president of Electronic Data Interchange (EDI) and Dental. QSI Dental offers feature-rich, flexible
software solutions to large dental practices, enabling its custoomerss to operate more efficiently and
cost effectively. Our dental suite of software solutions spans both clinical and financial capabili-
ties, such as patiennt t scscheh duling/registration, accounts receivable, billing, management reporting,
electronic cclalaims, statement processing and comprehensive electronic patient records, along with
Internet applications. QSI Dental has garnered a leadership position in electronic dental solutions
since our founding.
Lastly, we appointed Tim Eggena a exe ecutive vice president of research and development.
Eggena now oversees all ammbub latory research and development efforts, including, among others, ,
EHR, practice management solutions, mobile strategy, health information exchange and integra--
tion of inpatient solutions.
Collectively, our maanan gement team possesses more than 100 years of healthcare and
technology experience, which greatly strengthens our position in leading the way as we enter
unprecedented times in the HIT sector.
6 | 2 0 1 0 A n n u a l R e p o r t
M O N T E F I O R E M E D I C A L C E N T E R
Richard A. Kraut, D.D.S.
Chairman, Department of Dentistry
Montefiore Medical Center
Bronx, NY
“When I became Chairman of the
Montefiore Medical Center, one of
Department of Dentistry at Montefiore,
the largest privately held healthcare
we identified the need to transition the
systems in the U.S., has been working
department to a paperless platform.
with QSI Dental since July 2003 when
QSI Dental brought to us a long-standing
its multi-location dental clinic network
reputation and the ability to adapt to
searched for a system that would
allow it to bill and manage patient
data across various platforms. QSI
Dental was selected based on the
strength of its functionality, its size and
scope as well as its more than three
decades of experience. Montefiore
Medical Center’s Depar tment of
a continually evolving healthcare industry.
They quickly respond to technological
advancements, government regulations and
insurance requirements. Looking back,
I believe QSI Dental was the right choice for
our significant investment in EHR software.”
Dentistry utilizes the entire QSI Dental suite, including QSI Dental Enterprise Practice
Management and Electronic Dental Record, to oversee the clinical and business
components of its growing enterprise.
Q u a l i t y S y s t e m s , I n c . | 7
C R Y S T A L R U N H E A L T H C A R E
“NextGen’s solutions allowed us to create a
Gregory A. Spencer, MD, FACP
Chief Medical Officer
Crystal Run Healthcare
Middletown, NY
patient-engaged, quality data-driven model
Since 1999, Crystal Run Healthcare has
that enhances care, eliminates duplicative
utilized NextGen’s EHR and Practice
testing and allows for the accessing of data –
Management solutions. With 11 sites
anytime from anywhere. Clinically, we can
and approximately 200 providers that
better manage our patient population, and
handle nearly one million patient
from a financial perspective, we know where
we stand, enabling us to project growth
while foreseeing opportunity. Furthermore,
we achieved Level 3 PCMH recognition,
thanks to the feature-rich capabilities of
NextGen’s advanced EHR.”
encounters annually, the multi-specialty
group practice also recently incor-
porated the NextMD patient portal.
Crystal Run providers personalize the
patient care they deliver by capturing
data through NextGen’s EHR at the
point-of-care. Crystal Run was the first
private practice in New York to attain
accreditation from the Joint Commission, and in 2009, became one of a select few to
earn National Committee for Quality Assurance (NCQA) certification as an advanced,
Level 3 Patient-Centered Medical Home (PCMH).
8 | 2 0 1 0 A n n u a l R e p o r t
Revenues
(in millions)
Diluted Earnings
Per Share
Cash Flow from
Operations
(in millions)
$ 300
$ 240
$ 180
$ 120
$ 60
$ 0
$ 2.00
$ 1.60
$ 1.20
$ 0.80
$ 0.40
$ 0
$ 60
$ 50
$ 40
$ 30
$ 20
$ 10
$ 0
06
07 08
09 10
06
07 08
09 10
06
07 08
09 10
Financial Performance
Fiscal 2010 kept us busy prepariringg, acququiring and reorganizing for the opportunities ahead. We believe
the initiatives put in place during the past fiscal year further cement our industry role as we enter the
three- to five-year growth cycle for HIT implementation. We are fully armed with a product offering that
brings to the marketplace significant growth potential, particularly across sectors with low HIT pepeneetrtratatioon.
Revenue for the year ended March 31, 2010 reached $291.8 million, up 19 percent when
compared with $245.5 million reported in fiscal 2009. Net income e ffor fisfi cal 2010 was $48.4
million versus $46.1 million for 2009, an increase of five percent. Fully diluted earnings per share
increased to $1.68, compared with $1.62 last year, a four percent ini crcrease. The increase in
revenue was primarily attributed to expansion in RCM revenue related to the acquisitions of HSI
and PMP as well as growth in recurring revenue streams including maintenance and EDI.
The Company continued to generate strong cash h flow from operations in fiscal 2010, enabling
us to pay $34.3 million in dividends while leaving our casash and marketable securities position at
$991.8 million versus $77.6 million a year ago.
We continue to reach a diversified customer base through cutting-edge offerings of multiple
innnovative products and services that cater to medical, dental and ambulatory practices, as well
as small hospitals. From our various business units, we create customized solutions based on the
individual needs of our growing client base, whether it is a small hospital, a management services
ororgganization, a growing dental enterprise, a large physician group practice or an expansive health
sysyststemem. At the end of the 2010 fiscal year, our broad range of electronic-based healthcare solu-
tionns s wew re utilized by more than 60,000 physicians and dentists, representing in excess of 2,300
group prp actices.
Q u a l i t y S y s t e m s , I n c . | 9
During our 36 years in operation, the vision to automate
medical and dental practices has become a successful reality
through organic growth and acquisition.
Reflection and Recognition
During our 36 years in operation, the vision to automate medical and dental practices has become
a successful reality through organic growth and acquisition. Today, that reality continues to shape
both the HIT sector and our nation’s future electronic-based healthcare delivery system.
In April 2009, at the start of our 2010 fiscal year, we refleccteed d ononce again on our initial vision
by ringing the opening bell at the NASDAQ Stock Market, hohonon ring our anniversary. This was a
momentous occasion for our entire organization to truly realize not only how far we have come but
also to foresee the exciting journey that lies ahead.
ThThe Company and its management were recognized during fiscal 2010 on various occa-
sions. Founder and Chairman of the Board Sheldon Razin earned the 2009 Excellence in
Entrepreneurship award from the Orange County Business Jouo rnalal ana d was named Entrepreneur
of the Year in the Healthcare Services category by Ernst & Young in its annual Orange County/
Desert Cities awardsds pprogram. He also won the Chairman of the Year award from the American
Business AAwaw rds, which honors companies and the people behind them.
Quality Systems’ overall growth was also acknon wledged. The Company continues to be
among the fastest-growing HIT companies in theh sector. Quality Systems ranked third in the 2009
Forbes list of America’s 200 Best Smallll C Companies – recognized for the ninth consecutive year,
and moving up a notch from the previous year’s spot. In addition, for the first time, the Company
ranked in the Forbes list of America’s Fastest-Growing Tech Companies. Finally, Quality Systems
received the Growth Award in the public company category from The Association for Corporate
Growth, Orange County y Chapter (ACG OC), which recognizes a company that has exhibited
distinctive strategic positioning as well as sustainable growth and profitability during the previous
two-year period.
1 0 | 2 0 1 0 A n n u a l R e p o r t
T R I N I T Y H E A L T H
Dr. Kayla Pelegrin
Director of Medical Informatics-
Clinical Operations Improvement
Trinity Health
Novi, Michigan
Trinity Health, the nation’s fourth-largest
Catholic health system, and NextGen
Healthcare forged a par tnership
to deliver a completely integrated
physician practice suite of solutions.
These support Trinity’s clinical quality
“Due to Trinity Health’s size and scope,
we require the integration of an advanced
suite of services like NextGen’s. In
collaborating for the implementation of
our physician practice solutions, we help
NextGen enhance their products because they
understand our workflow, and they help us
initiatives and enhance the overall
see areas of missed opportunity. Together, we
patient experience by incorporating
are strengthening Trinity’s capabilities in the
electronic health records, practice
delivery of patient-centered care.”
management and revenue c ycle
management, along with a patient platform. The customized solutions designed
for Trinity work in unison to ensure continuity of care, maximize revenue, improve
workflow, capture appropriate documentation and provide meaningful data while
enhancing sharing among the communities it serves.
Q u a l i t y S y s t e m s , I n c . | 11
After a fiscal year spent dedicated to reorganization, hard work and preparation for the future
opportunities that await us, we now view our Company as optimally positioned to capture addi-
tional market share and capitalize on this right-place, right-time opportunity.
The Company has secured its leadership position as a result of the focused efforts put forth by
many parties engaged in our business operations. We want to thanank k ththose who continue to support
the Company on the road to success: our shareholders for theeirr oongoioing investment; our Board of
Directors for their guidance; our customers for their dedication; and our employees for their tireless
commitment. Each has played a key role in where we are today.
ThThe entire Quality Systems organization is excited about the considerable opportunity the
next decade holds as we enter into an extraordinary time for our Company, the HIT sector and
the nation.
Respectfully,
Sheldon Razin
Steven T. Plochocki
Chairman of the Board
and Founder
Chief Executive Officer
1 2 | 2 0 1 0 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)
(cid:95) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fi scal year ended March 31, 2010
or
(cid:134) 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 specifi ed in its charter)
California
(State or Other Jurisdiction of Incorporation or Organization)
95-2888568
(IRS employer identifi cation no.)
18111 Von Karman Avenue, Suite 600, Irvine, California
,
(Address of principal executive offi ces)
,
,
92612
(Zip Code)
Registrant’s telephone number, including area code:
(
(949) 255-2600
)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 Par Value
, $
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes (cid:134) No (cid:95)
fi
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 (cid:134) No (cid:95)
fi
Indicate by check mark whether the registrant (1) has filed all reports required to be fi
fi
led 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
fi
reports), and (2) has been subject to such fi ling requirements for the past 90 days. Yes
(cid:95) No (cid:134)
fi
fi
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 (cid:134) No (cid:134)
fi
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
fi
in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:134)
fi
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:95)
Accelerated Filer (cid:134)
Non-accelerated Filer (cid:134)
(Do not check if a smaller
reporting company)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95)
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2009: $1,168,507,000
(based on the closing sales price of the Registrant’s common stock as reported on the NASDAQ Global Select Market on that
date of $61.57 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 ppar value
(Class)
vv
28,884,481
(Outstanding at May 21, 2010)
,
,
* 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 com-
mon stock are deemed to be affiliates for purposes of this Report.
Documents Incorporated bybb Reference
RR
The following documents (or parts thereof) are incorporated by
reference into the following parts of this Form 10-K:
Proxy Statement for the 2010 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, 2010
Item
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Reserved
Part I
Part II
Page
4
12
22
22
22
22
Item 5. Market for Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities 23
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 Offi cers and Corporate Governance
Item 11.
Executive Compensation
Part III
Item 12. Security Ownership of Certain Benefi cial 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
25
26
48
49
49
49
49
50
50
50
50
50
50
54
3
Cautionary Statement
fi
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 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,”
or “estimate” or variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance.
fi
Forward-looking statements involve risks, uncertainties and assumptions. It is important to note that any such performance and
actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, the risk factors discussed in Item 1A of
this Report as well as factors discussed elsewhere in this and other reports and documents we file with the Commission. Other
unforeseen factors not 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,
financial condition or business over time unless required by law. Interested persons are urged to review the risks described und
er
fi
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.
fi
fi
Part I
expanded our information processing systems to serve the
medical market. In the mid-1990’s, we made two acquisitions
that accelerated our penetration of the medical market. These
two acquisitions formed the basis for the NextGen Division.
Today, we serve the medical and dental markets through our
NextGen Division and QSI Dental Division.
Business Segments
Historically, the Company has operated principally through
two operating divisions: QSI Dental Division and NextGen
Division. Through our acquisitions of HSI and PMP in 2008,
we continued to strengthen our RCM service offerings. During
fi scal year 2010, as a result of certain organizational changes,
fi
the composition of the Company’s NextGen Division was re-
vised to exclude the former NextGen Practice Solutions unit and
the Company’s RCM entities (HSI and PMP), both of which are
now administered and aggregated in the Company’s Practice
Solutions Division. Following the reorganization, the Company
now operates three reportable operating segments (not includ-
ing Corporate), comprised of the NextGen Division, the QSI
Dental Division and the Practice Solutions Division. As a result,
our fi scal year 2010 and 2009 results have been re-casted
to refl ect this change.
fi
ITEM 1. Business
Company Overview
(“Practice Solutions Division”)
Quality Systems, Inc., including its wholly-owned subsidiaries,
is comprised of the QSI Dental Division, NextGen Healthcare
Information Systems, Inc. (“NextGen Division”), including
NextGen Sphere, LLC and Opus Healthcare Solutions, Inc.,
and Lackland Acquisition II, LLC dba Healthcare Strategic
Initiatives (“HSI”) and Practice Management Partners, Inc.
(“PMP”)
the
“Company”, “we”, “our”, or “us”). The Company develops and
markets healthcare information systems that automate certain
aspects of medical and dental practices, networks of prac-
tices such as physician hospital organizations (“PHOs”) and
management service organizations (“MSOs”), ambulatory
care centers, community health centers, and medical and
dental schools. The Company also provides revenue cycle
management (“RCM”) services through the Practice Solutions
Division.
(collectively,
The Company, a California corporation formed in 1974, was
founded with an early focus on providing information systems
to dental group practices. In the mid-1980’s, we capitalized on
the increasing focus on medical cost containment and further
4
The following table breaks down our reported segment revenue and segment revenue growth by division for the years ended
March 31, 2010, 2009 and 2008:
Segment Revenue Breakdown
for the Year Ended March 31,
Segment Revenue Growth
for the Year Ended March 31,
QSI Dental Division
NextGen Division
Practice Solutions Division
2010
5.9%
79.4%
14.7%
2009
6.5%
83.1%
10.4%
2008
8.6%
91.4%
0.0%
Consolidated
100.0%
100.0%
100.0%
2010
8.1%
13.6%
67.5%
18.9%
2009
(1.2)%
19.6%
N/A
31.6%
2008
(3.3)%
21.3%
N/A
18.7%
QSI Dental Division. The QSI Dental Division, co-located with
our Corporate Headquarters in Irvine, California, currently
focuses on developing, marketing and supporting software
suites sold to dental and certain niche medical practices. In
addition, the Division supports a number of medical clients that
utilize its UNIX based medical practice management software
product and Software as a Service, or SaaS model, based
NextDDS fi nancial and clinical software.
fi
The QSI Dental 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 digital
imaging of X-ray and inter-oral camera images as part of the
electronic patient record. The Division develops, markets, and
manages our Electronic Data Interchange (“EDI”)/connectivity
applications. The QSInet Application Service Provider (“ASP/
Internet”) offering is also developed and marketed by the
Division.
In July 2009, we licensed source code from PlanetDDS, Inc.
that will allow us to deliver hosted, web-based SaaS model
practice management and clinical software solutions to the
dental industry. The software solution will be marketed primar-
ily to the multi-location dental group practice market in which
the Division has historically been a dominant player. This new
software solution (NextDDS) brings the QSI Dental Division to
the forefront of the emergence of internet based applications
and cloud computing and represents a signifi cant growth op-
portunity for the Division to sell both to its existing customer
base as well as new customers.
NextGen Division. The NextGen Division, with headquarters
in Horsham, Pennsylvania, and signifi cant locations in Atlanta,
Georgia and Austin, Texas, provides integrated clinical, finan-
cial and connectivity solutions for ambulatory, inpatient and
dental provider organizations.
fi
fi
On August 12, 2009, we acquired NextGen Sphere, LLC
(“Sphere”), a provider of financial information systems to the
small hospital inpatient market. This acquisition is also part
of our strategy to expand into the small hospital market and
to add new customers by taking advantage of cross selling
opportunities between the ambulatory and inpatient markets.
On February 10, 2010, we acquired Opus Healthcare
Solutions, Inc. (“Opus”), a provider of clinical information sys-
tems to the small hospital inpatient market. Founded in 1987
and headquartered in Austin, Texas, Opus delivers web-
based clinical solutions to hospital systems and integrated
health networks nationwide. This acquisition complements
and will be integrated with the assets of Sphere. Both compa-
nies are established developers of software and services for
the inpatient market and will operate under the Company’s
NextGen Division.
The NextGen Division’s major product categories include:
• NextGen ambulatory product suite that integrates as
one system to streamline patient care with standardized,
real-time clinical and administrative workfl ow through the
practice, which consists of:
o NextGen Electronic Health Records (“NextGenehr”) to
ensure complete, accurate documentation to manage
patient care electronically and to improve clinical pro-
cesses and patient outcomes with electronic charting
at the point of care; and
o NextGen Enterprise Practice Management (“NextGenepm”)
to automate business processes, from front-end
scheduling to back-end collections and financial and
administrative processes for increased performance
and effi ciencies.
fi
• NextGen inpatient products that deliver secure, highly
adaptable, and easy to use applications to patient cen-
tered hospitals and health systems, which consists of:
o NextGen Clinicals, which resides on an advanced
truly active web 2.0 platform – and is designed to initi-
ate widespread work effi ciency and communication,
5
reduce errors and time-to-chart, and improve care;
and
o NextGen Financials, which is a financial and adminis-
trative system that helps hospitals signifi cantly improve
the smart operations and fi nancial and regulatory
fi
management of their facilities.
fi
Practice Solutions Division provides technology solutions and
consulting services to cover the full spectrum of providers’ rev-
enue cycle needs from patient access to claims denials.
Practice Solutions Division revenue growth in both fi scal years
2010 and 2009 was impacted by the acquisitions of HSI
and PMP in May 2008 and October 2008, respectively.
fi
• NextGen Community Connectivity, which consists of:
o NextGen Health
Information Exchange
(“HIE”),
formerly Community Health Solution, to exchange
patient data securely with community healthcare
organizations;
o NextGen Patient Portal (“NextMD.com”) to commu-
nicate with patients online and import information
directly into NextGenehr; and
o NextGen Health Quality Measures (“HQM”) to
allow seamless quality measurement and reporting for
practice and physician performance initiatives.
The NextGen Division products utilize Microsoft Windows
technology and can operate in a client-server environment
as well as via private intranet, the Internet, or in an ASP
environment.
Services provided by the NextGen Division include:
• EDI services that are intended to automate a number of
manual, often paper-based or telephony intensive com-
munications between patients and/or providers and/or
payors;
• Hosting services that allow practices seeking the benefits fi
of IT automation but not the maintenance of in-house
hardware and networking;
• NextGuard – Data Protection services that provide an
off-site, data archiving, restoration, and disaster recovery
preparedness solution for practices to protect clinical and
fi
financial data;
• Consulting services, such as data conversions or interface
development, that allow practices to build custom add-on
features; and
•
Physician Resources services that allow practices to con-
sult with the NextGen Division’s physician team.
Practice Solutions Division. The Practice Solutions Division,
with locations in St. Louis, Missouri and Hunt Valley, Maryland,
focuses primarily on providing physician practices with RCM
services, primarily billing and collection services for medi-
cal practices. This Division combines a web-delivered SaaS
model and the NextGenepm software platform to execute its
service offerings. We intend to transition our customer base
onto the NextGen platform within the next two years. The
6
On May 20, 2008, we acquired St. Louis-based HSI, a full-
service healthcare RCM company. HSI operates under the um-
brella of the Company’s Practice Solutions Division. Founded
in 1996, HSI 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 the NextGen Division.
On October 28, 2008, we acquired Maryland-based PMP,
a full-service healthcare RCM company. This acquisition is
also part of our growth strategy for our Practice Solutions
Division. Similar to HSI, PMP operates under the umbrella of
the Company’s Practice Solutions Division. Founded in 2001,
PMP provides physician billing and technology management
services to healthcare providers, primarily in the Mid-Atlantic
region. We intend to cross sell both software and RCM ser-
vices to the acquired customer base of PMP and the NextGen
Division.
fi
The three Divisions operate largely as stand-alone operations,
with each Division maintaining its own distinct product lines,
product platforms, development, implementation and support
teams, sales staffi ng and branding. The three Divisions share
the resources of our “corporate offi ce,” which includes a variety
of accounting and other administrative functions. Additionally,
there are a small but growing number of clients who are simul-
taneously utilizing software or services from more than one of
our three Divisions.
We continue to pursue product and service enhancement ini-
tiatives within each Division. The majority of such expenditures
are currently targeted to the NextGen Division product line
and client base.
Industry Background
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 con-
tinue to see organizations that are doing fairly well operation-
ally; however, some organizations with a large dependency
fi
on Medicaid populations are being impacted by the chal-
lenging fi nancial 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 healthcare reform aimed at improving is-
sues surrounding healthcare. The American Recovery and
Reinvestment Act (“ARRA”), which became law on February
17, 2009, includes more than $20 billion to help healthcare
organizations 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 signifi cant.
Moreover, to compete in the continually changing healthcare
environment, providers are increasingly using technology to
help maximize the effi ciency of their business practices, to as-
sist in enhancing patient care, and to maintain the privacy of
patient information.
fi
As the reimbursement environment continues to evolve, more
healthcare providers enter into contracts, often with multiple en-
tities, which define the terms under which care is administered
and paid. The diversity of payor organizations, as well as ad-
ditional government regulation and changes in reimbursement
models, have greatly increased the complexity of pricing,
billing, reimbursement, and records management for medical
and dental practices. To operate effectively, healthcare pro-
vider organizations must effi ciently manage patient care and
other information and workfl ow processes, which increasingly
extend across multiple locations and business entities.
fi
In response, healthcare provider organizations have placed
increasing demands on their information systems. Initially,
these information systems automated financial and administra-
tive functions. As it became necessary to manage patient fl ow
processes, the need arose to integrate “back-offi ce” data with
such clinical information as patient test results and offi ce visits.
We believe information systems must facilitate management of
patient information incorporating administrative, financial and
clinical information from multiple entities. In addition, large
healthcare organizations increasingly require information sys-
tems that can deliver high performance in environments with
multiple concurrent computer users.
fi
Many existing healthcare information systems were designed
for limited administrative tasks such as billing and scheduling
and can neither accommodate multiple computing environ-
ments nor operate effectively across multiple locations and
entities. We believe that practices that leverage technology to
more effi ciently handle patient clinical data as well as admin-
istrative, fi nancial and other practice management data will
be best able to enhance patient fl ow, pursue cost effi cien-
cies, and improve quality of care. As healthcare organizations
fi
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 practices, dental practices, hospitals,
health centers, and other healthcare providers. 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;
• Expanding our relationship with existing customers
through delivery of add-on and complementary products
and services; and
• Continuing our gold standard commitment of service in
support of our customers.
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 and Services
In response to the growing need for more comprehensive,
cost-effective healthcare information solutions for medical
practices, dental practices, hospitals, health centers, and
other healthcare providers, our systems and services pro-
vide our clients with the ability to redesign patient care
and other workfl ow processes while improving productivity
through facilitation of managed access to patient informa-
tion. Utilizing our proprietary software in combination with
third party hardware and software solutions, our products
enable the integration of a variety of administrative and clini-
cal information operations. Leveraging more than 30 years
of experience in the healthcare information services industry,
we believe we continue to add value by providing our cli-
ents 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.
7
NextGen Ambulatory Practice Management Systems. Our
products consist primarily of proprietary healthcare software
applications together with third party hardware and other
non-industry specifi c software. The systems range in capacity
from one to thousands of users, allowing us to address the
needs of both small and large organizations. The systems are
modular in design and may be expanded to accommodate
changing client requirements. We offer both standard licenses
and SaaS arrangements in our software offerings; although to
date, SaaS arrangements have represented less than 5% of
our arrangements.
NextGenepm is the NextGen Division’s practice management
offering. NextGenepm has been developed with a functionally
graphical user interface (“GUI”) certifi ed for use with Windows
2000 and Windows XP operating systems. The product lever-
ages a relational database (Microsoft SQL Server) with sup-
port on both 32 and 64 bit enterprise servers. NextGenepm is
a scalable, multi-module solution that includes a master patient
index, enterprise-wide appointment scheduling with referral
tracking, clinical support, and centralized or decentralized pa-
tient fi nancial management based on either a managed care
or fee-for-service model. The NextGenepm product is a highly
confi gurable, cost-effective proven solution that enables the ef-
fective management of both single and multi-practice settings.
fi
NextGen Ambulatory Clinical Systems. The NextGen Division
provides clinical software applications that are complementary
to, and are integrated with, our medical practice management
offerings and interface with many of the other leading practice
management software systems on the market. The applica-
tions incorporated into our practice management solutions
and others such as scheduling, eligibility, billing and claims
processing are augmented by clinical information captured by
NextGenehr, including services rendered and diagnoses used
for billing purposes. We believe that we currently provide a
comprehensive information management solution for the medi-
cal marketplace.
r
NextGenehr was developed with client-server architecture and
a GUI and utilizes Microsoft Windows 2000, Windows NT
or Windows XP on each workstation and either Windows
2000, Windows NT, Windows XP or UNIX on the database
server. NextGenehr maintains data using industry standard
relational database engines such as Microsoft SQL Server
or Oracle. The system is scalable from one to thousands of
workstations. NextGenehr stores and maintains clinical data
including:
r
r
• Data captured using user-customizable input “templates”;
• Scanned or electronically acquired images, including
X-rays and photographs;
8
• Data electronically acquired through interfaces with clini-
cal instruments or external systems;
• Other records, documents or notes, including electroni-
cally captured handwriting and annotations; and
• Digital voice recordings.
r
NextGenehr also offers a workfl ow module, prescription man-
agement, automatic document and letter generation, patient
education, referral tracking, interfaces to billing and lab sys-
tems, physician alerts and reminders, and powerful reporting
and data analysis tools. NextGen Express is a version of
NextGenehr designed for small practices.
r
fi
QSI Dental Division Practice Management and Clinical
Systems. In fi scal year 2010, we began selling a hosted SaaS
practice management and clinical software solutions to the
dental industry. The software solution is marketed primarily to
the multi-location dental group practice market for which the
Division has historically been a dominate player. This new
software solution brings the QSI Dental Division to the forefront
of the emergence of internet based applications and cloud
computing and represents a signifi cant growth opportunity for
us to sell both to our existing customer base as well as new
customers.
In addition to the SaaS practice management offering, the
QSI Dental Division also sells a character-based practice man-
agement system using the IBM RS6000 central processing unit
and IBM’S AIX version of the UNIX operating system platform.
The hardware components, as well as the requisite operating
system licenses, are purchased from manufacturers or distribu-
tors of those components. We confi gure and test the hard-
ware components and incorporate our software and other
third party packages into completed systems. We continually
evaluate third party hardware components with a view toward
utilizing hardware that is functional, reliable and cost-effective.
In addition to the SaaS clinical offering, our dental charting
software system, the CPS is a comprehensive solution de-
signed specifi cally 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, com-
puter-based patient education modules, viewable chair-side
to enhance case presentation, full access to patient informa-
tion, treatment plans, and insurance plans via a fully integrated
interface with our dental practice management product and
document and image scanning for digital storage and linkage
to the electronic patient record.
The result is a comprehensive clinical information management
system that helps practices save time, reduce costs, improve
case presentation, and enhance the delivery of dental services
and quality of care. Clinical information is managed and main-
tained electronically thus forming an electronic patient record
that allows for the implementation of the “chartless” offi ce.
fi
fi
CPS incorporates Windows-based client-server technology
consisting of one or more file servers together with any com-
bination of one or more desktop, laptop, or pen-based PC
workstations. The fi le 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 confi guration
chosen, CPS is scalable from one to hundreds of workstations.
The hardware components, including the requisite operating
system licenses, are purchased from third party manufacturers
or distributors either directly by the customer or by us for resale
to the customer.
fi
NextGen Inpatient Solutions. NextGen inpatient solutions
includes both clinical and financial applications to provide
value based solutions for even rural and community hospitals
to improve patient safety, automate order entry, and facilitate
real-time communication of patient information throughout the
hospital. NextGen inpatient solutions are highly scalable,
secure and easy to use with a Web 2.0 based clinical com-
ponent that leverages full “cloud computing” capabilities.
Revenue Cycle Management Services. Our Practice Solutions
Division offers RCM services to physicians. Our RCM service
automates and manages billing-related functions for physician
practices to help manage reimbursement quickly and effi -
ciently. RCM services generally include:
• Electronic claims submission service that submits Health
Insurance Portability and Accountability Act of 1996
(“HIPAA”) compliant insurance claims electronically to
insurance payers;
• Electronic remittance and payment posting service that
uses NextGen Document Management system to link an
image of each explanation of benefit (“EOB”) to the cor-
responding encounter at the time of payment posting to
minimizes the need for storage of paper EOBs; and
fi
• Accounts receivable follow-up methodology that allows
practices to establish parameters, adjustment rules and
standards for account elevation.
Electronic Data Interchange. We make available EDI capa-
bilities and connectivity services to our customers. The EDI/
connectivity capabilities encompass direct interfaces between
our products and external third party systems, as well as trans-
action-based services. EDI products are intended to automate
a number of manual, often paper-based or telephony intensive
communications between patients and/or providers and/or
payors. Two of the more common EDI services are forwarding
insurance claims electronically from providers to payors and
assisting practices with issuing statements to patients. Most cli-
ent practices utilize at least some of these services from us or
one of our competitors. Other EDI/connectivity services are
used more sporadically by client practices. We typically com-
pete to displace incumbent vendors for claims and statements
accounts and attempt to increase usage of other elements in
our EDI/connectivity product line. In general, EDI services are
only sold to those accounts utilizing software from either the
QSI Dental or NextGen Divisions. Services include:
• 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 verifi cation; and
• Electronic posting of remittances from insurance carriers
into the accounts receivable application.
Community Connectivity. The NextGen Division also markets
NextGen HIE to facilitate cross-enterprise data sharing, 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 NextGenehs system, another compatible electronic
medical records system, or no electronic medical records
system, together with hospitals, payors, labs and other enti-
ties. The product is designed to facilitate a Regional Health
Information Organization. The result is that for every health
care encounter in the community, a patient-centric and com-
plete record is accessible for the provider. The availability, cur-
rency and completeness of information plus the elimination of
duplicate data entry can lead to signifi cantly improved patient
safety, enhanced decision making capabilities, time effi cien-
cies and cost savings. 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
medical professionals. Patients whose physicians are linked to
the portal are able to request appointments, send appointment
changes or cancellations, receive test results on-line, request
prescription refi lls, 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.
fi
9
Sales and Marketing
We sell and market our products nationwide primarily through
a direct sales force. The efforts of the direct sales force are
augmented by a small number of reseller relationships estab-
lished by us. Software license sales to resellers represented
less than 10% of total revenue for the years ended March 31,
2010, 2009 and 2008.
Our direct sales force typically makes presentations to poten-
tial clients by demonstrating the system and our capabilities
on the prospective client’s premises. Sales efforts aimed at
smaller practices can be performed on the prospective clients’
premises, or remotely via telephone or Internet-based 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 signifi cantly and typically ranges from
six to twenty-four months from initial contact to contract execu-
tion. 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 mutu-
ally agreed upon timetable. As part of the fees paid by our cli-
ents, we normally receive up-front licensing fees. Clients have
the option to purchase maintenance services which, if pur-
chased, are invoiced on a monthly, quarterly or annual basis.
Several clients have purchased our practice management soft-
ware and, in turn, are providing either time-share or billing
services to single and group practice practitioners. Under the
time-share or billing service agreements, the client provides
the use of our software for a fee to one or more practitioners.
Although we typically do not receive a fee directly from the
distributor’s customers, implementation of such arrangements
has, from time to time, resulted in the purchase of additional
software capacity by the distributor, as well as new software
purchases made by the distributor’s customers should such cus-
tomers decide to perform the practice management functions
in-house.
We continue to concentrate our direct sales and marketing
efforts on medical and dental practices, networks of such
practices including MSOs and PHOs, professional schools,
community health centers and other ambulatory care settings.
MSOs, PHOs and similar networks to which we have sold
systems provide use of our software to those group and single
physician practices associated with the organization or hospi-
tal on either a service basis or by directing us to contract with
those practices for the sale of stand-alone systems.
10
We have also entered into marketing assistance agreements
with certain of our clients pursuant to which the clients allow
us to demonstrate to potential clients the use of systems on the
existing clients’ premises.
fi
fi
From time to time we assist prospective clients in identifying
third party sources for fi nancing the purchase of our systems.
The fi nancing 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 fi nancing nor
retain any continuing interest in the transaction.
fi
We have numerous clients and do not believe that the loss
of any single client would adversely affect us. No client ac-
counted for 10% or more of our net revenue during the fiscal
years ended March 31, 2010, 2009 or 2008.
fi
Customer Service and Support
We believe our success is attributable in part to our customer
service and support departments. We offer support to our
clients seven days a week, 24 hours a day.
Our client support staff is comprised of specialists who are
knowledgeable in the areas of software and hardware as
well as in the day-to-day operations of a practice. System
support activities range from correcting minor procedural 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
client’s call to the automated support system. Additionally, our
online support systems maintain call records, available at both
the client’s facility and our offi ces.
We offer our clients support services for most system compo-
nents, including hardware and software, for a fi xed monthly,
quarterly or annual fee. Customers also receive access to
future unspecifi ed versions of the software, on a when-and-if
available basis, as part of support services. We also sub-
contract, in certain instances, with third party vendors to per-
form specifi c hardware maintenance tasks.
Implementation and Training
We offer full service implementation and training services.
When a client signs a contract for the purchase of a system
that includes implementation and training services, a client
manager/implementation specialist trained in medical and/or
dental group practice procedures is assigned to assist the client
in the installation of the system and the training of appropriate
practice staff. Implementation services include loading the soft-
ware, training customer personnel, data conversion, running
test data, and assisting in the development and documenta-
tion of procedures. Implementation and training services are
provided by our employees as well as certifi ed third parties
and certain resellers.
Training may include a combination of computer assisted in-
struction, or CAI, for certain of our products, remote training
techniques and training classes conducted at the client’s or our
offi ce(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 offi ces to train one or
more people at a client site via telephone and computer con-
nection, thus allowing an interactive and client-specifi c mode
of training without the expense and time required for travel. In
addition, our on-line “help” and other documentation features
facilitate client training as well as ongoing support.
In addition, NextGen “E-learning” is an on-line learning
subscription service which allows end users to train on the
software on the internet. E-learning allows end users to self
manage their own learning with their personal learning path
and pace. The service allows users to track the status of
courses taken.
At present, our training facilities are located in (i) Horsham,
Pennsylvania, (ii) Atlanta, Georgia, (iii) Dallas, Texas, and (iv)
Irvine, California.
Competition
The markets for healthcare information systems and services
are intensely competitive. The industry is highly fragmented
and includes numerous competitors, none of which we be-
lieve dominates these markets. Our principal existing competi-
tors in the healthcare information systems and services market
include: eClinicalWorks, GE Healthcare (“GE”), Allscripts-
Misys Healthcare Solutions, Inc. (“Allscripts”), EPIC and other
competitors.
Our recent entry into the small hospital market has introduced
new competitors, including Computer Programs and Systems,
Inc., Healthland and Healthcare Management Systems, Inc.
The electronic patient records and connectivity markets, in par-
ticular, are subject to rapid changes in technology, and we
expect that competition in these market segments will increase
as new competitors enter the market. We believe our principal
competitive advantages are the features and capabilities of
our products and services, our high level of customer support,
and our extensive experience in the industry.
The revenue cycle management market is also intensely com-
petitive as other healthcare information systems companies,
such as GE and Allscripts, are also in the market of selling both
practice management and electronic health records software
and medical billing and collection services.
Product Enhancement and Development
fi
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 fi scal years 2010, 2009 and 2008, we expended
approximately $24.5 million, $19.7 million, and $17.4 million,
respectively, on research and development activities, includ-
ing capitalized software amounts of $7.9 million, $5.9 million,
and $6.0 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, 2010, we employed approximately 1,502
persons, of which 1,466 were full-time employees. We be-
lieve that our future success depends in part upon recruiting
and retaining qualifi ed sales, marketing and technical person-
nel as well as other employees.
Intellectual Property
To protect our intellectual property, we enter into confi denti-
ality agreements and invention assignment agreements with
our employees with whom such controls are relevant. Certain
qualifi ed employees enter into additional agreements that per-
mit them access under certain circumstances, to software mat-
ters that are both confi dential and more strictly controlled. In
addition, we include intellectual property protective provisions
in many of our customer contracts.
Available Information
fi
q
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
fi
fi
11
v
site at www.sec.govg
that contains the reports, proxy state-
ments and other information that we fi le 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 fi le with the Commission.
fi
fi
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.
fi
Risks Related to Our Business
fi
fifi
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 fi xed income markets. These macro-
economic developments could negatively affect our business,
operating results or fi nancial 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 fi xed
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.
fi
fifi
fifi
We face significant, evolving competition which, if we fail
to properly address, could adversely affect our business,
results of operations, fi nancial condition and price of our
stock. The markets for healthcare information systems are in-
tensely competitive, and we face signifi cant competition from
a number of different sources. Several of our competitors have
signifi cantly greater name recognition as well as substantially
greater fi nancial, technical, product development and market-
ing resources than we do. There has been signifi cant merger
and acquisition activity among a number of our competitors in
recent years. Transaction induced pressures, or other related
fi
12
factors may result in price erosion or other negative market
dynamics that could adversely affect our business, results of
operations, financial condition and price of our stock.
fi
We compete in all of our markets with other major healthcare
related companies, information management companies, sys-
tems integrators, and other software developers. Competitive
pressures and other factors, such as new product introduc-
tions by us or our competitors, may result in price or market
share erosion that could adversely affect our business, results
of operations and financial condition. Also, there can be no
assurance that our applications will achieve broad market
acceptance or will successfully compete with other available
software products.
fi
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
fi
fi nancial condition. If new systems sales do not materialize, our
near term and longer term revenue will be adversely affected.
fifi
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 op-
erate, or our business, results of operations and financial
condition may be adversely affected. The software market
generally is characterized by rapid technological change,
changing customer needs, frequent new product introductions,
and evolving industry standards. The introduction of products
incorporating new technologies and the emergence of new
industry standards could render our existing products obso-
lete and unmarketable. There can be no assurance that we
will be successful in developing and marketing new products
that respond to technological changes or evolving industry
standards. New product development depends upon signifi -
cant research and development expenditures which depend
ultimately upon sales growth. Any material shortfall in revenue
or research funding could impair our ability to respond to tech-
nological advances or opportunities in the marketplace and
to remain competitive. If we are unable, for technological or
other reasons, to develop and introduce new products in a
timely manner in response to changing market conditions or
customer requirements, our business, results of operations and
fi
fi nancial condition may be adversely affected.
In response to increasing market demand, we are currently
developing new generations of certain of our software prod-
ucts. 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.
• diffi culty in effectively integrating any acquired technolo-
gies or software products into our current products and
technologies;
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, profi t 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
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.
fi
We may engage in future acquisitions, which may be ex-
pensive and time consuming and from which we may not
realize anticipated benefits. fi We may acquire additional
businesses, technologies and products if we determine that
these additional businesses, technologies and products are
likely to serve our strategic goals. During fiscal year 2009,
we acquired HSI and PMP, both of which are full-service
healthcare RCM companies servicing physician groups and
other healthcare clients. During fi scal year 2010, we acquired
fi
Opus and Sphere, both of which are developers of software
and services for the inpatient market. The specifi c risks we
may encounter in these types of transactions include but are
not limited to the following:
fi
• potentially dilutive issuances of our securities, the incur-
rence of debt and contingent liabilities and amortiza-
tion expenses related to intangible assets, which could
adversely affect our results of operations and financial
condition;
fi
•
use of cash as acquisition currency may adversely af-
fect interest or investment income, thereby potentially ad-
versely affecting our earnings and /or earnings per share;
• diffi culty 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 com-
pany might not accept new ownership and may transition
to different technologies or attempt to renegotiate contract
terms or relationships, including maintenance or support
agreements;
the possibility that the due diligence process in any such
acquisition may not completely identify material issues
associated with product quality, product architecture,
product development, intellectual property issues, key
personnel issues or legal and financial contingencies,
including any defi ciencies in internal controls and pro-
cedures and the costs associated with remedying such
defi ciencies;
fi
• diffi culty in integrating acquired operations due to geo-
graphical distance, and language and cultural differ-
ences; and
•
the possibility that acquired assets become impaired,
requiring us to take a charge to earnings which could be
signifi cant.
A failure to successfully integrate acquired businesses or tech-
nology for any of these reasons could have an adverse effect
on our fi nancial condition and results of operations.
fi
fifi
Our failure to manage growth could harm our business,
results of operations and financial condition.
We have in
the past experienced periods of growth which have placed,
and may continue to place, a signifi cant 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 qualifi ed individuals in such capaci-
ties within a reasonable timeframe, such failure could have
an adverse effect on us. In addition, our ability to manage
future increases, if any, in the scope of our operations or per-
sonnel will depend on signifi cant expansion of our research
and development, marketing and sales, management, and
administrative and fi nancial capabilities. The failure of our
management to effectively manage expansion in our busi-
ness could have an adverse effect on our business, results of
operations and fi nancial condition.
13
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 signifi cant part upon the continued service of
our key technical and senior management personnel, many
of whom have been with us for a signifi cant 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
signifi cant. We are also dependent on our ability to attract
high quality personnel, particularly in the areas of sales and
applications development.
The industry in which we operate is characterized by a high
level of employee mobility and aggressive recruiting of skilled
personnel. There can be no assurance that our current employ-
ees will continue to work for us. Loss of services of key em-
ployees could have an adverse effect on our business, results
of operations and fi nancial condition. Furthermore, we may
need to grant additional equity incentives to key employees
and provide other forms of incentive compensation to attract
and retain such key personnel. Equity incentives may be dilu-
tive to our per share fi nancial performance. Failure to provide
such types of incentive compensation could jeopardize our
recruitment and retention capabilities.
fi
fi
fi
Continuing worldwide political and economic uncertainties
may adversely affect our revenue and profitability.
The last
several years have been periodically marked by concerns in-
cluding but not limited to infl ation, decreased consumer con-
fi dence, the lingering effects of international confl icts, energy
costs and terrorist and military activities. These conditions can
make it extremely diffi cult 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.
The failure of auction rate securities to sell at their reset
dates could impact the liquidity of the investment and could
negatively impact the carrying value of the investment. Our
investments include auction rate securities (“ARS”). ARS are se-
curities 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 securi-
ties are subject to fl uctuations in interest rate depending on the
supply and demand at each auction. As of March 31, 2010,
we were holding a total of approximately $7.2 million, net of
unrealized loss, in ARS. The Company’s ARS are held by UBS
14
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’s 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 had ob-
tained an asset, ARS put option rights, whereby the Company
has a right to “put” the ARS back to UBS. The Company ex-
pects 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. While we believe that UBS has the
ability to honor the terms of its agreement to purchase the ARS
investments from the Company at par, the failure of UBS to
purchase these investments would result in the Company being
unable to liquidate these securities in the near future. While
these debt securities are all highly-rated investments, generally
with AAA/Aaa ratings, continued failure to sell at their reset
dates could impact the liquidity of the investment which in turn
could negatively impact our liquidity position.
Risks Related to Our Products and Service
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
fi nancial performance will depend in large part on our ability
fi
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 signifi cant percentage of our net revenue on
product development and believe that signifi cant 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
fi
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.
r
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 subscrip-
tion based, Software as a service delivery model which in-
cludes monthly subscription pricing. This model is designed
for smaller practices to quickly access the NextGenehr or
NextGenepm 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 penetrate 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 increasingly demands subscription pricing,
we may be forced to further adjust our sales, marketing and
pricing strategies accordingly, by offering a higher percentage
of our products and services through these means. Shifting
to a signifi cantly greater degree of subscription pricing could
adversely affect our financial condition, cash fl ows and quar-
terly and annual revenue and results of operations, as our
revenue would initially decrease substantially. There can be no
assurance that the marketplace will not increasingly embrace
subscription pricing.
fi
We face the possibility of claims based upon our Web site
content, which may cause us expense and management
distraction. We could be subject to third party claims based
on the nature and content of information supplied on our 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.
fifi
If our security measures are breached or fail, and unauthor-
ized access is obtained to a client’s data, our services may
be perceived as not being secure, clients may curtail or stop
using our services, and we may incur significant liabilities.
Our services involve the storage and transmission of clients’
proprietary information and protected health information of
patients. Because of the sensitivity of this information, secu-
rity features of our software are very important. If our security
measures are breached or fail as a result of third-party action,
employee error, malfeasance, insuffi ciency, defective design,
or otherwise, someone may be able to obtain unauthorized
access to client or patient data. As a result, our reputation
could be damaged, our business may suffer, and we could
face damages for contract breach, penalties for violation of
applicable laws or regulations, and signifi cant costs for reme-
diation and remediation efforts to prevent future occurrences.
We rely upon our clients as users of our system for key activi-
ties to promote security of the system and the data within it,
such as administration of client-side access credentialing and
control of client-side display of data. On occasion, our clients
have failed to perform these activities. Failure of clients to per-
form these activities may result in claims against us that this
reliance was misplaced, which could expose us to signifi cant
expense and harm to our reputation. Because techniques used
to obtain unauthorized access or to sabotage systems change
frequently and generally are not recognized until launched
against a target, we may be unable to anticipate these tech-
niques or to implement adequate preventive measures. If an
actual or perceived breach of our security occurs, the market
perception of the effectiveness of our security measures could
be harmed and we could lose sales and clients. In addition,
our clients may authorize or enable third parties to access
their client data or the data of their patients on our systems.
Because we do not control such access, we cannot ensure
the complete propriety of that access or integrity or security of
such data in our systems.
15
Failure by our clients to obtain proper permissions and
waivers may result in claims against us or may limit or pre-
vent our use of data, which could harm our business. We
require our clients to provide necessary notices and to obtain
necessary permissions and waivers for use and disclosure of
the information that we receive, and we require contractual
assurances from them that they have done so and will do so.
If they do not obtain necessary permissions and waivers, then
our use and disclosure of information that we receive from
them or on their behalf may be limited or prohibited by state
or federal privacy laws or other laws. This could impair our
functions, processes, and databases that refl ect, contain, or
are based upon such data and may prevent use of such data.
In addition, this could interfere with or prevent creation or use
of rules, and analyses or limit other data-driven activities that
benefi t us. Moreover, we may be subject to claims or liability
for use or disclosure of information by reason of lack of valid
notice, permission, or waiver. These claims or liabilities could
subject us to unexpected costs and adversely affect our oper-
ating results.
fi
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 con-
fi dential information, including patient health information,
in our processing centers and other facilities. A breach of
security in any of these facilities could damage our reputa-
tion and result in damages being assessed against us. In
addition, the other systems with which we may interface,
such as the Internet and related systems may be vulnerable
to security breaches, viruses, programming errors, or similar
disruptive problems. The effect of these security breaches
and related issues could disrupt our ability to perform certain
key business functions and could potentially reduce demand
for our services. Accordingly, we have expended signifi cant
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 signifi cant capital in the future.
The success of our strategy to offer our EDI services and
Internet solutions depends on the confi dence of our customers
in our ability to securely transmit confi dential 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 confi dential 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 confi dential 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 electronic
communication services could result in a lack of trust by our
customers causing them to seek out other vendors, and/or,
damage our reputation in the market, making it diffi cult to ob-
tain 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, diffi cul-
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.
fifi
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 fi -
nancial performance, industry reputation and ability to market
new system sales. In addition, a court or government agency
may take the position that our delivery of health information
directly, including through licensed practitioners, or delivery
of information by a third party site that a consumer accesses
through our Web sites, exposes us to assertions of malprac-
tice, other personal injury liability, or other liability for wrongful
delivery/handling of healthcare services or erroneous health
information. We maintain insurance to protect against claims
associated with the use of our products as well as liability
limitation language in our end-user license agreements, but
there can be no assurance that our insurance coverage or
contractual language would adequately cover any claim as-
serted against us. A successful claim brought against us in
excess of or outside of our insurance coverage could have
an adverse effect on our business, results of operations and
16
fi
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 pa-
tients including information that constitutes a record under
applicable law that we may store on our computer systems.
Numerous federal and state laws and regulations, the com-
mon law, and contractual obligations, govern collection,
dissemination, use and confi dentiality of patient-identifi able
health information, including:
•
state and federal privacy and confi dentiality laws;
• our contracts with customers and partners;
•
state laws regulating healthcare professionals;
• Medicaid laws;
•
the HIPAA and related rules proposed by the Health
Care Financing Administration; and
• Health Care Financing Administration standards for
Internet transmission of health data.
HIPAA establishes elements including, but not limited to, fed-
eral privacy and security standards for the use and protection
of Protected Health Information. Any failure by us or by our
personnel or partners to comply with applicable requirements
may result in a material liability to us.
Although we have systems and policies in place for safeguard-
ing Protected Health Information from unauthorized disclosure,
these systems and policies may not preclude claims against us
for alleged violations of applicable requirements. Also, third
party sites and/or links that consumers may access through our
web sites may not maintain adequate systems to safeguard
this information, or may circumvent systems and policies we
have put in place. In addition, future laws or changes in cur-
rent laws may necessitate costly adaptations to our policies,
procedures, or systems.
There can be no assurance that we will not be subject to prod-
uct 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 busi-
fi
ness, results of operations and financial condition.
We are subject to the effect of payor and provider con-
duct which we cannot control and accordingly, there is
no assurance that revenue for our services will continue
at historic levels. We offer certain electronic claims submis-
sion products and services as part of our product line. While
we have implemented certain product features designed to
maximize the accuracy and completeness of claims submis-
sions, these features may not be suffi cient to prevent inaccurate
claims data from being submitted to payors. Should inaccu-
rate claims data be submitted to payors, we may be subject
to liability claims.
Electronic data transmission services are offered by certain
payors to healthcare providers that establish a direct link be-
tween the provider and payor. This process reduces revenue
to third party EDI service providers such as us. As a result of
this, or other market factors, we are unable to ensure that we
will continue to generate revenue at or in excess of prior levels
for such services.
A signifi cant increase in the utilization of direct links between
healthcare providers and payors could adversely affect our
transaction volume and fi nancial results. In addition, we can-
not 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.
fi
Risks Related to Regulation
fi
We face increasing involvement of the federal govern-
ment in our industry, which may give rise to uncertain
and unwarranted expectations concerning the benefits we
are to receive from government funding and programs.
In February 2009, President Obama signed the American
Recovery and Reinvestment Act (“ARRA”), which allocates over
$20 billion dollars to healthcare IT over the next several years.
The provision of the legislation that addresses health informa-
tion technology specifi cally is known as the Health Information
Technology for Economic and Clinical Health Act (“HITECH
Act”). Under the provisions of HITECH Act, the ARRA includes
signifi cant fi nancial incentives to healthcare providers who can
demonstrate meaningful use of certifi ed EHR technology be-
ginning in 2011. While the Company expects the ARRA to
create signifi cant opportunities for sales of NextGenehr over
the next several years, we are unsure of the immediate impact
from the ARRA and the long-term potential could be signifi cant.
fi
r
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 con-
dition. 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 diver-
sion of management’s time and attention away from business
fifi
17
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 connec-
tion with an acquisition.
fi
There can be no assurance that such litigation will not result
in liability in excess of our insurance coverage, that our insur-
ance will cover such claims or that appropriate insurance will
continue to be available to us in the future at commercially
reasonable rates.
fifi
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, confi dentiality 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 pre-
cautions we take will be adequate to prevent misappropria-
tion of our technology or that competitors will not indepen-
dently develop technologies equivalent or superior to ours.
Further, the laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the
United States and are often not enforced as vigorously as
those in the United States.
We do not believe that our operations or products infringe
on the intellectual property rights of others. However, there
can be no assurance that others will not assert infringement
or trade secret claims against us with respect to our current or
future products or that any such assertion will not require us
to enter into a license agreement or royalty arrangement or
other financial arrangement with the party asserting the claim.
Responding to and defending any such claims may distract
the attention of our management and adversely affect our busi-
ness, results of operations and financial condition. In addition,
fi
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.
fi
If we are deemed to infringe on the proprietary rights of
third parties, we could incur unanticipated expense and be
prevented from providing our products and services. We
are and may continue to be subject to intellectual property
infringement claims as the number of our competitors grows
and our applications’ functionality is viewed as similar or over-
lapping with competitive products. We do not believe that
we have infringed or are infringing on any proprietary rights
18
of third parties. However, claims are occasionally asserted
against us, and we cannot assure you that infringement claims
will not be asserted against us in the future. Also, we cannot
assure you that any such claims will be unsuccessful. We could
incur substantial costs and diversion of management resources
defending any infringement claims – even if we are ultimately
successful in the defense of such matters. Furthermore, a party
making a claim against us could secure a judgment awarding
substantial damages, as well as injunctive or other equitable
relief that could effectively block our ability to provide products
or services. In addition, we cannot assure you that licenses for
any intellectual property of third parties that might be required
for our products or services will be available on commercially
reasonable terms, or at all.
We are dependent on our license rights and other services
from third parties, which may cause us to discontinue, delay
or reduce product shipments. We depend upon licenses for
some of the technology used in our products as well as other
services from third-party vendors. Most of these arrangements
can be continued/renewed only by mutual consent and may
be terminated for any number of reasons. We may not be
able to continue using the products or services made available
to us under these arrangements on commercially reasonable
terms or at all. As a result, we may have to discontinue, delay
or reduce product shipments or services provided until we can
obtain equivalent technology or services. Most of our third-
party licenses are non-exclusive. Our competitors may obtain
the right to use any of the business elements covered by these
arrangements and use these elements to compete directly with
us. In addition, if our vendors choose to discontinue providing
their technology or services in the future or are unsuccessful in
their continued research and development efforts, we may not
be able to modify or adapt our own products.
fi
fi
There is signifi cant uncertainty in the healthcare industry
in which we operate, and we are subject to the possibility
of changing government regulation, which may adversely
impact our business, financial condition and results of
operations. The healthcare industry is subject to changing
political, economic and regulatory infl uences that may affect
the procurement processes and operation of healthcare facili-
ties. 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.
fi
fi
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 neces-
sary 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 regula-
tions could be costly and distract management’s attention and
divert other company resources, and any noncompliance by
us could result in civil and criminal penalties.
Developments of additional federal and state regulations and
policies have the potential to positively or negatively affect
our business.
Our software may potentially be subject to regulation by
the U.S. Food and Drug Administration (“FDA”) as a medical
device. Such regulation could require the registration of the
applicable manufacturing facility and software and hardware
products, application of detailed record-keeping and manu-
facturing standards, and FDA approval or clearance prior
to marketing. An approval or clearance requirement could
create delays in marketing, and the FDA could require supple-
mental filings or object to certain of these applications, the
result of which could adversely affect our business, financial
condition and results of operations.
fi
fi
The United States Congress in 2009 enacted legislation that
would cut Medicare reimbursement to physicians by 21%
per procedure. Congress has passed several successive acts
postponing the cuts and there is discussion to rescind the cut.
However, should the cuts be implemented by Medicare, there
would be a direct material adverse revenue and earnings
impact to our RCM revenue stream. The impact would vary
by client depending on the client’s concentration of Medicare
patients. Disruption could also affect system sales due to client
reexamination of IT spending.
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 signifi cant 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 disqualifi ed from serving clients doing
business with government payors and have an adverse effect
on our business.
In most cases where we are permitted to do so, we calculate
charges for our RCM services based on a percentage of the
collections that our clients receive as a result of our services.
To the extent that violations or liability for violations of these
laws and regulations require intent, it may be alleged that
this percentage calculation provides us or our employees with
incentive to commit or overlook fraud or abuse in connection
with submission and payment of reimbursement claims. The
U.S. Centers for Medicare and Medicaid Services has stated
that it is concerned that percentage-based billing services may
encourage billing companies to commit or to overlook 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.
fifi
If our products fail to comply with evolving government
and industry standards and regulations, we may have
diffi culty selling our products.
We may be subject to addi-
tional federal and state statutes and regulations in connection
with offering services and products via the Internet. On an
increasingly frequent basis, federal and state legislators are
proposing laws and regulations that apply to Internet com-
merce and communications. Areas being affected by these
regulations include user privacy, pricing, content, taxation,
copyright protection, distribution, and quality of products and
19
services. To the extent that our products and services are sub-
ject to these laws and regulations, the sale of our products
and services could be harmed.
fifi
fifi
We are subject to changes in and interpretations of finan-
cial accounting matters that govern the measurement of our
performance, one or more of which could adversely affect
our business, financial condition, cash fl
flfl
ows, revenue and
results of operations. Based on our reading and interpreta-
tions of relevant guidance, principles or concepts issued by,
among other authorities, the American Institute of Certifi ed
Public Accountants, the Financial Accounting Standards
Board, and the Commission, we believe our current sales and
licensing contract terms and business arrangements have been
properly reported. However, there continue to be issued inter-
pretations and guidance for applying the relevant standards to
a wide range of sales and licensing contract terms and busi-
ness 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 fl ows, revenue
and results of operations.
fi
Failure to maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002 could
have an adverse effect on our business, and our per share
price may be adversely affected. Pursuant to Section 404
of the Sarbanes-Oxley Act of 2002 (“Section 404”) and the
rules and regulations promulgated by the SEC to implement
Section 404, we are required to include in our Form 10-K a
report by our management regarding the effectiveness of our
internal control over fi nancial reporting. The report includes,
among other things, an assessment of the effectiveness of our
internal control over financial reporting. The assessment must
include disclosure of any material weakness in our internal
control over fi nancial reporting identifi ed by management.
fi
fi
fi
fi
fi
As part of the ongoing evaluation being undertaken by man-
agement and our independent registered public accountants
pursuant to Section 404, our internal control over financial
reporting was effective as of March 31, 2010. However, if
we fail to maintain an effective system of disclosure controls
or internal controls over financial reporting, we may discover
material weaknesses that we would then be required to dis-
close. Any material weaknesses identifi ed in our internal con-
trols could have an adverse effect on our business. We may
not be able to accurately or timely report on our financial
results, and we might be subject to investigation by regulatory
authorities. This could result in a loss of investor confi dence in
the accuracy and completeness of our fi nancial reports, which
may have an adverse effect on our stock price.
fi
fi
20
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 re-
quired to be reported. The effectiveness of our controls and
procedures could also be limited by simple errors or faulty
judgments. In addition, if we continue to expand, through
either organic growth or through acquisitions (or both), the
challenges involved in implementing appropriate controls will
increase and may require that we evolve some or all of our
internal control processes.
It is also possible that the overall scope of Section 404 may
be revised in the future, thereby causing 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.
fi
Risks Related to Ownership of
Our Common Stock
The unpredictability of our quarterly operating results may
cause the price of our common stock to fluctuate or decline.
Our revenue may fl uctuate in the future from quarter to quarter
and period to period, as a result of a number of factors includ-
ing, without limitation:
flfl
•
•
•
•
•
•
•
the size and timing of orders from clients;
the specifi c 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;
fi
changes in pricing policies or price reductions by us or
our competitors;
the timing of new product announcements and product
introductions by us or our competitors;
changes in revenue recognition or other accounting
guidelines employed by us and/or established by the
Financial Accounting Standards Board or other rule-
making bodies;
• accounting policies concerning the timing of the recogni-
tion of revenue;
•
•
the availability and cost of system components;
the financial stability of clients;
fi
• 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;
would not adversely affect our operating results reported in
any particular quarter or year.
• deferrals of client orders in anticipation of new products,
applications, product enhancements, or public/private
sector initiatives;
• execution of or changes to our strategy;
• personnel changes; and
• general market/economic factors.
Our software products are generally shipped as orders are
received and accordingly, we have historically operated with
a minimal backlog of license fees. As a result, revenue in any
quarter is dependent on orders booked and shipped in that
quarter and is not predictable with any degree of certainty.
Furthermore, our systems can be relatively large and expen-
sive, and individual systems sales can represent a signifi cant
portion of our revenue and profi ts for a quarter such that the
fi
loss or deferral of even one such sale can adversely affect our
quarterly revenue and profi tability.
fi
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 re-
place or substantially modify their existing information systems,
and subsequently, their decision concerning which products
and services to purchase. These are major decisions for health-
care providers and, accordingly, the sales cycle for our systems
can vary signifi cantly and typically ranges from six to twenty
four months from initial contact to contract execution/shipment.
Because a signifi cant percentage of our expenses are rela-
tively fi xed, a variation in the timing of systems sales, imple-
mentations, and installations can cause signifi cant 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 Financial
Accounting Standards Board (“FASB”) Accounting Standards
Codifi cation (“ASC”) Topic 985-605, Software, Revenue
Recognition, or ASC 985-605. ASC 985-605 summarizes
the FASB’s views in applying generally accepted accounting
principles to revenue recognition in financial statements.
fi
There can be no assurance that application and subsequent
interpretations of these pronouncements will not further modify
our revenue recognition policies, or that such modifi cations
Due to all of the foregoing factors, it is possible that our oper-
ating results may be below the expectations of public market
analysts and investors. In such event, the price of our common
stock would likely be adversely affected.
Our common stock price has been volatile, which could
result in substantial losses for investors purchasing shares
of our common stock and in litigation against us. Volatility
may be caused by a number of factors including but not
limited to:
• actual or anticipated quarterly variations in operating
results;
•
•
rumors about our performance, software solutions, or
merger and acquisition activity;
changes in expectations of future financial performance
or changes in estimates of securities analysts;
fi
• 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 inter
nationally; 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 fl uctuations may
adversely affect the trading price of our common stock,
regardless of actual operating performance.
Moreover, in the past, securities class action litigation has
often been brought against a company following periods of
volatility in the market price of its securities. We may in the 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 infl
flfl
uence over
the outcome of all matters submitted to our shareholders for
flfl
approval and which influence may be alleged to confl
ict with
fifi
fifi
flfl
21
ITEM 2. Properties
Our principal administrative, accounting, QSI Dental Division
operations and NextGen Division training operations are lo-
cated in Irvine, California. 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 of March 31, 2010, we lease an aggregate of approxi-
mately 305,500 square feet of space with expiration dates,
excluding options, ranging from month-to-month to September
2016, as follows:
QSI Dental Division
Irvine, California – Corporate Headquarters
24,000
Square Feet
Other U.S. locations
NextGen Division
Horsham, Pennsylvania
Austin, Texas
Atlanta, Georgia
Laguna Hills, California
Practice Solutions Division
St. Louis, Missouri
Hunt Valley, Maryland
Total leased properties
5,000
98,000
39,000
35,000
4,500
66,500
33,500
305,500
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 fi nancial position, results of operations or liquidity.
fi
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-
fi cult to predict. We refer you to the discussion of infringement
and litigation risks in our Risk Factors section of this Report.
ITEM 4. Reserved
our interests and the interests of our other shareholders. Two
of our directors and principal shareholders benefi cially owned
an aggregate of approximately 33.5% of the outstanding
shares of our common stock at March 31, 2010. 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 of Directors.
The amounts required to assure a Board position can vary
based upon the number of shares outstanding, the number of
shares voting, the number of directors to be elected, the num-
ber of “broker non-votes,” and the number of shares held by
the shareholder exercising cumulative voting rights. In the event
that cumulative voting is invoked, it is likely that the two of our
directors holding an aggregate of approximately 33.5% of the
outstanding shares of our common stock at March 31, 2010
will each have suffi cient votes to assure themselves of one or
more seats on our Board of Directors. With or without cumula-
tive voting, these shareholders will have signifi cant infl uence
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 approximately $1.5 million to defend the
Company’s slate. In addition, such infl uence by one or both of
these shareholders could have the effect of discouraging oth-
ers from attempting to purchase us, implement a change over
our Board of Directors and management, and/or reducing the
market price offered for our common stock in such an event.
fi
fi
Our future policy concerning the payment of dividends is
uncertain, which could adversely affect the price of our
stock. We have announced our intention to pay a quarterly
dividend commencing with the conclusion of our first fi
fi
scal
quarter of 2008 (June 30, 2007) and pursuant to this policy
our Board of Directors has declared a quarterly cash divi-
dend ranging from $0.25 to its most recent level of $0.30 per
share on our outstanding shares of common stock, each quar-
ter thereafter. We anticipate that future quarterly dividends, if
and when declared by our Board of Directors pursuant to this
policy, would likely be distributable on or about the fi fth day of
each of the months of October, January, April and July. There
can be no guarantees that we will have the financial where-
withal to fund this dividend in perpetuity or to pay it at historic
rates. Further, our Board of Directors may decide not to pay
fi
the dividend at some future time for financial or non-fi
nancial
reasons. Unfulfi lled expectations regarding future dividends
could adversely affect the price of our stock.
fi
fi
fi
ITEM 1B. Unresolved Staff Comments
None.
22
Part II
ITEM 5. Market for Registrant’s
Common Equity, 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:
Quarter Ended
June 30, 2008
September 30, 2008
December 31, 2008
March 31, 2009
June 30, 2009
September 30, 2009
December 31, 2009
March 31, 2010
High
$35.97
$47.94
$44.98
$48.46
$62.00
$64.16
$65.98
$68.59
Low
$29.00
$27.34
$25.70
$34.26
$43.44
$50.87
$57.63
$51.30
At May 21, 2010, there were approximately 88 holders of
record of our common stock.
Dividends
In January 2007, our Board of Directors adopted a policy
whereby we intend to pay a regular quarterly dividend of
$0.25 per share on our outstanding common stock, subject
to further Board review and approval and establishment of
record and distribution dates by our Board of Directors prior
to the declaration of each such quarterly dividend. In August
2008, our Board of Directors increased the quarterly dividend
to $0.30 per share. We anticipate that future quarterly divi-
dends, if and when declared by our Board of Directors pursu-
ant to this policy, would likely be distributable on or about
the fi fth day of each of the months of October, January, April
and July.
On May 26, 2010, the Board of Directors 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 June 17, 2010 with an expected distribution date on or
about July 6, 2010.
The following dividends have been declared in the 2010, 2009, and 2008 fiscal years on the dates indicated:
fi
Board Approval Date
Fiscal year 2010
January 27, 2010
October 28, 2009
July 23, 2009
May 27, 2009
Fiscal year 2009
January 28, 2009
October 30, 2008
August 4, 2008
May 29, 2008
Fiscal year 2008
January 30, 2008
October 25, 2007
July 31, 2007
May 31, 2007
Record
Date
Payment
Date
Dividend
Amount
March 23, 2010
December 23, 2009
September 25, 2009
June 12, 2009
March 11, 2009
December 15, 2008
September 15, 2008
June 15, 2008
March 14, 2008
December 14, 2007
September 14, 2007
June 15, 2007
April 5, 2010
$ 0.30
January 5, 2010
October 5, 2009
July 6, 2009
0.30
0.30
0.30
April 3, 2009
$ 0.30
January 5, 2009
October 1, 2008
July 2, 2008
0.30
0.30
0.25
April 7, 2008
$ 0.25
January 7, 2008
October 5, 2007
July 5, 2007
0.25
0.25
0.25
Payment of future dividends, if any, will be at the discretion
of our Board of Directors after taking into account various
factors, including without limitation, our fi nancial condition,
operating results, current and anticipated cash needs and
plans for expansion.
23
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 fi ve-year period ended March 31, 2010 assuming
$100 was invested on March 31, 2005 with all dividends, if
any, reinvested. This performance graph shall not be deemed
to be “soliciting material” or “filed” for purposes of Section
fi
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.
fi
Comparison of 5 Year Cumulative Total Return*
Among Quality Systems, Inc., The NASDAQ Composite Index
and the NASDAQ Computer & Data Processing Index
$ 350
$ 300
$ 250
$ 200
$ 150
$ 100
$ 50
$ 0
3/31/2005
3/31/2006
3/31/2007
3/31/2008
3/31/2009
3/31/2010
Quality Systems, Inc. NASDAQ Composite NASDAQ Computer & Data Processing
* $100 invested on 3/31/2005 in stock or index, including reinvestment of dividends. Fiscal year ending March 31.
The last trade price of our common stock on each of March
31, 2006, 2007, 2008, 2009 and 2010 was published
by NASDAQ and, accordingly for the periods ended
March 31, 2006, 2007, 2008, 2009 and 2010 the re-
ported last trade price was utilized to compute the total
cumulative return for our common stock for the respective
periods then ended. Shareholder returns over the indicated
periods should not be considered indicative of future stock
prices or shareholder returns.
24
ITEM 6. Selected Financial Data
fi
The following selected fi nancial data with respect to our
Consolidated Statements of Income data for each of the
fi ve years in the period ended March 31, 2009 and the
Consolidated Balance Sheet data as of the end of each
such fi scal year are derived from our audited consolidated
fi
financial statements. The following information should be read
fi
in conjunction with our Consolidated Financial Statements
and the related notes thereto and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere herein. All share prices in the
table below have been retroactively adjusted to refl ect the fis-fi
cal year 2006 and 2005 stock splits.
Consolidated Financial Data
Statements of Income Data:
Revenue
Cost of revenue
Gross profi t
Selling, general and
administrative expenses
Research and development costs
Amortization of acquired
intangible assets
Income from operations
Interest income
Other income (expense)
Income before provision for
income taxes
Provision for income taxes
Year ended March 31,
2010
2009
2008
2007
2006
(in thousands, except per share data)
$ 291,811
$ 245,515
$ 186,500
$ 157,165
$ 119,287
110,807
88,890
62,501
50,784
181,004
156,625
123,999
106,381
39,828
79,459
86,951
16,546
69,410
13,777
53,260
11,350
45,337
10,166
35,554
8,087
1,783
1,035
–
–
–
75,724
72,403
59,389
50,878
35,818
226
268
1,203
(279)
2,661
953
3,306
2,108
–
–
76,218
27,839
73,327
27,208
63,003
22,925
54,184
20,952
37,926
14,604
Net income
$ 48,379
$ 46,119
$ 40,078
$ 33,232
$ 23,322
Basic net income per share
$ 1.69
$ 1.65
$ 1.47
$ 1.24
$ 0.88
Diluted net income per share
$ 1.68
$ 1.62
$ 1.44
$ 1.21
$ 0.85
Basic weighted average shares
outstanding
Diluted weighted average shares
outstanding
28,635
28,031
27,298
26,882
26,413
28,796
28,396
27,770
27,550
27,356
Dividends declared per common share
$ 1.20
$ 1.15
$ 1.00
$ 1.00 $ 0.875
March 31,2010 March 31,2009 March 31,2008 March 31,2007 March 31,2006
Balance Sheet Data:
Cash and cash equivalents
$ 84,611
$ 70,180
$ 59,046
$ 60,028
$ 57,255
Working capital
Total assets
Total liabilities
$ 118,935
$ 98,980
$ 79,932
$ 76,616
$ 61,724
$ 310,180
$ 242,101
$ 187,908
$ 150,681
$ 122,247
$ 121,891
$ 86,534
$ 74,203
$ 59,435
$ 49,838
Total shareholders’ equity
$ 188,289
$ 155,567
$ 113,705
$ 91,246
$ 72,409
25
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, includ-
fi
ing discussions of our product development plans, business
strategies and market factors infl uencing our results, may in-
clude 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 unfore-
seen, including, but not limited to, our ability to continue to
develop new products and increase systems sales in markets
characterized by rapid technological evolution, consolidation,
and competition from larger, better capitalized competitors.
Many other economic, competitive, governmental and tech-
nological 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
fi
other public disclosures and filings with the Commission.
Overview
fi
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 op-
erations and financial condition and the following discussion
should be read in conjunction with, and is qualifi ed in its en-
tirety by, the Consolidated Financial Statements and related
notes thereto included elsewhere in this Report. Historical re-
sults of operations, percentage margin fl uctuations and any
trends that may be inferred from the discussion below are not
necessarily indicative of the operating results for any future
period.
• Management Overview. This section provides a general
description of our Company and operating segments, a
discussion as to how we derive our revenue, background
information on certain trends and developments affecting
our Company, a summary of our acquisition transactions
and a discussion on management’s strategy for driving
revenue growth.
• Critical Accounting Policies and Estimates. This section
discusses those accounting policies that are considered
important to the evaluation and reporting of our financial
condition and results of operations, and whose applica-
tion requires us to exercise subjective or complex judgments
in making estimates and assumptions. In addition, all of
our significant accounting policies, including our critical
accounting policies, are summarized in Note 2 to the
Consolidated Financial Statements included in this Report.
fi
fi
• Overview of Results of Operations and Results of
Operations by Operating Divisions. These sections pro-
vide our analysis and outlook for the signifi cant line items
on our Consolidated Statements of Income, as well as
other information that we deem meaningful to understand
our results of operations on both a consolidated basis
and an operating division basis.
•
Liquidity and Capital Resources. This section provides an
analysis of our liquidity and cash fl ows and discussions of
our contractual obligations and commitments as of March
31, 2010.
• New Accounting Pronouncements. This section pro-
vides a summary of the most recent authoritative ac-
counting standards 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 Dental Division,
the NextGen Division, and the Practice Solutions Division.
Operationally, HSI and PMP are considered and adminis-
tered as part of the Practice Solutions Division while Opus
and Sphere operate under the NextGen Division. We primar-
ily derive revenue by developing 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 along with comprehensive
systems implementation, maintenance and support and add
on complementary services such as RCM and EDI. Our sys-
tems and services provide our clients with the ability to re-
design patient care and other workfl ow processes while im-
proving productivity through facilitation of managed access to
patient information. Utilizing our proprietary software in com-
bination with third party hardware and software solutions, our
products enable the integration of a variety of administrative
and clinical information operations.
On May 20, 2008, we acquired HSI, a full-service health-
care RCM company. HSI operates under the umbrella of the
Company’s Practice Solutions Division. Founded in 1996, HSI
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.
On October 28, 2008, we acquired PMP, a full-service
healthcare RCM company. This acquisition is also part of
our growth strategy for our Practice Solutions Division. Similar
to HSI, PMP operates under the umbrella of the Company’s
26
Practice Solutions Division. Founded in 2001, PMP provides
physician billing and technology management services to
healthcare providers, primarily in the Mid-Atlantic region.
On August 12, 2009, we acquired Sphere, a provider of
financial information systems to the small hospital inpatient
fi
market. This acquisition is also part of our strategy to expand
into the small hospital market and to add new customers by
taking advantage of cross selling opportunities between the
ambulatory and inpatient markets.
On February 10, 2010, we acquired Opus, a provider of
clinical information systems to the small hospital inpatient mar-
ket. Founded in 1987 and headquartered in Austin, Texas,
Opus delivers web-based clinical solutions to hospital systems
and integrated health networks nationwide. This acquisition
complements and will be integrated with the assets of Sphere.
Both companies are established developers of software and
services for the inpatient market and will operate under the
Company’s NextGen Division.
Our strategy is, at present, to focus on providing software 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 invest-
ments in our infrastructure including but not limited to product
development, sales, marketing, implementation, and support,
to continue efforts to make infrastructure investments within an
overall context of maintaining reasonable expense discipline,
to add new customers through maintaining and expanding
sales, marketing and product development activities, and to
expand our relationship with existing customers through de-
livery of add-on and complementary products and services
and to continue our gold standard commitment of service in
support of our customers.
Critical Accounting Policies and Estimates
The discussion and analysis of our Consolidated Financial
Statements and results of operations is based upon our
Consolidated Financial Statements, which have been pre-
pared in accordance with accounting principles generally ac-
cepted in the United States of America. The preparation of
these Consolidated Financial Statements requires us to make
estimates and judgments that affect the reported amounts of as-
sets, 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, software
development cost, intangible assets and self-insurance accru-
als for reasonableness. We base our estimates on historical
experience and on various other assumptions that manage-
ment believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about
the carrying values of assets and liabilities that may not be
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
We believe that signifi cant accounting policies, as de-
scribed in Note 2 of our Consolidated Financial Statements,
“Summary of Signifi cant Accounting Policies” should be read
in conjunction with Management’s Discussion and Analysis of
Financial Condition and Results of Operations. We believe
the following table depicts the most critical accounting policies
that affect our Consolidated Financial Statements:
Revenue Recognition
Judgments and Uncertainties
We generate revenue from the sale of licensing
rights to use our software products sold directly
to end-users and value-added resellers, or VARs.
We also generate revenue from sales of hardware
and third party software, implementation, training,
software customization, EDI, post-contract support
(maintenance) and other services, including RCM
services, performed for customers who license our
products.
Revenue from implementation and training services
is recognized as the corresponding services are
performed. Maintenance revenue is recognized
ratably over the contractual maintenance period.
RCM revenue is derived from services fees, which
include amounts charged for ongoing billing and
other related services and are generally billed to
A typical system contract contains multiple elements of the above items.
FASB ASC Topic 985-605-25, Software, Revenue Recognition, Multiple
Elements, or ASC 985-605-25, requires revenue earned on software ar-
rangements 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 specifi c 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 product or
service. We have established VSOE for the related undelivered elements
based on the bell-shaped curve method. Maintenance VSOE for our larg-
est customers is based on stated renewal rates only if the rate is determined
to be substantive and falls within our customary pricing practices.
When evidence of fair value exists for the undelivered elements only, the
residual method, provided for under ASC 985-605, is used. Under the
27
Revenue Recognition (continued)
the customer as a percentage of total collections.
We do not recognize revenue for services fees
until these collections are made as the services
fees are not fi xed or determinable until such time.
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 ele-
ments, and allocate 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, hard-
ware and third party software, maintenance, future purchase discounts, or
other services. If VSOE of fair value of any undelivered element does not
exist, all revenue is deferred until VSOE of fair value of the undelivered ele-
ment is established or the element has been delivered.
We bill for the entire system sales contract amount upon contract execu-
tion, except for maintenance which is billed separately. Amounts billed in
excess of the amounts contractually due are recorded in accounts receiv-
able as advance billings. Amounts are contractually due when services are
performed or in accordance with contractually specifi ed payment dates.
Provided the fees are fi xed or 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 fi xed or determinable, then
the revenue recognized in each period (subject to application of other
revenue recognition criteria) will be the lesser of the aggregate of amounts
due and payable or the amount of the arrangement fee that would have
been recognized if the fees were being recognized using the residual
method. Fees which are considered fi xed or determinable at the inception
of our arrangements must include the following characteristics:
•
•
The fee must be negotiated at the outset of an arrangement, and
generally be based on the specifi c volume of products to be de-
livered 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 signifi cant por-
tion of the fee is due more than 12 months after delivery or after the
expiration of the license, the fee is presumed not fi xed or determinable.
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may
be exposed to increases or decreases in revenue that could be material.
Valuation of Marketable Securities and
ARS Put Option Rights
Our investments at March 31, 2010 and 2009
are in tax exempt municipal ARS which are clas-
sifi ed as either current or non-current marketable
securities on our Consolidated Balance Sheets,
depending on the liquidity and timing of expected
realization of such securities.
Judgments and Uncertainties
Marketable securities are recorded at fair value, based on quoted market
rates or on valuation analysis when appropriate. The cost of marketable
securities sold is based upon the specifi c identifi cation method. Realized
gains or losses and other-than-temporary declines in the fair value of mar-
ketable securities are determined on a specifi c identifi cation basis and
reported in interest and other income, net, as incurred.
The fair value of our marketable securities has been estimated by manage-
ment based on certain assumptions of what market participants would use
28
Valuation of Marketable Securities and
ARS Put Option Rights (continued)
Our ARS are held by UBS Financial Services
Inc.. On November 13, 2008, we entered into
an Auction Rate Security Rights Agreement with
UBS, whereby the we accepted UBS’s 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, we had obtained an as-
set, ARS put option rights, whereby the we have a
right to “put” the ARS back to UBS. We expect 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.
l
in pricing the asset in a current transaction, or level 3 – unobservable inputs
in accordance with FASB ASC Topic 820-10, Fair Value Measurements
and Disclosures-Overall, or ASC 820-10. 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 manage-
ment’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.
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may
be exposed to increases or decreases in gains and losses that could
be material.
Allowance for Doubtful Accounts
Judgments and Uncertainties
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 custom-
ers and maintain reserves for estimated credit
losses. Reserves for potential credit losses are
determined by establishing both specifi c and
general reserves.
Specifi c reserves are based on management’s estimate of the probability
of collection for certain troubled accounts. General reserves are estab-
lished based on our historical experience of bad debt expense and the
aging of our accounts receivable balances net of deferred revenue and
specifi cally reserved accounts. If the financial condition of our customers
were to deteriorate resulting in an impairment of their ability to make pay-
ments, additional allowances would be required.
fi
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may
be exposed to increases or decreases in required reserves that could
be material.
Software Development Costs
Judgments and Uncertainties
Development costs incurred in the research and
development of new software products and en-
hancements to existing software products are
expensed as incurred until technological feasi-
bility has been established. After technological
feasibility is established with the completion of
a working model of the enhancement or prod-
uct, any additional development costs are capi-
talized in accordance with FASB ASC Topic
985-20, Software, Costs of Computer Software
to be Sold, Leased or Marketed, or ASC 985-
20. Such capitalized costs are amortized on a
straight line basis over the estimated economic
life of the related product, which is generally
three years.
d
We perform an annual review of the recoverability of such capital-
ized software costs. At the time a determination is made that capital-
ized amounts are not recoverable based on the estimated cash fl ows to
be generated from the applicable software, any remaining capitalized
amounts are written off.
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may
be exposed to increases or decreases in revenue that could be material.
29
Goodwill
Judgments and Uncertainties
Goodwill is related to the NextGen Division
and the HSI, PMP, Sphere, and Opus acquisi-
tions, which closed on May 20, 2008, October
28, 2008, August 12, 2009, and February 10,
2010, respectively.
l
fi
In accordance with FASB ASC Topic 350-20, Intangibles – Goodwill and
Other, Goodwill, or ASC 350-20, we test goodwill for impairment annu-
fi
ally at the end of our first fi
scal quarter, referred to as the annual test date.
We will also test for impairment between annual test dates if an event
occurs or circumstances change that would indicate the carrying amount
may be impaired. Impairment testing for goodwill is performed at a re-
porting unit level, which is defined as an operating segment or one level
below and operating segment (referred to as a component). A component
of an operating segment is a reporting unit if the component constitutes a
business for which discrete fi nancial information is available and segment
management regularly reviews the operating results of that component. An
impairment loss would generally be recognized when the carrying amount
of the reporting unit’s net assets exceeds the estimated fair value of the
reporting unit.
fi
fi
Effect if Actual Results Differ from Assumptions
We have not made any material changes in the accounting methodology
we use to assess impairment loss during the past three fiscal years.
fi
The carrying values of goodwill at March 31, 2010 were $46.2 million.
We have determined that there was no risk of impairment to our goodwill
as of March 31, 2010.
We do not believe there is a reasonable likelihood that there will be a
material change in the future estimates or assumptions we use to test for
impairment losses on goodwill and other intangible assets. However, if
actual results are not consistent with our estimates or assumptions, we may
be exposed to an impairment charge that could be material.
Judgments and Uncertainties
In accordance with business combination accounting under FASB ASC
Topic 805, Business Combinations, or ASC 805, we allocate the purchase
price of acquired businesses to the tangible and intangible assets acquired
and liabilities assumed based on estimated fair values. Our purchase price
allocation methodology contains uncertainties because it requires manage-
ment to make assumptions and to apply judgment to estimate the fair value
of acquired assets and liabilities. Management estimates the fair value of
assets and liabilities based upon quoted market prices, the carrying value
of the acquired assets and widely accepted valuation techniques, includ-
ing discounted cash fl ows and market multiple analyses. Unanticipated
events or circumstances may occur which could affect the accuracy of our
fair value estimates, including assumptions regarding industry economic
factors and business strategies.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood that there will be a
material change in the future estimates or assumptions we use to complete
the purchase price allocation and estimate the fair value of acquired as-
sets and liabilities. However, if actual results are not consistent with our
Business Combinations – Purchase Price
Allocations
During the last three fi scal years, we completed
three signifi cant acquisitions:
fi
In February 2010, we acquired for $20.6 million.
In October 2008, we acquired PMP for $19.7
million, including transaction costs.
In May 2008, we acquired HSI for $15.6 million,
including transaction costs.
30
Business Combinations – Purchase Price
Allocations (continued)
estimates or assumptions, we may be exposed to losses or gains that could
be material.
Intangible Assets
Judgments and Uncertainties
Intangible assets consist of capitalized software
costs, customer relationships, trade names and
certain intellectual property. Intangible assets re-
lated to customer relationships and trade names
arose in connection with the acquisition of HSI,
PMP, Opus, and Sphere.
These intangible assets were recorded at fair value and are stated net of
accumulated amortization and impairments. Intangible assets are amor-
tized over their remaining estimated useful lives, ranging from 3 to 9 years.
Our amortization policy for intangible assets is based on the principles in
FASB ASC Topic 350-30, Intangibles – Goodwill and Other, General
Intangibles Other than Goodwill,l or ASC 350-30, which requires that
the amortization of intangible assets refl ect the pattern that the economic
benefi ts of the intangible assets are consumed.
fi
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to decreases in the fair value of our intangible assets, resulting in
impairment charges that could be material.
Share-Based Compensation
Judgments and Uncertainties
We have a stock-based compensation plan,
which includes stock options and restricted stock
units. See Note 2, “Summary of Signifi cant
Accounting Policies,” and Note 13, “Share-
Based Awards,” to the Consolidated Financial
Statements of this Report for a complete discus-
sion of our stock-based compensation programs.
We apply the provisions of FASB ASC Topic 718, Compensation – Stock
Compensation, or ASC 718, 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. ASC 718
requires us to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. We estimate the expected
term of the option using historical exercise experience. We estimate volatil-
ity 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 Statements of Income.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood there will be a material
change in the future estimates or assumptions we use to determine stock-
based compensation expense. However, if actual results are not consistent
with our estimates or assumptions, we may be exposed to changes in
stock-based compensation expense that could be material.
31
Self-Insured Liabilities
Judgments and Uncertainties
fi
Effective January 1, 2010, the Company became
self-insured with respect to healthcare claims, sub-
ject to stop-loss limits. The Company accrues for
estimated self-insurance costs and uninsured ex-
posures based on claims filed and an estimate
of claims incurred but not reported as of each
balance sheet date. However, it is possible that
recorded accruals may not be adequate to cover
the future payment of claims. Adjustments, if any,
to estimated accruals resulting from ultimate claim
payments will be refl ected in earnings during the
periods in which such adjustments are determined.
Our self-insured liabilities contain uncertainties because management is re-
quired to make assumptions and to apply judgment to estimate the ultimate
cost to settle reported claims and claims incurred but not reported at the
balance sheet date.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood that there will be a
material change in the estimates or assumptions we use to calculate our
self-insured liabilities. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to losses or gains that could
be material.
Overview of Our Results
• Our total revenue increased 18.9% and income from
operations grew 4.6% on a consolidated basis for the
year ended March 31, 2010. Revenue was positively
impacted by growth in recurring revenue, including main-
tenance, EDI and RCM revenue, which grew 22.4%,
18.7% and 71.1% respectively, offset by higher corporate
expenses.
fi
• Uncertainty over the fi nal rules regarding incentive pay-
ments tied to the ARRA continued to negatively impact
system sales revenue in fi scal year 2010. We have made
investments in our sales and marketing areas in anticipa-
tion of receiving the final rules related to the ARRA.
fi
fi
• Our year over year growth in revenue and operating in-
come during the year ended March 31, 2010 was par-
tially attributable to the HSI and PMP acquisitions. HSI
and PMP combined generated $42.7 million of revenue
for fiscal year 2010 as compared to a total of $24.4 mil-
lion of revenue for the ten and fi ve months of respective
results in fi scal year 2009.
fi
fi
fi
• Operating income was negatively impacted 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, gen-
eral and administrative expenses primarily due to higher
selling related expenses incurred in preparation for the
ARRA, which was enacted in February 2009, as well as
higher corporate related expenses.
• We do not believe the revenue mix changes noted above
represent a change in the overall purchasing environment.
fi
On top of the potential benefits from the ARRA, we have
32
fi
benefited and hope to continue to benefi
fi
t from the in-
creased demands on healthcare providers for greater ef-
fi ciency and lower costs, as well as increased adoption
rates for electronic medical records and other technology
in the healthcare arena.
fi
• While we expect to benefit from the increasing demands
for greater effi ciency as well as government support for in-
creased adoption of electronic health records, the current
economic environment, combined with unpredictability
of the federal government’s plans to promote increased
adoption of electronic medical records, makes the near
term achievement of such benefi ts and, ultimately, their
fi
impact on system sales, uncertain.
NextGen Division
• NextGen Division revenue increased 13.6% in the year
ended March 31, 2010 and divisional operating income
(excluding unallocated corporate expenses) increased
8.3% from the year ended March 31, 2009. Organic
revenue growth in the NextGen Division was 11.6% and
20.4% for the years ended March 31, 2010 and 2009,
respectively.
•
The acquisitions of Opus and Sphere in fi scal year 2010
added approximately $2.9 million in revenue for the year
ended March 31, 2010 and $0.7 million in additional
operating income in the same period a year ago.
fi
• Recurring revenue, consisting of maintenance and EDI
revenue, represented $111.9 million and accounted for
48.3% of total NextGen Division revenue during fiscal
year 2010. In the same period a year ago, recurring
revenue represented 44.3% of total NextGen Division
revenue, or $90.3 million.
fi
• During the year ended March 31, 2010, we added staff-
ing resources in anticipation of future growth from the
ARRA. We intend to continue doing so in future periods
to maximize our opportunities from the ARRA.
• Our goals include taking maximum advantage of future
benefi ts related to the ARRA and continuing to further
enhance and expand the marketing and sales of our
existing products, developing new products for targeted
markets, continuing to add new customers, selling ad-
ditional software and services to existing customers, ex-
panding penetration of connectivity and other services
to new and existing customers, and capitalizing on
growth and cross selling opportunities within the Practice
Solutions Division and the recently acquired acute care
software product lines.
QSI Dental Division
• QSI Dental Division revenue increased 8.1% in the year
ended March 31, 2010 and divisional operating income
(excluding unallocated corporate expenses) increased
2.2% from the year ended March 31, 2009.
• An increase in system sales revenue offset by an increase
in selling, general and administrative expenses were the
chief contributors to the operating income results in fiscal
year 2010.
fi
•
In July 2009, we licensed source code from PlanetDDS,
Inc. that will allow us to deliver hosted, web-based SaaS
practice management and clinical software solutions to
the dental industry. The software solution will be marketed
primarily to the multi-location dental group practice mar-
ket in which the Division has historically been a dominant
player. This new software solution (NextDDS) brings the
QSI Dental Division to the forefront of the emergence of
internet based applications and cloud computing and
represents a signifi cant growth opportunity for us to
sell both to our existing customer base as well as new
customers.
• Our goal for the QSI Dental Division is to maximize profit fi
performance given the constraints represented by a rela-
tively weak purchasing environment in the dental group
practice market while taking advantage of opportunities
with the new NextDDS product. The QSI Dental Division
also intends to leverage the NextGen Division’s sales
force to sell its dental electronic medical records software
to practices that provide both medical and dental ser-
vices such as Federal Qualifi ed Health Centers, which
are receiving grants as part of the ARRA.
Practice Solutions Division
•
Practice Solutions Division revenue increased 67.5% in the
year ended March 31, 2010 and divisional operating
income (excluding unallocated corporate expenses) de-
creased 5.7% from the year ended March 31, 2009. A
signifi cant driver of the increase in revenue was that fact
that fiscal year 2010 included a full year of results for HSI
and PMP versus approximately ten and fi ve months of re-
spective results in fi scal year 2009. The Practice Solutions
Division also benefi ted from organic growth achieved
through cross selling RCM services to existing NextGen
Division customers.
fi
fi
fi
• Operating income as a percentage of revenue declined
to approximately 5.4% of revenue versus 9.5% of revenue
primarily as a result of a smaller amount of software sales
to RCM customers compared to the prior year as well
as costs related to transitioning to the NextGen platform
including training of staff and initial set up and other costs
related to achieving higher production volumes.
33
The following table sets forth for the periods indicated the percentage of net revenue represented by each item in our Consolidated
Statements of Income (certain percentages below may not sum due to rounding):
Year Ended March 31,
2010
2009
2008
(Unaudited)
30.8%
34.8%
40.9%
4.9
35.7
30.6
12.0
12.6
9.2
64.3
100.0
4.2
4.1
8.3
4.6
8.7
9.5
7.0
29.7
38.0
62.0
29.8
5.7
0.6
36.1
25.9
0.1
0.1
26.1
9.5
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
28.3
5.6
0.4
34.3
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
11.4
6.7
8.5
0.3
6.7
22.1
33.5
66.5
28.6
6.1
0.0
34.6
31.8
1.4
0.5
33.8
12.3
16.6%
18.8%
21.5%
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 revenues
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 profi t
Operating expenses:
Selling, general and administrative
Research and development costs
Amortization of acquired intangible assets
Total operating expenses
Income from operations
Interest income
Other income (expense)
Income before provision for income taxes
Provision for income taxes
Net income
34
Comparison of Fiscal Years Ended
March 31, 2009 and March 31, 2008
Net Income. For the year ended March 31, 2010, our net
income was $48.4 million or $1.69 per share on a basic
and $1.68 per share on a fully diluted basis. In comparison,
we earned $46.1 million or $1.65 per share on a basic and
$1.62 per share on a fully diluted basis in the year ended
March 31, 2009. The increase in net income for the year
ended March 31, 2010 was achieved primarily through the
following:
• an 18.9% increase in consolidated revenue, including an
increase of $27.7 million in revenue from our NextGen
Division and an increase of $17.4 million in revenue from
our Practice Solutions Division;
• a 13.6% increase in NextGen Division revenue, which
accounted for 79.4% of consolidated revenue;
• an increase of recurring revenue, including RCM, mainte-
nance, and EDI revenue, offset by a decline in our gross
profit margin due primarily to both a shift in revenue mix
with increased RCM revenue and lower gross margins
related to RCM revenue;
fi
• an increase in selling, general and administrative ex-
penses as a percentage of revenue related to higher sell-
ing and corporate expenses and
• a decrease in interest income primarily due signifi cantly
lower interest rates, as compared to the prior year, on
money market accounts in which we invest a majority of
our cash.
Revenue. Revenue for the year ended March 31, 2010 in-
creased 18.9% to $291.8 million from $245.5 million for the
year ended March 31, 2009. NextGen Division revenue
increased 13.6% to $231.6 million from $204.0 million in
the year ended March 31, 2009 while QSI Dental Division
revenue increased 8.1% during that same period to $17.1 mil-
lion from $15.9 million and Practice Solutions Division revenue
increased 67.5% during that same period to $43.1 million
from $25.7 million. Practice Solutions Division revenue was
impacted positively in fiscal year 2010 as a result of including
a full year of results versus approximately ten and fi ve months
of results for HSI and PMP, respectively, in fiscal year 2009.
fi
fi
We divide revenue into two categories, “system sales” and
“maintenance, EDI, RCM and other services.” Revenue i n
the system sales category includes software license fees,
third party hardware and software, and implementation and
training 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 services, annual third party
license fees, hosting and other services revenue.
System Sales. Revenue earned from Company-wide sales of
systems for the year ended March 31, 2010 increased 5.4%
to $104.1 million from $98.8 million in the prior year.
Our increase in revenue from sales of systems was princi-
pally the result of a 5.1% increase in category revenue at our
NextGen Division whose sales in this category grew from
$93.3 million during the year ended March 31, 2009 to
$98.1 million during the year ended March 31, 2010. This
increase was driven by higher sales of ambulatory practice
management and health records software to both new and
existing clients, as well as increases in revenue related to
implementation and training services.
Systems sales revenue in the QSI Dental Division increased
to approximately $3.9 million in the year ended March 31,
2010 from $3.0 million in the year ended March 31, 2009
while systems sales revenue in the Practice Solutions Division
decreased to approximately $2.1 million in the year ended
March 31, 2010 from $2.4 million in the year ended March
31, 2009. Systems sales in the QSI Dental Division was posi-
tively impacted by greater joint sales of dental and medical
software to Federally Qualifi ed Health Centers.
35
The following table breaks down our reported system sales into software, hardware, third party software, supplies, and imple-
mentation and training services components by division:
Software
,
Hardware, Third Party
y
,
Software and Supplies
pp
Implementation and
Training Services
Total System Sales
Year ended March 31, 2010
QSI Dental Division
NextGen Division
Practice Solutions Division
Consolidated
Year ended March 31, 2009
QSI Dental Division
NextGen Division
Practice Solutions Division
Consolidated
$ 1,699
$ 1,409
$
825
$
3,933
79,832
1,877
4,944
–
13,284
267
98,060
2,144
$ 83,408
$ 6,353
$
14,376
$
104,137
$
915
$ 1,171
$
938
$
3,024
74,128
2,397
6,775
–
12,437
–
93,340
2,397
$ 77,440
$ 7,946
$
13,375
$
98,761
NextGen Division software license revenue increased 7.7%
between the year ended March 31, 2009 and the year
ended March 31, 2010. The Division’s software revenue ac-
counted for 81.4% of divisional system sales revenue during
the year ended March 31, 2010, compared to 79.4% during
the year ended March 31, 2009. Software license revenue
growth continues to be an area of primary emphasis for the
NextGen Division. The Opus acquisition contributed approxi-
mately $0.9 million to the NextGen Division’s software license
revenue during the year ended March 31, 2010.
During the year ended March 31, 2010, 5.0% of NextGen
Division’s system sales revenue was represented by hardware
and third party software compared to 7.3% during the year
ended March 31, 2009. The number of customers who
purchase hardware and third party software and the dollar
amount of hardware and third party software revenue fl uctu-
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 6.8% in the year ended
March 31, 2010 compared to the year ended March 31,
2009. The amount of implementation and training services
revenue is dependent on several factors, including timing of
customer implementations, the availability of qualifi ed staff,
and the mix of services being rendered. The number of imple-
mentation and training staff increased during the year ended
March 31, 2010 versus 2009 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 staffi ng increases and additional train-
ing facilities are anticipated, though actual future increases in
fi
revenue and staff will depend upon the availability of quali-
fi ed staff, business mix and conditions, and our ability to retain
current staff members.
The NextGen Division’s growth has come in part from invest-
ments in sales and marketing activities including a revamped
NextGen.com Web site, new NextGen logo, new marketing
campaigns, trade show attendance, and other expanded ad-
vertising and marketing expenditures. We have also benefited
from winning numerous industry awards for the NextGen
Division’s fl agship NextGenehr and NextGen
epm software
r
products and the increasing acceptance of electronic medical
records technology in the healthcare industry.
fi
For the QSI Dental Division, total system sales increased
30.1% in the year ended March 31, 2010 compared to
the year ended March 31, 2009. Systems sales in the QSI
Dental Division were positively impacted by greater joint
sales of dental and medical software to Federally Qualifi ed
Health Centers. In addition, the Division began selling the
SaaS based NextDDS product during the year ended
March 31, 2010.
For the Practice Solutions Division, total system sales decreased
by 10.6% in the year ended March 31, 2010 compared to
the year ended March 31, 2009. Systems sales revenue
within the Practice Solutions Division is composed of sales to
existing RCM customers only.
Maintenance, EDI, Revenue Cycle Management and Other
Services. For the year ended March 31, 2010, Company-
wide revenue from maintenance, EDI, RCM and other services
grew 27.9% to $187.7 million from $146.8 million for the year
ended March 31, 2009. The increase in this category re-
sulted from an increase in maintenance, EDI, RCM and other
services revenue from the NextGen and Practice Solutions
36
Divisions. Total NextGen Division maintenance revenue for the
year ended March 31, 2010 grew 24.9% to $81.9 million
from $65.6 million in the prior year. The Opus acquisition
contributed $1.2 million to the NextGen Division’s mainte-
nance revenue during the fi scal year ended March 31, 2010.
NextGen Division EDI revenue grew 21.2% to $30.0 million
compared to $24.8 million in the prior year. RCM revenue
grew to $36.7 million from $21.4 million in the prior year
primarily as a result of increases in RCM revenue to existing
customers as well as including a full year of results for HSI and
fi
fi
PMP in fi scal year 2010 versus approximately ten and fi ve
months of respective results in fi scal year 2009. Other services
fi
revenue for the NextGen Division, which consists primarily of
third party annual software license renewals, consulting ser-
vices and hosting services increased 6.9% to $21.7 million
from $20.3 million a year ago. QSI Dental Division main-
tenance, EDI and other services revenue increased 2.9% to
$13.2 million for the year ended March 31, 2010 compared
to $12.8 million in the prior year.
The following table details maintenance, EDI, RCM, and other services revenue by category for the years ended March 31,
2010 and 2009:
Maintenance
EDI
Revenue Cycle
Management
Other
Total
Year ended March 31, 2010
QSI Dental Division
NextGen Division
$ 7,217
$ 5,038
$
81,867
29,997
–
–
$
940
$ 13,195
21,697
133,561
Practice Solutions Division
108
–
36,665
4,145
40,918
Consolidated
$ 89,192
$35,035
$ 36,665
$ 26,782
$187,674
Year ended March 31, 2009
QSI Dental Division
NextGen Division
$ 7,167
$ 4,766
$
65,559
24,756
–
–
$
894
$ 12,827
20,299
110,614
Practice Solutions Division
136
–
21,431
1,746
23,313
Consolidated
$ 72,862
$29,522
$ 21,431
$ 22,939
$146,754
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 additional
licenses, and our relative success in retaining existing main-
tenance customers. NextGen Division’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.
Cost of Revenue. Cost of revenue for the year ended March
31, 2010 increased 24.7% to $110.8 million from $88.9 mil-
lion for the year ended March 31, 2009 and the cost of
revenue as a percentage of revenue increased to 38.0% from
36.2% due to the fact that the rate of growth in cost of revenue
grew faster than the aggregate revenue growth rate for the
Company.
37
The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended
March 31, 2010 and 2009:
Year Ended March 31,
2010
%
2009
%
QSI Dental Division
Revenue
Cost of revenue
Gross profi t
NextGen Division
Revenue
Cost of revenue
Gross profi t
Practice Solutions Division
Revenue
Cost of revenue
Gross profi t
Consolidated
Revenue
Cost of revenue
Gross profi t
$ 17,128
7,788
$ 9,340
$ 231,621
73,534
$ 158,087
$ 43,062
29,485
$ 13,577
$291,811
110,807
$ 181,004
100.0%
45.5%
54.5%
100.0%
31.7%
68.3%
100.0%
68.5%
31.5%
100.0%
38.0%
62.0%
$ 15,851
7,582
$ 8,269
$ 203,954
65,311
$ 138,643
$ 25,710
15,997
$ 9,713
$ 245,515
88,890
$ 156,625
100.0%
47.8%
52.2%
100.0%
32.0%
68.0%
100.0%
62.2%
37.8%
100.0%
36.2%
63.8%
Gross profi t margins at the NextGen Division for the year
ended March 31, 2010 increased slightly to 68.3% from
68.0% from the year ended March 31, 2009 primarily as a
result of a lower amount of hardware revenue in fi scal year
2010 versus fi scal year 2009. Gross profi t margins at the
QSI Dental Division for the year ended March 31, 2010
increased to 54.5% from 52.2% for the year ended March
31, 2009 also as result of lower percentage of payroll and
related benefi ts in system sales in fi scal year 2010 versus
fi scal year 2009. Gross margin in the Practice Solutions
Division declined as a result of a smaller proportion of soft-
ware revenue included in revenue versus the prior year as
well as costs related to transitioning to the NextGen Division
platform and other ramp-up costs.
The following table details the individual components of cost of revenue and gross profi t as a percentage of total revenue on a
consolidated and divisional basis for the years ended March 31, 2010 and 2009:
fi
Hardware, Third
Party Software
Payroll and
Related Benefi ts
EDI
Other
Total Cost
of Revenue Gross Profi t
Year ended March 31, 2010
QSI Dental Division
NextGen Division
Practice Solutions Division
Consolidated
Year ended March 31, 2009
QSI Dental Division
NextGen Division
Practice Solutions Division
Consolidated
38
8.5%
2.5%
0.5%
2.5%
7.6%
3.9%
0.2%
3.7%
13.8%
13.2%
43.6%
17.7%
19.8%
11.0%
45.0%
15.1%
16.0%
9.5%
1.1%
8.7%
17.1%
9.1%
0.0%
8.4%
7.2%
6.5%
23.3%
9.1%
3.3%
8.0%
17.0%
9.0%
45.5%
31.7%
68.5%
38.0%
47.8%
32.0%
62.2%
36.2%
54.5%
68.3%
31.5%
62.0%
52.2%
68.0%
37.8%
63.8%
fi
The increase in our consolidated cost of revenue as a percent-
age of revenue between the year ended March 31, 2010
and the year ended March 31, 2009 is primarily attributable
to an increase in RCM revenue, which carries higher payroll
and related benefits as a percentage of revenue and higher
consolidated EDI costs, offset by a decrease in hardware and
third party software as a percentage of revenue. Other ex-
pense, which consists of outside service costs, amortization
of software development costs and other costs, increased
slightly to 9.1% of total revenue during the year ended March
31, 2010 from 9.0% of total revenue during the year ended
March 31, 2009.
During the year ended March 31, 2010, hardware and third
party software constituted a smaller portion of 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 fl uctuates each quarter depending
on the needs of the customers and is not a priority focus for us.
fi
Our payroll and benefits expense associated with delivering
our products and services increased to 17.7% of consolidated
revenue in the year ended March 31, 2010 compared to
15.1% during the year ended March 31, 2009 primarily due
to inclusion of a full year of HSI and PMP transactions in fiscal
year 2010 versus a partial period in fi scal year 2009. RCM
is a service business, which inherently has higher percentage
of payroll costs as a percentage of revenue.
fi
fi
fi
fi
fi
The absolute level of consolidated payroll and benefit ex-
penses grew from $37.1 million in the year ended March 31,
2009 to $51.8 million in the year ended March 31, 2010,
an increase of 39.4% or approximately $14.6 million. Of the
$14.6 million increase, approximately $7.2 million of the in-
crease is related to the Practice Solutions Division, which in-
cluded a full year of HSI and PMP expenses during fiscal year
2010 versus approximately ten and fi ve months of respective
expense in fi scal year 2009. For the NextGen Division, an in-
crease of approximately $8.2 million was related to increased
headcount and payroll and benefi ts expense associated with
delivering products and services Payroll and benefi ts expense
associated with delivering products and services in the QSI
Dental Division decreased $0.7 million from $3.1 million in
the year ended March 31, 2009 to $2.4 million in the year
ended March 31, 2010. The application of ASC 718 added
approximately $0.1 million and $0.2 million in compensation
expense to cost of revenue in the years ended March 31,
2010 and 2009, respectively.
fi
fi
As a result of the foregoing events and activities, the gross
profit percentage for the Company decreased for the year
ended March 31, 2010 versus the prior year.
fi
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 qualifi ed personnel, and other issues, we
cannot accurately predict if related headcount expense as a
percentage of revenue will increase or decrease in the future.
Selling, General and Administrative Expenses. Selling, gen-
eral and administrative expenses for the year ended March
31, 2010 increased 25.3% to $87.0 million as compared to
$69.4 million for the year ended March 31, 2009. The in-
crease in these expenses resulted primarily from a:
• $9.9 million increase in salaries and related expenses in
the NextGen Division primarily as a result of headcount
additions;
• $2.5 million increase in marketing and trade shows in the
NextGen Division;
• $1.5 million increase from the acquisition of Sphere
and Opus;
• $3.3 million increase in corporate related expenses,
primarily as a result of headcount additions, and
• $0.4 million increase in other selling and administrative
expenses.
The application of ASC 718 added approximately $1.9 mil-
lion and $1.5 million in compensation expense to selling, gen-
eral and administrative expenses for the year ended March
31, 2010 and 2009, respectively, and is included in the
aforementioned amounts. Selling, general and administrative
expenses as a percentage of revenue increased from 28.3%
in the year ended March 31, 2009 to 29.8% in the year
ended March 31, 2010.
We anticipate increased expenditures for trade shows, adver-
tising and the employment of additional sales and administra-
tive 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 ex-
pect selling, general and administrative expenses to increase
on an absolute basis, we cannot accurately predict the impact
these additional expenditures will have on selling, general and
administrative expenses as a percentage of revenue.
Research and Development Costs. Research and develop-
ment costs for the years ended March 31, 2010 and 2009
were $16.5 million and $13.8 million, respectively. The in-
creases in research and development expenses were due in
part to increased investment in the NextGen Division product
line. Additionally, the application of ASC 718 added ap-
proximately $0.1 million and $0.2 million in the years ended
39
fi
March 31, 2010 and 2009, respectively, in compensation
expense to research and development costs, net of amounts
capitalized as software development in those fi scal years.
Additions to capitalized software costs offset research and
development costs. For the year ended March 31, 2010, $7.9
million was added to capitalized software costs while $5.9
million was capitalized during the year ended March 31,
2009. Research and development costs as a percentage of
revenue increased to 5.7% in the year ended March 31, 2010
from 5.6% in the year ended March 31, 2009. Research and
development expenses are expected to continue at or above
current dollar levels.
Amortization of Acquired Intangible Assets. Amortization
expense related to acquired intangible assets for the years
ended March 31, 2010 and 2009 were $1.8 million and
$1.0 million, respectively. The increase in amortization ex-
pense is primarily due to the addition of customer relation-
ships and software technology intangible assets, which were
acquired through the acquisitions of Opus and Sphere dur-
ing fi scal year 2010.
Interest Income. Interest income for the year ended March 31,
2010 decreased to $0.2 million compared to $1.2 million in
the year ended March 31, 2009 primarily due to signifi cantly
lower interest rates received on the Company’s cash invest-
ments, which are primarily in institutional money market ac-
counts. Short term interest rates were at historic lows for most
of the year ended March 31, 2010.
Our investment policy is determined by our Board of Directors.
We currently maintain our cash in very liquid short term assets
including tax exempt and taxable money market funds. We
owned approximately $7.2 million in ARS as of March 31,
2010, which are illiquid due to the auction failures in the ARS
market. Our Board of Directors continues to review alternate
uses for our cash including, but not limited to, payment of
a special dividend, initiation of a stock buyback program,
an expansion of our investment policy to include investments
with longer maturities of greater than 90 days, 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 signifi cantly impact our
investment income in future periods.
Other Income (Expense). Other income (expense) for the year
ended March 31, 2010 consists of gains and losses in fair
value recorded on our ARS investments as well as on our ARS
put option rights. We recorded an overall gain on our ARS
and ARS put option rights of approximately $0.3 million.
Provision for Income Taxes. The provision for income taxes for
the year ended March 31, 2010 was approximately $27.8
40
fi
million as compared to approximately $27.2 million for the
prior year. The effective tax rates for fiscal years 2010 and
2009 were 36.5% and 37.1%, respectively. The provision
for income taxes for the years ended March 31, 2010 and
2009 differs from the combined statutory rates primarily due
to the impact of varying state income tax rates, research and
development tax credits, the qualifi ed 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, 2010 includes an
increase in the benefi t from the qualifi ed production activities
deduction and a decrease in the state income tax expense.
fi
During the year ended March 31, 2010 and 2009, we
claimed research and development tax credits of approxi-
mately $0.7 million and $1.0 million, respectively. The
Company also claimed the qualifi ed production activities
deduction under Section 199 of the Internal Revenue Code
(“IRC”) of approximately $4.1 million and $2.7 million during
the years ended March 31, 2010 and 2009, respectively.
Research and development credits and the qualifi ed produc-
tion activities income deduction taken by us involve certain as-
sumptions and judgments regarding qualifi cation of expenses
under the relevant tax code provision.
Comparison of Fiscal Years Ended
March 31, 2009 and March 31, 2008
fi
fi
During fiscal year 2010, as a result of certain organiza-
tional changes, the composition of the Company’s NextGen
Division was revised to exclude the former NextGen Practice
Solutions unit and the Company’s RCM entities (HSI and PMP),
both of which are now administered and aggregated in the
Company’s Practice Solutions Division. Following the reorga-
nization, the Company now operates three reportable oper-
ating segments (not including Corporate), comprised of the
NextGen Division, the QSI Dental Division and the Practice
Solutions Division. During fi scal year 2009, we strengthened
our position in the RCM market with the acquisitions of HSI
and PMP, which closed on May 20, 2008 and October 28,
2008, respectively. Prior to fi scal year 2009, the Company
had no material operations in the RCM area and as such, fis-fi
cal year 2008 result of operations are not re-casted to refl ect
the change in reportable segments established in fiscal year
2010. Further for purposes of the presentation of the compari-
son of fi scal years ended March 31, 2009 and March 31,
2008, the tables and discussion therein are not re-casted to
refl ect the change in reportable segments. See the presenta-
tion of the comparison of fiscal years ended March 31, 2010
and March 31, 2009 for re-casted reportable segment results
for fiscal year 2009.
fi
fi
fi
fi
fi
Net Income. 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
accounted 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 profitfi
margin;
• an increase in selling, general and administrative ex-
penses 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 signifi -
cantly 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
increased 34.7% to $229.7 million from $170.5 million in
the year ended March 31, 2008, while QSI Dental Division
revenue decreased by 1.2% during that same period, to $15.9
million from $16.0 million. NextGen Division revenue is inclu-
sive of approximately $15.6 million in revenue from HSI and
$8.6 million in revenue from PMP, our two fi scal year 2009
RCM acquisitions.
fi
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 services, annual third party license
fees, hosting and other services revenue.
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 princi-
pally 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 NextGenehr and
NextGenepm 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.
r
Systems sales revenue in the QSI Dental 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 imple-
mentation and training services components by division:
Software
Hardware, Third Party
Software and Supplies
Implementation and
Training Services
Total System Sales
Year ended March 31, 2009
QSI Dental Division
NextGen Division
Consolidated
Year ended March 31, 2008
QSI Dental Division
NextGen Division
Consolidated
$
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
41
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 dur-
ing 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
Division’s system sales revenue was represented by hardware
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 fl uctu-
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 qualifi ed staff,
and the mix of services being rendered. The number of imple-
mentation 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 conjunc-
tion with increased software sales. In order to achieve growth
in this area, additional staffi ng increases and additional train-
ing facilities are anticipated, though actual future increases in
revenue and staff will depend upon the availability of quali-
fi ed staff, business mix and conditions, and our ability to retain
current staff members.
fi
The NextGen Division’s growth has come in part from invest-
ments in sales and marketing activities including a revamped
NextGen.com Web site, new NextGen logo, new marketing
campaigns, trade show attendance, and other expanded ad-
vertising and marketing expenditures. We have also benefited
from winning numerous industry awards for the NextGen
Division’s fl agship NextGenehr and NextGen
epm software
r
products and the apparent increasing acceptance of elec-
tronic medical records technology in the healthcare industry.
fi
For the QSI Dental 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 fore-
see any material changes in the business environment for the
Division with respect 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 million
compared to $17.9 million in the prior year. RCM grew to
$21.4 million primarily as a result of the HSI and PMP ac-
quisitions. 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
Dental Division maintenance, EDI and other services revenue
decreased 4.2% to $12.8 million for the year ended March
31, 2009 compared to $13.4 million in the prior year.
The following table details maintenance, EDI, RCM, and other services revenue by category for the years ended March 31,
2009 and 2008:
Maintenance
EDI
Reven ue Cycle
Management
Other
Total
Year ended March 31, 2009
QSI Dental Division
NextGen Division
Consolidated
Year ended March 31, 2008
QSI Dental Division
NextGen Division
Consolidated
42
$ 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
49,269
17,886
$56,455
$22,450
$
$
–
871
871
$ 1,639
$ 13,389
15,316
83,342
$16,955
$ 96,731
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 additional
licenses, and our relative success in retaining existing main-
tenance customers. NextGen Division’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 expected from cross selling opportunities between the cus-
tomer bases.
Cost of Revenue. Cost of revenue for the year ended March
31, 2009 increased 42.2% to $88.9 million from $62.5
million 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:
QSI Dental Division
Revenue
Cost of revenue
Gross profi t
NextGen Division
Revenue
Cost of revenue
Gross profi t
Consolidated
Revenue
Cost of revenue
Gross profi t
Year Ended March 31,
2009
%
2008
%
$ 15,851
7,582
$
8,269
$ 229,664
81,308
$ 148,356
$ 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%
fi
Gross profi t 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
fi
the QSI Dental 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 profi t as a percentage of total revenue on a
consolidated and divisional basis for the years ended March 31, 2009 and 2008:
fi
Hardware, Third
Party Software
Payroll and
Related Benefi ts
EDI
Other
Total Cost
of Revenue Gross Profi t
Year ended March 31, 2009
QSI Dental Division
NextGen Division
Consolidated
Year ended March 31, 2008
QSI Dental 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%
43
fi
The increase in our consolidated cost of revenue as a percent-
age of revenue between the year ended March 31, 2009
and the year ended March 31, 2008 is primarily attributable
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 outside 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 consolidated
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 fl uctuates each
quarter depending on the needs of the customers and is not a
priority focus for us.
fi
Our payroll and benefits expense associated with delivering
our products and services increased to 15.1% of consolidated
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
percentage of revenue.
fi
fi
The absolute level of consolidated payroll and benefit ex-
penses grew from $22.1 million in the year ended March 31,
2008 to $37.1 million in the year ended March 31, 2009,
an increase of 67.9% or approximately $15.0 million. Of the
$15.0 million increase, approximately $4.8 million was a re-
sult of the HSI acquisition and $3.9 million was a result of the
PMP acquisition. In addition, related headcount, payroll and
benefi ts expense associated with delivering products and ser-
vices in the NextGen Division increased by $6.1 million in the
year ended March 31, 2009 to $25.1 million from $19.0 mil-
lion in the year ended March 31, 2008. Payroll and benefitsfi
expense associated with delivering products and services in
the QSI Dental Division remained consistent at $3.1 million in
the year ended March 31, 2009 and 2008, respectively. The
application of ASC 718 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.
fi
As a result of the foregoing events and activities, the gross
profit percentage for the Company and both our Divisions
decreased for the year ended March 31, 2009 versus the
prior year.
44
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
services in the NextGen Division;
• $0.9 million increase in advertising in the NextGen
Division;
• $6.7 million increase in other selling, general and admin-
istrative expenses in the NextGen Division; and
• $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 associ-
ated with the proxy contest which occurred in conjunction
with the 2008 Annual Shareholders’ Meeting. Amortization
of identifi able intangibles related to the HSI and PMP ac-
quisitions of approximately $1.0 million and an increase in
corporate salaries and related benefi ts of $0.7 million also
contributed to the year over year corporate increase.
The application of ASC 718 added approximately $1.5 mil-
lion and $2.5 million in compensation expense to selling, gen-
eral and administrative expenses for the year ended March
31, 2009 and 2008, respectively, and is included in the
aforementioned amounts. Selling, general and administrative
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.
Research and Development Costs. Research and develop-
ment costs for the years ended March 31, 2009 and 2008
were $13.8 million and $11.4 million, respectively. The in-
creases in research and development expenses were due in
part to increased investment in the NextGen Division product
line. Additionally, the application of ASC 718 added ap-
proximately $0.2 million and $0.8 million in the years ended
March 31, 2009 and 2008, respectively, in compensation
expense to research and development costs, net of amounts
capitalized as software development in those fiscal years.
Additions to capitalized software costs offset research and
development costs. For the year ended March 31, 2009,
$5.9 million was added to capitalized software costs while
$6.0 million was capitalized during the year ended March
31, 2008. Research and development costs as a percentage
fi
of revenue decreased to 5.6% in the year ended March 31,
2009 from 6.1% in the year ended March 31, 2008.
Amortization of Acquired Intangible Assets. Amortization ex-
pense related to acquired intangible assets for the year ended
March 31, 2009 was $1.0 million. The amortization expense
relates to the addition of customer relationships and trade
name intangible assets, which were acquired through the ac-
quisitions of HSI and PMP during fi scal year 2009.
fi
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:
• a lower amount of investments held in ARS when com-
pared to the prior year;
•
larger amounts invested in money market accounts which
earned signifi cantly 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.
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 approxi-
mately $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,
Liquidity and Capital Resources
Executive Vice President and General Manager of the QSI
Dental Division. Mr. Flynn participated in our deferred com-
pensation plan which is funded through the purchase of life
insurance policies with the Company named as benefi ciary.
There was no gain or loss recorded on investment securities
during the year ended March 31, 2008.
fi
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 qualifi ed 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 qualifi ed production activities
deduction and an increase in state income tax expense.
fi
During the year ended March 31, 2009 and 2008,
we claimed research and development tax credits of ap-
proximately $1.0 million and $0.8 million, respectively. The
Company also claimed the qualifi ed production activities de-
duction under 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 qualifi ed production activities income deduc-
tion taken by us involve certain assumptions and judgments re-
garding qualifi cation of expenses under the relevant tax code
provision.
The following table presents selected financial statistics and information for each of the years ended March 31, 2010, 2009
and 2008:
fi
Cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Net income
Net cash provided by operating activities
Number of days of sales outstanding
Year Ended March 31,
2010
2009
2008
$ 84,611
$ 14,431
$ 48,379
$ 55,220
125
$ 70,180
$ 11,134
$ 46,119
$ 48,712
125
$ 59,046
$
(982)
$ 40,078
$ 43,599
136
45
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 plus adjustments to add back non-cash ex-
penses, including depreciation, amortization of intangibles
and capitalized software costs, provisions for bad debts and
inventory obsolescence, share-based compensation and de-
ferred taxes.
The following table summarizes our Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and
2008:
Net income
Non-cash expenses
Gain on life insurance proceeds, net
Tax benefi t from exercise of stock options, net
Change in deferred revenue
Change in accounts receivable
Change in other assets and liabilities
2010
$ 48,379
16,152
–
–
12,528
(18,944)
(2,895)
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
Net cash provided by operating activities
$ 55,220
$ 48,712
$ 43,599
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, 2010, 2009 and 2008. The
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 and inventory obsolescence,
share-based compensation and deferred taxes. Total non-cash
expenses were $16.2 million, $17.7 million and $11.3 million
for the years ended March 31, 2010, 2009 and 2008, re-
spectively. The change for the year ended March 31, 2010
as compared to the prior year is primarily related to an in-
crease of approximately $0.8 million in depreciation, $0.8
million of amortization of capitalized software costs, $0.7 mil-
lion of amortization of other intangibles, and $1.4 million in
the allowance for bad debt, offset by a decrease of $5.2
million in deferred income tax expense.
fi
Tax Benefi ts From Stock Options.
Tax benefi ts from the ex-
ercise of stock options were $1.6 million, $3.4 million and
$1.4 million for the years ended March 31, 2010, 2009
and 2008, respectively. Our application of ASC 718 re-
quired excess tax benefi ts to be reclassed to fi nancing activi-
ties, resulting in a corresponding decrease in our net cash
provided by operating activities of $1.6 million, $3.4 million
and $1.3 million in the years ended March 31, 2010, 2009
and 2008, respectively.
46
fi
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 off-
set by the increase in unpaid deferred revenue. Deferred rev-
enue grew by approximately $12.5 million for the year ended
March 31, 2010 versus growth of $3.1 million and $5.4 mil-
lion for the years ended March 31, 2009 and 2008, resulting
in increases to cash provided by operating activities for the
respective periods.
fi
Accounts Receivable. Accounts receivable grew by approxi-
mately $18.9 million, $11.4 million and $13.8 million for the
years ended March 31, 2010, 2009 and 2008, respectively.
The increase in accounts receivable in the periods is due to
the following factors:
• NextGen Division revenue grew 13.6%, 19.6 % and
21.3% for the years ended March 31, 2010, 2009 and
2008, respectively;
•
Turnover of accounts receivable is generally slower in the
NextGen Division due to the fact that the systems sales
related revenue have longer payment terms, generally up
to one year, which historically have accounted for a ma-
jor portion of NextGen Division sales;
•
The Opus acquisition added approximately $2.1 million
of accounts receivable as of March 31, 2010; and
• We experienced an increase in the volume of undeliv-
ered 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 in-
crease in both deferred revenue and accounts receivable
of approximately $9.5 million, $1.2 million and $4.9 mil-
lion for the years ended March 31, 2010, 2009 and
2008, respectively.
The turnover of accounts receivable measured in terms of days
sales outstanding (“DSO”) fl uctuated during the year, but re-
mained consistent at 125 days during the year ended March
31, 2010 as compared to the prior year.
If amounts included in both accounts receivable and deferred
revenue were netted, our turnover of accounts receivable ex-
pressed as DSO would be 79 days as of March 31, 2010
and 83 days as of March 31, 2009. Provided turnover of ac-
counts receivable, deferred revenue, and profi tability remain
consistent with the year ended March 31, 2010, we antici-
pate being able to continue to generate cash from operations
during fiscal 2011 primarily from our net income.
fi
fi
Cash Flows from Investing Activities
Net cash used in investing activities for the years ended
March 31, 2010, 2009 and 2008 was $13.9 million, $19.4
million and $30.2 million, respectively. The decrease in cash
used in investing activities for the year ended March 31, 2010
is due mainly to the fact that we acquired cash balances of
$2.0 million from the acquisition of Opus whereas for the year
ended March 31, 2009, we had paid approximately $8.2
million and $17.0 million for the acquisitions of HSI and PMP,
respectively, offset by proceeds from the sale of marketable
securities of $14.8 million. Other net cash outfl ows during the
year ended March 31, 2010 include payments of $0.3 mil-
lion for each of our two fi scal year 2010 acquisitions, Opus
and Sphere, and payment of contingent consideration related
to the PMP acquisition of $3.0 million as well as additions to
equipment and improvements and capitalized software costs
totaling $12.9 million.
fi
Cash Flows from Financing Activities
fi
Net cash used in fi nancing activities for the year ended March
31, 2010 was $26.8 million and consisted of dividends paid
to shareholders totaling $34.3 million, offset by proceeds of
$5.9 million from the exercise of stock options. We recorded
a reduction in income tax liability of $1.6 million related to ex-
cess tax deductions received from employee stock option exer-
cises. The benefi t was recorded as additional paid in capital.
fi
Cash and Cash Equivalents
and Marketable Securities
At March 31, 2010, we had cash and cash equivalents of
$84.6 million and marketable securities of $7.2 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 signifi cant current capital commitments.
On February 10, 2010, we acquired Opus and on August
12, 2009, we acquired Sphere. The Opus purchase price
of $20.6 million consisted of approximately $0.3 million in
cash plus up to $11.6 million in contingent consideration tied
to future performance. The Sphere purchase price of $1.4 mil-
lion consisted of approximately $0.3 million in cash plus an
estimated $1.1 million (but in no event to exceed $2.5 million)
in contingent consideration tied to future performance.
On October 28, 2008, we acquired PMP and on May 20,
2008, we acquired HSI. The PMP purchase price consisted of
approximately $17.0 million in cash (including direct transac-
tion costs) plus up to $3.0 million in contingent consideration
tied to future performance, which has been paid as of March
31, 2010. The HSI purchase price consisted of approximately
$8.2 million in cash (including direct transaction costs) plus up
to approximately $1.7 million in contingent consideration tied
to future performance.
In January 2007, our Board of Directors adopted a policy
whereby we intend to pay a regular quarterly dividend of
$0.25 per share on our outstanding common stock, subject
to further Board review and approval and establishment of
record and distribution dates by our Board of Directors prior
to the declaration of each such quarterly dividend. In August
2008, our Board of Directors increased the quarterly dividend
to $0.30 per share. We anticipate that future quarterly divi-
dends, if and when declared by our Board of Directors pursu-
ant to this policy, would likely be distributable on or about
the fi fth day of each of the months of October, January, April
and July.
On May 26, 2010, the Board of Directors 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 June 17, 2010 with an expected distribution date on or
about July 6, 2010.
47
The following dividends have been declared in the 2010, 2009, and 2008 fi scal years on the dates indicated:
fi
Board Approval Date
Fiscal year 2010
January 27, 2010
October 28, 2009
July 23, 2009
May 27, 2009
Fiscal year 2009
January 28, 2009
October 30, 2008
August 4, 2008
May 29, 2008
Fiscal year 2008
January 30, 2008
October 25, 2007
July 31, 2007
May 31, 2007
Record
Date
Payment
Date
Dividend
Amount
March 23, 2010
December 23, 2009
September 25, 2009
June 12, 2009
March 11, 2009
December 15, 2008
September 15, 2008
June 15, 2008
March 14, 2008
December 14, 2007
September 14, 2007
June 15, 2007
April 5, 2010
$ 0.30
January 5, 2010
October 5, 2009
July 6, 2009
0.30
0.30
0.30
April 3, 2009
$ 0.30
January 5, 2009
October 1, 2008
July 2, 2008
0.30
0.30
0.25
April 7, 2008
$ 0.25
January 7, 2008
October 5, 2007
July 5, 2007
0.25
0.25
0.25
Management believes that its cash and cash equivalents on
hand at March 31, 2010, together with its marketable securi-
ties and cash fl ows from operations, if any, will be suffi cient to
meet its working capital and capital expenditure requirements
as well as any dividends to be paid in the ordinary course of
fi
business for the remainder of fi scal year 2011.
Contractual Obligations. The following table summarizes our
signifi cant contractual obligations, all of which relate to op-
erating leases, at March 31, 2010 and the effect that such
obligations are expected to have on our liquidity and cash in
future periods:
Year ended March 31,
2011
2012
2013
2014
2015 and beyond
$ 4,413
4,565
4,577
3,963
7,215
$ 24,733
New Accounting Pronouncements
Refer to Note 2 of our Consolidated Financial Statements,
“Summary of Signifi cant Accounting Policies” for a discussion
of new accounting standards.
ITEM 7A. Quantitative and Qualitative
Disclosures about Market Risks
We maintain investments in tax exempt municipal ARS which
are classifi ed as current and non-current marketable securities
on the Company’s Consolidated Balance Sheets. A small
portion of our portfolio is invested in closed-end funds which
invest in tax exempt municipal ARS. At March 31, 2010, we
had approximately $7.2 million of ARS on our Consolidated
Balance Sheets. The ARS are rated by one or more national
rating agencies and have contractual terms of up to 30 years
but generally have interest rate reset dates that occur every 7,
28 or 35 days.
Despite the underlying long-term maturity of ARS, such se-
curities were priced and subsequently traded as short-term
investments because of the interest rate reset feature. If there
are insuffi cient 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 auction
rate preferred securities. To determine their estimated fair val-
ues at March 31, 2010, factors including credit quality, the
likelihood of redemption, and yields or spreads of fi xed 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 fl ows, and our other sources
48
of cash, we do not anticipate the current lack of liquidity on
these investments to have a material impact on our fi nancial
condition or results of operation.
ITEM 8. Financial Statements and
Supplementary Data
Our Consolidated Financial Statements identifi ed 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.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls
and Procedures
fi
fi
Our Chief Executive Offi cer and Chief Financial Offi cer (our
principal executive offi cer and principal financial offi cer, re-
spectively) have concluded, based on their evaluation as of
March 31, 2010, that the design and operation of our “dis-
closure controls and procedures” (as defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act of 1934, as amended)
are effective to provide reasonable assurance that information
required to be disclosed by us in the reports filed or submitted
by us under the Security Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported, within the
time periods specifi ed 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 Offi cer and Chief Financial Offi cer, as
appropriate to allow timely decisions regarding whether or not
disclosure is required.
fi
fi
Management’s Report on Internal Control
over Financial Reporting
fi
fi
Our management is responsible for establishing and maintain-
ing adequate internal control over fi nancial reporting as de-
fined in Rule 13a-15(f) under the Exchange Act. Internal control
fi
over fi nancial reporting is a process designed by, or under
the supervision and with the participation of our management,
including our principal executive offi cer and principal financial
offi cer, to provide reasonable assurance regarding the reli-
fi
ability of fi nancial reporting and the preparation of fi
nancial
statements for external purposes in accordance with generally
accepted accounting principles.
fi
fi
Our internal control over financial reporting is supported by
written policies and procedures, that:
fi
(1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly refl ect the transactions and
dispositions of our assets;
(2) provide reasonable assurance that transactions are re-
corded as necessary to permit preparation of financial
statements in accordance with generally accepted ac-
counting principles, and that receipts and expenditures of
our company are being made only in accordance with
authorizations of our management and directors; and
fi
(3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or dis-
position of our assets that could have a material effect on
our financial statements.
fi
Because of its inherent limitations, internal control over finan-
cial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of compli-
ance with the policies or procedures may deteriorate.
fi
fi
fi
Management of the Company has assessed the effective-
ness of the Company’s internal control over fi nancial reporting
as of March 31, 2010 in making our assessment of internal
control over fi nancial reporting, management used the criteria
set forth in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation, our management con-
cluded that our internal control over financial reporting was
effective as of March 31, 2010.
fi
k
The effectiveness of the Company’s internal control over fi -
nancial reporting as of March 31, 2010 has been audited
by PricewaterhouseCoopers LLP, an independent registered
public accounting fi rm, as stated in their report which ap-
pears herein.
Changes in Internal Control over
Financial Reporting
During the quarter ended March 31, 2010, 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 af-
fi
fect, our internal control over fi nancial reporting.
fi
fi
ITEM 9B. Other Information
None.
49
PART III
ITEM 10. Directors, Executive Officers
and Corporate Governance
fi
The information required by Item 10 is incorporated herein
by reference from our defi nitive proxy statement for our 2010
Annual Shareholders’ Meeting to be filed with the Commission.
fi
fi
ITEM 11. Executive Compensation
The information required by Item 11 is incorporated herein
by reference from our defi nitive proxy statement for our 2010
Annual Shareholders’ Meeting to be filed with the Commission.
fi
fi
ITEM 12. Security Ownership of Certain
Benefi cial Owners and Management
and Related Shareholder Matters
fi
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 2010
Annual Shareholders’ Meeting to be filed with the Commission.
fi
fi
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 2010
Annual Shareholders’ Meeting to be filed with the Commission.
fi
fi
The information required by Item 12 is incorporated herein
by reference from our defi nitive proxy statement for our 2010
Annual Shareholders’ Meeting to be filed with the Commission.
fi
fi
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
(a) (1) Index to Financial Statements:
• Report of Independent Registered Public Accounting Firm
• Report of Independent Registered Public Accounting Firm
• Consolidated Balance Sheets as of March 31, 2010 and March 31, 2009
• Consolidated Statements of Income –
Fiscal Years Ended March 31, 2010, March 31, 2009 and March 31, 2008
• Consolidated Statements of Shareholders’ Equity –
Fiscal Years Ended March 31, 2010, March 31, 2009 and March 31, 2008
• Consolidated Statements of Cash Flows –
Fiscal Years Ended March 31, 2010, March 31, 2009 and March 31, 2008
• Notes to Consolidated Financial Statements
(2) The following supplementary fi nancial 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.
fi
fi
• 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.
fi
50
Page
55
56
57
58
59
60
62
87
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 in-
corporated 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).
Form of Second Amended and Restated Indemnification Agreement for directors and executive officers is hereby
incorporated by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K filed on February 2, 2010.
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.
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.
51
Exhibit
Number Description
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 Offi ce 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 Offi ce 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 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.
Offi ce 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 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 is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on
Form 8-K filed February 2, 2010.
fi
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.
fi
Description of Compensation Program for Named Executive Offi cers for Fiscal Year Ended March 31, 2010 is
incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed June 1, 2009.
fi
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.
Offi ce 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.
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.
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
52
Exhibit
Number Description
10.29
10.30
10.31
10.32
10.33*
10.34*
10.35*
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.
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.
fi
Outside Directors Amended and Restated Restricted Stock Agreement is incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed February 9, 2010.
fi
Employment Offer and Terms of Employment dated September 17, 2009, between Quality Systems, Inc. and
Philip N. Kaplan, is incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed
on September 21, 2009.
fi
10.36**
Agreement and Plan of Merger dated February 10, 2010, by and among Quality Systems, Inc., OHS Merger
Sub, Inc., Opus Healthcare Solutions, Inc., and the Shareholders of Opus Healthcare Solutions, Inc.
10.37**
Sixth Amendment to Lease Agreement between the Company and Tower Place, L.P. dated April 1, 2010.
10.38**
Third Amendment to Office Lease agreement between the Company and HUB Properties LLC dated January 1, 2010.
fi
10.39**
Fourth Amendment to Office Lease agreement between the Company and HUB Properties LLC dated March 17, 2010.
fi
10.40**
10.41**
Third 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 March 15, 2010.
Second Amendment to Lease Agreement between Hill Management Services, Inc. and Practice Management
Partners, Inc., dated November 1, 2009.
10.42** Modifi cation of Lease #1 between Olen Commercial Realty Corp. and NXG Acute Care LLC, dated October 13, 2009.
fi
10.43**
Lease between Olen Commercial Realty Corp. and NXG Acurate Care LLC, dated October 1, 2009.
10.44**
Sublease Agreement between Centex Homes and Opus Healthcare Solutions, Inc., dated February __, 2009.
21**
List of subsidiaries.
23.1**
Consent of Independent Registered Public Accounting Firm – PricewaterhouseCoopers LLP.
23.2**
Consent of Independent Registered Public Accounting Firm – Grant Thornton LLP.
31.1**
31.2**
32.1**
Certifi cation of Principal Executive Offi cer 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.
Certifi cation of Principal Financial Offi cer 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.
Certifi cation of Chief Executive Offi cer and Chief Financial Offi cer 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.
53
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.
Signatures
By:
/s/ Steven T. Plochocki
Steven T. Plochocki
President and Chief Executive Offi cer
Date: May 26, 2010
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 fi
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 confi rming 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.
fi
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed by the following persons on
our behalf in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Sheldon Razin
Sheldon Razin
/s/ Steven T. Plochocki
Chairman of the Board and Director
May 26, 2010
Steven T. Plochocki
Chief Executive Offi cer (Principal Executive Offi cer) and Director
May 26, 2010
Chief Financial Offi cer (Principal Financial Offi cer) and Secretary
May 26, 2010
President and Chief Strategy Offi cer, and Director
May 26, 2010
/s/ Paul A. Holt
Paul A. Holt
/s/ Patrick B. Cline
Patrick B. Cline
/s/ Murray Brennan
Murray Brennan
/s/ George Bristol
George Bristol
Director
Director
Ahmed Hussein
Director
Joseph Davis
Director
/s/ Craig Barbarosh
Craig Barbarosh
/s/ Russell Pfl ueger
Russell Pfl ueger
54
Director
Director
May 26, 2010
May 26, 2010
May 26, 2010
May 26, 2010
Report Of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Quality Systems, Inc.,
rr
fi
fi
fi
fi
fi
fi
In our opinion, the consolidated fi nancial statements listed in the index appearing under Item 15(a)(1), present fairly, in all ma-
terial respects, the financial position of Quality Systems, Inc. and its subsidiaries at March 31, 2010, and the results of their
operations and their cash fl ows for the year then ended in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the fi nancial statement schedule listed in the index appearing under Item
15(a)(2), presents fairly, in all material respects, the information set forth therein for the year ended March 31, 2010 when read
in conjunction with the related consolidated fi nancial statements. Also in our opinion, the Company maintained, in all mate-
rial respects, effective internal control over fi nancial reporting as of March 31, 2010, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
nancial statement schedule, for maintaining effec-
The Company’s management is responsible for these financial statements and fi
fi
fi
tive internal control over fi nancial reporting and for its assessment of the effectiveness of internal control over fi
fi
nancial reporting,
included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is
to express opinions on these financial statements, on the fi
fi
nancial statement schedule, and on the Company’s internal control
fi
over financial reporting based on our integrated audit. 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
fi
reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audit of the fi
fi
nancial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and signifi cant estimates made by management, and evaluating the overall financial statement presentation. Our audit of
fi
internal control over financial reporting included obtaining an understanding of internal control over fi
nancial reporting, assess-
ing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
fi
fi
fi
fi
fi
fi
We also have audited the adjustments to the financial statements for the years ended March 31, 2009 and 2008 to retrospec-
tively apply the change in reportable segments as described in Note 15. In our opinion, such adjustments are appropriate and
have been properly applied. We were not engaged to audit, review, or apply any procedures to financial statements for the
years ended March 31, 2009 and 2008 of the Company other than with respect to the adjustments and, accordingly, we do
not express an opinion or any other form of assurance on the financial statements for the years ended March 31, 2009 and
fi
2008 taken as a whole.
fi
A company’s internal control over fi nancial reporting is a process designed to provide reasonable assurance regarding the
reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over fi nancial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of fi nancial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the fi nancial statements.
Because of its inherent limitations, internal control over fi nancial 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.
fi
/s/ PricewaterhouseCoopers LLP
Orange County, California
May 28, 2010
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Quality Systems, Inc.
We have audited, before the effects of the adjustments to retrospectively apply the change in operating segment information de-
scribed in Note 15, the consolidated balance sheet of Quality Systems, Inc. as of March 31, 2009, and the related statements
of income, shareholders’ equity, and cash fl ows for each of the two years in the period ended March 31, 2009 (the 2009 and
2008 consolidated financial statements before the effects of the adjustments discussed in Note 15 are not presented herein).
nancial statement Schedule II listed in the index appearing under Item
Our audits of the basic financial statements included the fi
fi
nancial statement schedule are the responsibility of the
15 (a)(2). These 2009 and 2008 consolidated financial statements and fi
fi
Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and fi
fi
nancial
statement schedule based on our audits.
fi
fi
fi
fi
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
fi
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.
fi
fi
fi
In our opinion, the 2009 and 2008 consolidated financial statements referred to above, which are before the effects of the
adjustments to retrospectively apply the change in operating segment information described in Note 15, present fairly, in all
material respects, the financial position of Quality Systems, Inc. as of March 31, 2009 and the results of its operations and its
cash fl ows for each of the two years in the period 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.
fi
fi
fi
We were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in
operating segment information described in Note 15 and accordingly, we do not express an opinion or any other form of
assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited
by other auditors.
/s/ Grant Thornton LLP
Irvine, California
May 27, 2009
56
Quality Systems, Inc.
Consolidated Balance Sheets
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Marketable securities
Accounts receivable, net
Inventories, net
Income taxes 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 benefi ts
Dividends payable
Other current liabilities
Total current liabilities
Deferred revenue, net of current
Net deferred tax liabilities
Deferred compensation
Other noncurrent liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock
$0.01 par value; authorized 50,000 shares; issued and
outstanding 28,879 and 28,447 shares at March 31, 2010 and
March 31, 2009, respectively
Additional paid-in capital
Retained earningsg
Total shareholders’ equity
q y
Total liabilities and shareholders’ equity
March 31, 2010
March 31, 2009
$
84,611
2,339
7,158
107,458
1,340
2,953
5,678
8,684
220,221
–
8,432
11,546
20,145
46,189
3,647
$ 310,180
$
3,342
64,109
8,951
8,664
16,220
101,286
474
10,859
1,883
7,389
121,891
$
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
289
122,271
65,729
188,289
284
103,524
51,759
155,567
$ 310,180
$ 242,101
The accompanying notes to these Consolidated Financial Statements are an integral part of these Consolidated Statements.
57
Quality Systems, Inc.
Consolidated Statements of Income
(in thousands, except per share data)
Fiscal Year Ended
March 31, 2010 March 31, 2009 March 31, 2008
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 revenues
p
g
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 profi t
Operating expenses:
Selling, general and administrative
Research and development costs
Amortization of acquired intangible assets
q
Total operating expenses
Income from operations
g
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
$
$
$
$
$
89,761
14,376
104,137
89,192
35,035
36,665
26,782
187,674
291,811
12,115
11,983
24,098
13,339
25,262
27,715
20,393
86,709
110,807
181,004
86,951
16,546
1,783
105,280
75,724
226
268
76,218
27,839
48,379
1.69
1.68
28,635
28,796
1.20
$
85,386
13,375
98,761
72,862
29,522
21,431
22,939
146,754
245,515
$
76,363
13,406
89,769
56,455
22,450
871
16,955
96,731
186,500
13,184
10,286
23,470
11,859
21,374
14,674
17,513
65,420
88,890
10,887
10,341
21,228
12,446
15,776
558
12,493
41,273
62,501
156,625
123,999
69,410
13,777
1,035
84,222
72,403
1,203
(279)
73,327
27,208
46,119
1.65
1.62
28,031
28,396
1.15
$
$
$
$
53,260
11,350
–
64,610
59,389
2,661
953
63,003
22,925
40,078
1.47
1.44
27,298
27,770
1.00
$
$
$
$
The accompanying notes to these Consolidated Financial Statements are an integral part of these Consolidated Statements.
58
Quality Systems, Inc.
Consolidated Statements of Shareholders’ Equity
(in thousands)
Common Stock
Shares
Amount
Additional
Paid-in Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance, March 31, 2007
27,123 $ 271
$ 65,666
$ 25,309
$ –
$ 91,246
Exercise of stock options
325
3
4,757
Tax benefi t resulting from exercise
of stock options
Stock-based compensation
Dividends declared
Net income
Unrealized loss on marketable
securities, net of tax
–
–
–
–
–
–
–
–
–
–
Balance, March 31, 2008
Exercise of stock options
27,448
274
697
7
Tax benefi t resulting from exercise
of stock options
Stock-based compensation
Common stock issued for acquisitions
Dividends declared
Net income
Reclassifi cation of unrealized loss
on marketable securities, net of tax
–
–
302
–
–
–
–
–
3
–
–
–
1,376
3,757
–
–
–
75,556
12,512
3,382
1,977
10,097
–
–
–
–
–
–
(27,316)
40,078
–
–
–
–
–
4,760
1,376
3,757
(27,316)
40,078
–
(196)
(196)
38,071
(196)
113,705
–
–
–
–
(32,431)
46,119
–
–
–
–
–
–
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
Exercise of stock options
238
3
5,852
Tax benefi t resulting from exercise
of stock options
Stock-based compensation
Stock-based compensation
related to acquisitions
Common stock issued for acquisitions
Dividends declared
Net income
–
–
–
194
–
–
–
–
–
2
–
–
1,576
2,073
433
8,813
–
–
–
–
–
–
–
(34,409)
48,379
–
–
–
–
–
–
–
–
155,567
5,855
1,576
2,073
433
8,815
(34,409)
48,379
Balance, March 31, 2010
28,879 $ 289
$ 122,271
$ 65,729
$ –
$ 188,289
The accompanying notes to these Consolidated Financial Statements are an integral part of these Consolidated Statements.
59
Quality Systems, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Fiscal Year Ended
March 31, 2010 March 31, 2009 March 31, 2008
$
48,379
$
46,119
$
40,078
Cash fl ows 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
Provision (recovery) for inventory obsolescence
Share-based compensation
Deferred income tax (benefi t) expense
Tax benefi t from exercise of stock options
Excess tax benefi t from share-based compensation
Loss on disposal of equipment and improvements
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable
Inventories
Income taxes receivable
Other current assets
Other assets
Accounts payable
Deferred revenue
Accrued compensation and related benefi ts
Income taxes payable
Other current liabilities
Deferred compensation
Net cash provided by operating activities
p
Cash fl ows 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
Cash acquired from purchase of Opus
Purchase of Opus
Purchase of Sphere
Purchase of PMP, including direct transaction costs
Purchase of HSI, including direct transaction costs
Payment of contingent consideration related to purchase of PMP
Net cash used in investing activities
g
p
y
Cash fl ows from fi nancing activities:
Excess tax benefi t from share-based compensation
Proceeds from exercise of stock options
Dividends paid
Loan repayment
Net cash used in fi nancing activities
p y
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
60
3,663
5,927
1,783
–
3,465
27
2,073
(786)
1,576
(1,576)
–
(18,944)
(238)
3,875
(2,310)
(894)
(1,810)
12,528
(1,006)
(1,404)
846
46
55,220
(7,921)
(4,935)
425
–
–
2,036
(250)
(300)
–
–
(3,000)
(13,945)
1,576
5,855
(34,275)
–
(26,844)
14,431
70,180
84,611
$
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
–
–
–
–
–
(16,950)
(8,241)
–
(19,447)
3,381
12,519
(30,763)
(3,268)
(18,131)
11,134
59,046
70,180
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)
60,028
59,046
$
Quality Systems, Inc.
Consolidated Statements of Cash Flows
oo
- (Continued)
(in thousands)
Fiscal Year Ended
March 31, 2010 March 31, 2009 March 31, 2008
Supplemental disclosures of cash fl ow information:
y
Cash paid during the year for income taxes, net of refunds
g
p
Non-cash investing and fi nancing activities:
Unrealized gain (loss) on marketable securities, net of tax
g
(
)
Issuance of stock options with fair value of $433 in
connection with the purchase of PMP
p
Effective February 10, 2010, the Company acquired Opus
in a transaction summarized as follows:
Fair value of net assets acquired
Cash paid
Common stock issued for Opus stock
Fair value of contingent consideration
Liabilities assumed
g
Effective August 12, 2009, the Company acquired Sphere in
a transaction summarized as follows:
Fair value of net assets acquired
Cash paid
Fair value of contingent consideration
Liabilities assumed
g
Effective October 28, 2008, the Company acquired PMP in
a transaction summarized as follows:
Fair value of net assets acquired
Cash paid
Common stock issued for PMP stock
Liabilities assumed
Effective May 20, 2008, the Company acquired HSI in
a transaction summarized as follows:
Fair value of net assets acquired
Cash paid
Common stock issued for HSI stock
Liabilities assumed
$
$
$
$
$
$
$
$
$
$
24,506
$ 26,455
$ 20,546
–
$
196
$
)
(196)
(
433
32,209
(250)
(8,815)
(11,516)
11,628
1,453
(300)
(1,074)
79
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$ 23,875
(16,950)
(2,750)
4,175
$
$ 20,609
(8,241)
(7,350)
5,018
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
$
$
$
$
$
$
$
The accompanying notes to these Consolidated Financial Statements are an integral part of these Consolidated Statements.
61
Quality Systems, Inc.
Notes to Consolidated Financial Statements
MARCH 31, 2010 and 2009
(In Thousands, Except Shares and Per Share Data)
1. Organization of Business
Description of Business
Quality Systems, Inc. is comprised of the QSI Dental Division
and wholly-owned
subsidiaries, NextGen Healthcare
Information Systems, Inc. (“NextGen Division”), Lackland
Acquisition II, LLC dba Healthcare Strategic Initiatives (“HSI”)
and Practice Management Partners, Inc. (“PMP”) and most re-
cently NextGen Sphere, LLC and Opus Healthcare Solutions,
Inc. (collectively, the Company). The Company develops and
markets healthcare information systems that automate certain
aspects of medical and dental practices, networks of practic-
es such as physician hospital organizations (“PHOs”) and man-
agement service organizations (“MSOs”), ambulatory care
centers, community health centers, and medical and dental
schools. The Company also provides revenue cycle manage-
ment (“RCM”) services through the Practice Solutions 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, the Company
capitalized on the increasing focus on medical cost contain-
ment and further expanded its information processing systems
to serve the medical market. In the mid-1990’s, the Company
made two acquisitions that accelerated its penetration of the
medical market. These two acquisitions formed the basis for
the NextGen Division. Today, the Company serves the medi-
cal and dental markets through its NextGen Division and QSI
Dental Division.
fi
During fi scal year 2010, as a result of certain organization-
al changes, the composition of the Company’s NextGen
Division was revised to exclude the former NextGen Practice
Solutions unit and the Company’s RCM entities (HSI and PMP),
both of which are now administered and aggregated in the
Company’s Practice Solutions Division. Following the reorga-
nization, the Company now operates three reportable oper-
ating segments (not including Corporate), comprised of the
NextGen Division, the QSI Dental Division and the Practice
Solutions Division.
The QSI Dental Division, co-located with the Corporate
Headquarters in Irvine, California, currently focuses on de-
veloping, 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 its
UNIX based medical practice management software product
and Software as a Service, or SaaS model, based NextDDS
fi
fi nancial and clinical software.
The NextGen Division, with headquarters in Horsham,
Pennsylvania, and signifi cant locations in Atlanta, Georgia
and Austin, Texas, provides integrated clinical, financial and
connectivity solutions for ambulatory, inpatient and dental pro-
vider organizations.
fi
The Practice Solutions Division, with locations in St. Louis,
Missouri and Hunt Valley, Maryland, focuses primarily on
providing physician practices with RCM services, primarily bill-
ing and collection services for medical practices. This Division
combines a web-delivered SaaS model and the NextGenepm
software platform to execute its service offerings.
fi
The three Divisions operate largely as stand-alone operations,
with each Division maintaining its own distinct product lines,
product platforms, development, implementation and support
teams, sales staffi ng and branding. The three Divisions share
the resources of the Company’s “corporate offi ce,” which in-
cludes a variety of accounting and other administrative func-
tions. Additionally, there are a small but growing number of
clients who are simultaneously utilizing software or services
from more than one of the three Divisions.
Acquisitions
On May 20, 2008, the Company acquired St. Louis-based
HSI, a full-service healthcare RCM company. HSI operates
under the umbrella of the Company’s Practice Solutions
Division. Founded in 1996, HSI 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 tech-
nology. The Company intends to cross sell both software
and RCM services to the acquired customer base of HSI and
the NextGen Division.
On October 28, 2008, the Company acquired Maryland-
based PMP, a full-service healthcare RCM company. This
acquisition is also part of the Company’s growth strategy
for the Practice Solutions Division. Similar to HSI, PMP oper-
ates under the umbrella of the Company’s Practice Solutions
Division. Founded in 2001, PMP provides physician billing
and technology management services to healthcare providers,
primarily in the Mid-Atlantic region. The Company intends to
62
cross sell both software and RCM services to the acquired
customer base of PMP and the NextGen Division.
fi
On August 12, 2009, the Company acquired NextGen
Sphere, LLC (“Sphere”), a provider of financial information sys-
tems to the small hospital inpatient market. This acquisition is
also part of the Company’s strategy to expand into the small
hospital market and to add new customers by taking advan-
tage of cross selling opportunities between the ambulatory
and inpatient markets.
On February 10, 2010, the Company acquired Opus
Healthcare Solutions, Inc. (“Opus”), a provider of clinical infor-
mation systems to the small hospital inpatient market. Founded
in 1987 and headquartered in Austin, Texas, Opus delivers
web-based clinical solutions to hospital systems and integrat-
ed health networks nationwide. This acquisition complements
and will be integrated with the assets of Sphere. Both compa-
nies are established developers of software and services for
the inpatient market and will operate under the Company’s
NextGen Division.
fi
2. Summary of Significant Accounting Policies
Principles of Consolidation. The Consolidated Financial
Statements include the accounts of Quality Systems, Inc. and
its wholly-owned subsidiaries, which consists of NextGen
Healthcare Information Systems, Lackland Acquisition II, LLC
dba Healthcare Strategic Initiatives, Practice Management
Partners, Inc., NextGen Sphere, LLC, and Opus Healthcare
Solutions, Inc. All signifi cant intercompany accounts and trans-
actions have been eliminated.
Business Segments. The Company has prepared operating
segment information in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codifi cation
(“ASC”) Topic 280, Segment Reporting, or ASC 280, which
requires that companies disclose “operating segments” based
on the manner in which management disaggregates the
Company’s operations for making internal operating deci-
sions. See Note 15.
Basis of Presentation. The accompanying Consolidated
Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States
of America (“GAAP”).
Certain prior year amounts have been reclassifi ed to conform
with fi scal year 2010 presentation.
fi
References to dollar amounts in the Consolidated Financial
Statement sections are in thousands, except for shares and per
share data, unless otherwise specifi ed.
Revenue Recognition. The Company recognizes system sales
revenue pursuant to FASB ASC Topic 985-605, Software,
Revenue Recognition, or ASC 985-605. The Company gen-
erates revenue from the sale of licensing rights to its software
products directly to end-users and value-added resellers, or
VARs. The Company also generates revenue from sales of
hardware and third party software, implementation, train-
ing, Electronic Data Interchange (“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. FASB ASC Topic 985-605-25, Software,
Revenue Recognition, Multiple Elements, or ASC 985-605-25,
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 specifi c objective evi-
dence (“VSOE”). The Company limits its assessment of VSOE
for each element to either the price charged when the same
element is sold separately or the price established by manage-
ment having the relevant authority to do so, for an element
not yet sold separately. VSOE calculations are updated and
reviewed quarterly or annually depending on the nature of the
product or service. The Company has established VSOE for
the related undelivered elements based on the bell-shaped
curve method. Maintenance VSOE for the Company’s largest
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.
When evidence of fair value exists for the delivered and unde-
livered elements of a transaction, then discounts for individual
elements are aggregated and the total discount is allocated to
the individual elements in proportion to the elements’ fair value
relative to the total contract fair value.
When evidence of fair value exists for the undelivered ele-
ments only, the residual method, provided for under ASC
985-605, is used. Under the residual method, the Company
defers revenue related to the undelivered elements in a system
sale based on VSOE of fair value of each of the undelivered
elements, and allocates the remainder of the contract price
net of all discounts to revenue recognized from the delivered
elements. If VSOE of fair value of any undelivered element
does not exist, all revenue is deferred until VSOE of fair value
of the undelivered element is established or the element has
been delivered.
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 contrac-
tually due are recorded in accounts receivable as advance
63
billings. Amounts are contractually due when services are per-
formed or in accordance with contractually specifi ed payment
dates. Provided the fees are fi xed or determinable and col-
lection is considered probable, revenue from licensing rights
and sales of hardware and third party software is generally
recognized upon physical or electronic shipment and transfer
of title. In certain transactions where collections risk is high,
the cash basis method is used to recognize revenue. If the fee
is not fi xed or determinable, then the revenue recognized in
each period (subject to application of other revenue recogni-
tion 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 fi xed 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 specifi c volume of
products to be delivered without being subject to change
based on variable pricing mechanisms such as the num-
ber of units copied or distributed or the expected number
of users.
Payment terms must not be considered extended. If a sig-
nifi cant portion of the fee is due more than 12 months
after delivery or after the expiration of the license, the fee
is presumed not fi xed or determinable.
Revenue from implementation and training services is rec-
ognized as the corresponding services are performed.
Maintenance revenue is recognized ratably over the contrac-
tual maintenance period.
Contract accounting is applied where services include signifi -
cant software modifi cation, development or customization. In
such instances, the arrangement fee is accounted for in accor-
dance with FASB ASC Topic 605-35, Revenue Recognition,
Construction-Type and Production-Type Contracts, or ASC
605-35. Pursuant to ASC 605-35, the Company uses the per-
centage of completion method provided all of the following
conditions exist:
the contract includes provisions that clearly specify the
enforceable rights regarding goods or services to be 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.
•
•
•
•
64
The Company measures completion using labor input hours.
Costs of providing services, including services accounted for
in accordance with ASC 605-35, are expensed as incurred.
If a situation occurs in which a contract is so short term that
the fi nancial statements would not vary materially from us-
ing 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 FASB ASC
Topic 605-15, Revenue Recognition, Products, or ASC 605-
15. The Company also ensures that the other criteria in ASC
605-15 have been met prior to recognition of revenue:
•
•
•
•
•
•
the price is fi xed 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 signifi cant 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 re-
turn 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
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 that include the right to
use software stored on the Company’s hardware is accounted
for under FASB ASC Topic 985-605-05, Software, Revenue
Recognition, Hosting Arrangements, or ASC 985-605-05,
which requires that for software licenses and related imple-
mentation services to continue to fall under ASC 985-605-05,
the customer must have the contractual right to take possession
of the software without incurring a signifi cant penalty and it
must be feasible for the customer to either host the software
themselves or through another third party. If an arrangement is
not deemed to be accounted for under ASC 985-605-05, the
entire arrangement is accounted for as a service contract in
accordance with ASC 985-605-25. 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 ar-
rangements. Pursuant to FASB ASC Topic 985-605-55,
Software, Revenue Recognition, Flowchart of Revenue
Recognition on Software Arrangements, or ASC 985-605-
55, such discounts that are incremental to the range of dis-
counts refl ected in the pricing of the other elements of the
arrangement, that are incremental to the range of discounts
typically given in comparable transactions, and that are sig-
nifi cant, 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.
RCM service 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. The Company does not recognize
revenue for services fees until these collections are made, as
the services fees are not fi xed or 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 train-
ing services related to purchase of the Company’s software
systems. Revenue in the maintenance, EDI, RCM and other
services category includes maintenance, EDI, RCM services,
follow on training and implementation services, annual third
party license fees, hosting services and other services revenue.
fi
Cash and Cash Equivalents. Cash and cash equivalents gen-
erally consist of cash, money market funds and short-term U.S.
Treasury securities with original maturities of less than 90 days.
The Company had cash deposits at U.S. banks and financial
institutions at March 31, 2010 of which $82,223 was in ex-
cess of the Federal Deposit Insurance Corporation insurance
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 mon-
ey 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 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 receives such cash from the government social ser-
vice 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 market
rates or valuation analysis when appropriate.
The Company’s investments at March 31, 2010 and 2009
are in tax exempt municipal Auction Rate Securities (“ARS”),
which are classifi ed as either current or non-current marketable
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 30 years,
but generally have interest rate reset dates that occur every 7,
28 or 35 days. Despite the underlying long-term maturity of
ARS, such securities were priced and subsequently traded as
short-term investments because of the interest rate reset feature.
If there are insuffi cient 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 respective 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.
The Company’s ARS are held 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’s 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 had obtained an asset, ARS
put option 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.
Prior to signing the Rights Agreement the Company had as-
serted that it had the intent and ability to hold these securities
until anticipated recovery and classifi ed its ARS as held for
sale securities on its Consolidated Balance Sheets. By accept-
ing the Rights Agreement, the Company could no longer as-
sert that it has the intent to hold the auction rate securities until
anticipated recovery and consequently elected to reclassify its
investments in ARS as trading securities, as defi ned by FASB
ASC Topic 320, Investments – Debt and Equity Securities, or
ASC 320, on the date of Company’s acceptance of the Rights
fi
65
Agreement. As trading securities, the ARS are carried at fair
value with changes recorded through earnings.
To determine the estimated fair values of the ARS at March
31, 2010 and 2009, factors including credit quality, assump-
tions about the likelihood of redemption, observable market
data such as yields or spreads of fi xed rate municipal bonds
and other trading instruments issued by the same or compa-
rable issuers, were considered. The Company has valued the
ARS as the approximate midpoint 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. Based on this analy-
sis, the Company recognized a gain of approximately $188
through its earnings for the year ended March 31, 2010. The
estimated fair value of the ARS as of March 31, 2010 was
determined to be $7,158 and is included on the accompany-
ing Consolidated Balance Sheets.
As the Company will be permitted to put the ARS back to
UBS at par value, the Company accounted for the ARS put
option right 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. Based on this analysis, the Company recognized
a gain of approximately $80 through its earnings for the year
ended March 31, 2010. The estimated fair value of the ARS
put option rights as of March 31, 2010 was determined to be
$548 and is included on the accompanying Consolidated
Balance Sheets in other current assets.
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.
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 performs
credit evaluations of its customers and maintains reserves for
estimated credit losses. Reserves for potential credit losses
are determined by establishing both specifi c and general re-
serves. Specifi c 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
revenue and specifi cally reserved accounts. Accounts are writ-
ten off as uncollectible only after the Company has expended
extensive collection efforts.
Included in accounts receivable are amounts related to main-
tenance 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 specifi c cus-
tomer orders and spare parts, and are valued at lower of cost
(first-in, fi
fi
rst-out) or market. Management provides a reserve to
fi
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
3-5 years
Furniture and fi xtures
5-7 years
Leasehold improvements
lesser of lease term or
estimated useful life of asset
Software Development Costs. Development costs incurred
in the research and development of new software products
and enhancements to existing software products are ex-
pensed as incurred until technological feasibility has been
established. After technological feasibility is established, any
additional development costs are capitalized in accordance
with FASB ASC Topic 985-20, Software, Costs of Computer
Software to be Sold, Leased or Marketed, or ASC 985-
20. Such capitalized costs are amortized on a straight-line
basis over the estimated economic life of the related prod-
uct, which is typically 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 recoverability of such capi-
talized software costs. If a determination is made that capi-
talized amounts are not recoverable based on the estimated
d
66
cash fl ows to be generated from the applicable software,
any remaining capitalized amounts are written off.
l
Goodwill. Goodwill is related to the NextGen Division and
the HSI, PMP, Sphere, and Opus acquisitions, which closed
on May 20, 2008, October 28, 2008, August 12, 2009,
and February 10, 2010, respectively (see Notes 5, 6 and
7). In accordance with FASB ASC Topic 350-20, Intangibles
– Goodwill and Other, Goodwill, or ASC 350-20, the
Company tests goodwill for impairment annually at the end
of its fi rst fi
fi
scal quarter, referred to as the annual test date. The
fi
Company will also test for impairment between annual test
dates if an event occurs or circumstances change that would
indicate the carrying amount may be impaired. Impairment
testing for goodwill is performed at a reporting-unit level. An
impairment loss would generally be recognized when the car-
rying amount of the reporting unit’s net assets exceeds the
estimated fair value of the reporting unit. The Company has
determined that there was no indication of impairment to its
goodwill as of March 31, 2010. See also Note 6.
Intangible Assets. Intangible assets consist of capitalized soft-
ware costs, customer relationships, trade names and certain
intellectual property. Intangible assets related to customer rela-
tionships and trade names arose in connection with the acquisi-
tion of HSI, PMP, Sphere, and Opus. These intangible assets
were recorded at fair value and are stated net of accumulated
amortization and impairments. Intangible assets are amortized
over their remaining estimated useful lives, ranging from 3 to
9 years. The Company’s amortization policy for intangible as-
sets is based on the principles in FASB ASC Topic 350-30,
Intangibles – Goodwill and Other, General Intangibles Other
than Goodwill, or ASC 350-30, which requires that the amorti-
zation of intangible assets refl ect the pattern that the economic
benefits of the intangible assets are consumed.
fi
l
Long-Lived Assets. The Company assesses the recoverability
of long-lived assets at least annually or whenever adverse
events or changes in circumstances indicate that impairment
may have occurred in accordance with FASB ASC Topic 360-
10, Property, Plant, and Equipment, Impairment or Disposal of
Long-Lived Assets, or ASC 360-10. If the future undiscounted
cash fl ows expected to result from the use of the related assets
are less than the carrying value of such assets, an impairment
has been incurred and a loss is recognized to reduce the
carrying value of the long-lived assets to fair value, which is
determined by discounting estimated future cash fl ows.
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 im-
pairment to its long-lived assets as of March 31, 2010. In ad-
dition to the recoverability assessment, the Company routinely
reviews the remaining estimated lives of its long-lived assets.
fi
Income Taxes. The Company accounts for income taxes in ac-
cordance with FASB ASC Topic 740, Income Taxes, or ASC
740. Income taxes are provided based on current taxable in-
come and the future tax consequences of temporary differenc-
es between the basis of assets and liabilities for financial and
tax reporting. The deferred income tax assets and liabilities
represent the future state and federal tax return consequences
of those differences, which will either be taxable or deduct-
ible when the assets and liabilities are recovered or settled.
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, es-
timates of future taxable income, and adjusts the related valu-
ation allowance as necessary. 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-
fi
nesses based on management’s interpretation of existing facts
and circumstances.
On April 1, 2007, the Company adopted the provisions of
ASC 740 related to the accounting for uncertain tax provi-
sions. The adoption of the provisions of ASC 740 did not have
a material effect on the Consolidated Financial Statements. As
a result, there was no cumulative effect related to adopting
ASC 740. However, certain amounts have been reclassifi ed
in the Company’s Consolidated Balance Sheets in order to
comply with the requirements of the statement. See Note 11.
fi
Self-Insurance Liabilities. Effective January 1, 2010, the
Company became self-insured with respect to healthcare
claims, subject to stop-loss limits. The Company accrues for
estimated self-insurance costs and uninsured exposures based
on claims filed and an estimate of claims incurred but not
reported as of each balance sheet date. However, it is pos-
sible that recorded accruals may not be adequate to cover the
future payment of claims. Adjustments, if any, to estimated ac-
cruals resulting from ultimate claim payments will be refl ected
in earnings during the periods in which such adjustments are
determined. Periodically, the Company reevaluates the ade-
quacy of the accruals by comparing amounts accrued on the
balance sheet for anticipated losses to an updated actuarial
loss forecasts and third party claim administrator loss estimates
and makes adjustments to the accruals as needed.
67
As of March 31, 2010, the self-insurance accrual was ap-
proximately $516, which is included in other current liabilities
on the accompanying Consolidated Balance Sheet. If any
of the factors that contribute to the overall cost of insurance
claims were to change, the actual amount incurred for the self-
insurance liabilities would be directly affected.
Advertising Costs. Advertising costs are charged to operations
as incurred. The Company does not have any direct-response
advertising. Advertising costs, which includes trade shows
and conventions, were approximately $6,198, $3,459 and
$2,580 for the years ended March 31, 2010, 2009 and
2008, respectively, and were included in selling, general
and administrative expenses in the Consolidated Statements
of Income.
Marketing Assistance Agreements. The Company has en-
tered into marketing assistance agreements with certain
existing users of the Company’s products, which provide the
opportunity for those users to earn commissions if they host
specifi c site visits upon the Company’s request for prospective
customers that 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, 2010 or 2009.
Net income
Other comprehensive income:
Year Ended March 31,
2010
2009
2008
$ 48,379
$ 46,119
$ 40,078
Unrealized loss on marketable securities, net of tax
–
–
(196)
Comprehensive income
$ 48,379
$ 46,119
$ 39,882
Earnings per Share. Pursuant to FASB ASC Topic 260, Earnings
Per Share, or ASC 260, the Company provides dual presenta-
tion of “basic” and “diluted” earnings per share (“EPS”).
Basic EPS excludes dilution from common stock equivalents
and is computed by dividing income available to common
shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS refl ects the
potential dilution from common stock equivalents.
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 share:
Year ended March 31,
2010
2009
2008
$ 48,379
$ 46,119
$ 40,078
Weighted average shares outstanding – Basic
28,635
28,031
27,298
Basic net income per common share
$
1.69
$
1.65
$
1.47
Net income
Diluted net income per share:
Weighted average shares outstanding – Basic
Effect of potentially dilutive securities
Weighted average shares outstanding – Diluted
$ 48,379
$ 46,119
$ 40,078
28,635
161
28,796
28,031
365
28,396
27,298
472
27,770
Diluted net income per common share
$
1.68
$
1.62
$
1.44
68
The computation of diluted net income per share does not
include 74,962, 440,338 and 279,752 options for the years
ended March 31, 2010, 2009 and 2008, respectively, be-
cause their inclusion would have an anti-dilutive effect on earn-
ings per share.
Share-Based Compensation. FASB ASC Topic 718 Compen-
sation – Stock Compensation, or ASC 718, requires compa-
nies 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 expect-
ed 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, 2010, 2009 and 2008, respectively:
Costs and expenses:
Cost of revenue
Research and development
Selling, general and administrative
Total share-based compensation
Year ended March 31,
2010
2009
2008
$
85
108
1,880
$
195
242
1,540
$
496
800
2,461
$ 2,073
$ 1,977
$ 3,757
Amounts capitalized in software development costs
(27)
(21)
(39)
Amounts charged against earnings, before income tax benefi t
$ 2,046
$ 1,956
$ 3,718
Related income tax benefi t
Decrease in net income
(608)
(549)
(969)
$ 1,438
$ 1,407
$ 2,749
Sales Taxes.
In accordance with the guidance of FASB
ASC Topic 605-45, Revenue Recognition, Principal Agent
Considerations, or ASC 605-45, the Company accounts for
sales taxes imposed on its goods and services on a net basis
in the Consolidated Statements of Income.
fi
Use of Estimates. The preparation of Consolidated Financial
Statements in conformity with 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 financial statements,
and the reported amounts of revenue and expenses during
the reporting period. On an ongoing basis, the Company
evaluates its estimates, including those related to uncollectible
receivables, vendor specifi c objective evidence, valuation of
marketable securities and ARS put option rights, self-insurance
accruals, and income taxes and related credits and deduc-
tions. The Company bases its estimates on historical experi-
ence 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.
Newly Adopted Accounting Standards. In September 2009,
the FASB issued an accounting standards update to ASC 740.
This update addresses the need for additional implementation
guidance on accounting for uncertainties in income taxes, spe-
cifi cally, whether income tax paid by an entity is attributable
to the entity or its owners; what constitutes a tax position for
a pass-through entity or a tax-exempt entity; and how to ap-
ply the uncertainty in income taxes when a group of related
entities comprise both taxable and nontaxable entities. This
update also eliminates certain disclosures for nonpublic enti-
ties. Since the Company currently applies the standards for
accounting for uncertainty in income taxes, this update was
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The adoption of
this update did not have a material impact on the Company’s
Consolidated Financial Statements.
fi
69
In August 2009, the FASB issued an accounting standards
update to ASC Topic 820, Fair Value Measurements and
Disclosures, or ASC 820. This update provides clarifi cation
that in circumstances in which a quoted price in an active
market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of
the following techniques: (i) a valuation technique that uses
the quoted price of the identical liability when traded as an
asset or the quoted prices for similar liabilities when traded
as assets and (ii) another valuation technique that is consistent
with the principles of ASC 820. This update also clarifi es that
when estimating the fair value of a liability, a reporting entity is
not required to include a separate input or adjustment to other
inputs relating to the existence of a restriction that prevents
the transfer of the liability. Additionally, this update clarifi es
that both a quoted price in an active market for the identical
liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market
when no adjustments to the quoted price of the asset are re-
quired are Level 1 fair value measurements. This update was
effective for the fi rst reporting period beginning after issuance
(the Company’s interim period ended September 30, 2009).
The adoption of this update did not have a material impact on
the Company’s Consolidated Financial Statements.
fi
In April 2009, the FASB issued three related accounting provi-
sions intended to provide additional application guidance and
enhanced disclosures regarding fair value measurements and
other-than-temporary impairments of securities: (i) FASB ASC
Topic 820-10-65, Fair Value Measurements and Disclosures
– Transition and Open Effective Date Information, or ASC
820-10-65; (ii) FASB ASC Topic 320-10-65, Investments –
Debt and Equity Securities – Transition and Open Effective
Date Information, or ASC 320-10-65; and (iii) FASB ASC
Topic 825-10-65, Financial Instruments – Transition and Open
Effective Date Information, or ASC 825-10-65. ASC 820-10-
65 provides guidelines for making fair value measurements
more consistent with the principles presented in ASC 820-10.
ASC 820-10-65 must be applied prospectively and retrospec-
tive application is not permitted. ASC 820-10-65 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 ASC 820-10-65 must
also early adopt ASC 320-10-65. ASC 320-10-65 provides
additional guidance designed to create greater clarity and
consistency in accounting for and presenting impairment loss-
es on debt securities. ASC 320-10-65 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 these provisions only if it also elects
to early adopt ASC 820-10-65. ASC 825-10-65 enhances
consistency in financial reporting by increasing the frequency
fi
70
of fair value disclosures. ASC 825-10-65 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 re-
quirements only if it also elects to early adopt ASC 820-10-65
and ASC 320-10-65. The adoption of these provisions did
not have a material impact on the Company’s Consolidated
Financial Statements.
In April 2009, the FASB issued ASC Topic 805-20, Business
Combinations, Identifi able Assets and Liabilities, and Any
Noncontrolling Interest,tt or ASC 805-20. ASC 805-20
amends the guidance in ASC 805 to: (i) require that assets
acquired and liabilities assumed in a business combination
that arise from contingencies be recognized 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 ASC Topic 450, Contingencies, or ASC 450), (ii) elimi-
nate the requirement to disclose an estimate of the range of
outcomes of recognized contingencies at the acquisition date
(for unrecognized contingencies, the FASB decided to require
that entities include only the disclosures required by ASC 450
and that those disclosures be included in the business combi-
nation footnote); and (iii) require that contingent consideration
arrangements of an acquiree assumed by the acquirer in a
business combination be treated as contingent consideration
of the acquirer and should be initially and subsequently mea-
sured at fair value in accordance with ASC 805. ASC 805-
20 is effective for assets or liabilities arising from contingencies
in business combinations for which the acquisition date is on
fi
or after the beginning of the fi rst annual reporting period be-
ginning on or after December 15, 2008.
l
In December 2007, the FASB issued ASC Topic 805-10-65-1,
Business Combinations – Overall – Transition Related to SFAS
No. 141 (revised 2007), Business Combinations (SFAS 141(R))
and SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements – an amendment of Accounting Review
Bulletin No. 51, or ASC 805-10-65-1, the provisions of which
have been incorporated in ASC Topic 805-10, Business
Combinations – Overall, or ASC 805-10, and ASC 805-20.
ASC 805-10-65-1 retains the fundamental requirements of the
original pronouncement requiring that the purchase method
be used for all business combinations. ASC 805-10-65-1 de-
fi nes the acquirer as the entity that obtains control of one or
fi
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 (including
goodwill) at their fair values as of the acquisition date. In
addition, ASC 805-10-65-1 requires expensing of acquisition-
related and restructure-related costs, remeasurement of earn
out provisions at fair value, measurement of equity securities
issued for purchase at the date of close of the transaction
and non-expensing of in-process research and development
related intangibles. ASC 805-10-65-1 applies prospectively
to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. An entity may
not apply it before that date. The Company adopted ASC
805-10 and ASC 805-20 and applied the provisions of the
pronouncement to the business combinations completed dur-
ing fi scal year 2010.
fi
fi
In November 2008, the FASB ratifi ed ASC Topic 350-30-55,
Intangibles – Goodwill and Other, Defensive Intangible Asset,tt
or ASC 350-30-55. ASC 350-30-55 clarifi es the account-
ing for certain separately identifi able intangible assets that an
acquirer does not intend to actively use but instead intends to
hold to prevent its competitors from obtaining access to them.
ASC 350-30-55 requires an acquirer in a business combina-
tion 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. ASC 350-30-
55 is effective for fiscal years beginning after December 15,
2008, with early adoption prohibited. The adoption of ASC
350-30-55 did not have a material impact on the Company’s
Consolidated Financial Statements.
fi
In June 2008, the FASB issued ASC Topic 260-10-45,
Earnings Per Share, Required EPS Presentation on the Face of
the Income Statement,tt or ASC 260-10-45. ASC 260-10-45
concluded that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equiva-
lents (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. ASC 260-10-
45 became effective on April 1, 2009. Early adoption was
not permitted; however, it does apply retrospectively to EPS
data for all periods presented in the financial statements or in fi -
nancial data. The Company does not currently have any share-
based awards with nonforfeitable rights to dividends or divi-
dend equivalents and therefore ASC 260-10-45 did not have
an impact on the Company’s EPS data in fiscal year 2010
or on EPS for any prior periods presented in the Company’s
Consolidated Financial Statements or financial data.
fi
fi
fi
fi
In April 2008, the FASB finalized ASC Topic 350-30-65,
Intangibles – Goodwill and Other, General Intangibles
Other than Goodwill – Transition and Open Effective Date
Information, or ASC 350-30-65. ASC 350-30-65 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 ASC Topic 350-20,
Intangibles – Goodwill and Other, Goodwill. ASC 350-30-
65 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.
ASC 350-30-65 is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fis-fi
cal years. The adoption of ASC 350-30-65 did not have
a material impact on the Company’s Consolidated Financial
Statements.
fi
Recently Issued Accounting Standards. In January 2010, the
FASB issued guidance that requires reporting entities to make
new disclosures about recurring or nonrecurring fair value
measurements, including signifi cant transfers into and out of
Level 1 and Level 2 fair value measurements and information
on purchases, sales, issuances, and settlements on a gross ba-
sis in the reconciliation of Level 3 fair value measurements. The
guidance is effective for annual reporting periods beginning
after December 15, 2009, except for Level 3 reconciliation
disclosures that are effective for interim and annual periods
beginning after December 15, 2010. The Company does
not expect the disclosure provisions for Level 3 reconciliation
to have a signifi cant impact on its Consolidated Financial
Statements.
In September 2009, the FASB reached a consensus on
Accounting Standards Update, or ASU, 2009-13, Revenue
Recognition (Topic 605) – Multiple-Deliverable Revenue
Arrangements, or ASU 2009-13, and ASU 2009-14,
Software (Topic 985) – Certain Revenue Arrangements That
Include Software Elements, or ASU 2009-14. ASU 2009-13
modifi es the requirements that must be met for an entity to rec-
ognize revenue from the sale of a delivered item that is part of
a multiple-element arrangement when other items have not yet
been delivered. ASU 2009-13 eliminates the requirement that
all undelivered elements must have either: (i) VSOE or (ii) third-
party evidence, or TPE, before an entity can recognize the
portion of an overall arrangement consideration that is attribut-
able to items that already have been delivered. In the absence
of VSOE or TPE of the standalone selling price for one or
more delivered or undelivered elements in a multiple-element
arrangement, entities will be required to estimate the selling
prices of those elements. Overall arrangement consideration
will be allocated to each element (both delivered and undeliv-
ered items) based on their relative selling prices, regardless of
whether those selling prices are evidenced by VSOE or TPE or
are based on the entity’s estimated selling price. The residual
method of allocating arrangement consideration has been
eliminated. ASU 2009-14 modifi es the software revenue rec-
ognition guidance to exclude from its scope tangible products
that contain both software and non-software components that
function together to deliver a product’s essential functionality.
71
These new updates are effective for revenue arrangements
entered into or materially modifi ed in fi scal years beginning
on or after June 15, 2010. Early adoption is permitted. The
Company is currently evaluating the impact that the adop-
tion of these ASUs will have on its Consolidated Financial
Statements.
fi
3. Cash and Cash Equivalents
At March 31, 2010 and 2009, the Company had cash and
cash equivalents of $84,611 and $70,180, 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 market fund
is approximately two months.
4. Fair Value Measurements
The Company applies ASC 820 with respect to fair value
measurements of (a) nonfinancial assets and liabilities that
are recognized or disclosed at fair value in the Company’s
fi
fi
Consolidated Financial Statements on a recurring basis (at
least annually) and (b) all financial assets and liabilities. The
Company adopted the aspects of ASC 820 relative to non-
fi
fi nancial assets and liabilities that are measured at fair value,
but are recognized and disclosed at fair value on a nonrecur-
ring basis, prospectively effective April 1, 2009. ASC 820
prioritizes the inputs used in measuring fair value into the fol-
lowing hierarchy:
Level 1 Quoted market prices in active markets for identical
assets or liabilities;
2
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 refl ecting management’s own
assumptions about the inputs used in estimating the
value of the asset.
The following table summarizes the Company’s financial assets measured at fair value on a recurring basis in accordance with
ASC 820 as of March 31, 2010 and March 31, 2009:
fi
Balance at
March 31, 2010
Quoted Prices in Active
Markets For Identical
Assets (Level 1)
Signifi cant Other
Observable Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Cash and cash equivalents
$
84,611
$
84,611
$ –
$ –
Restricted cash
Marketable securities(1)
ARS put option rights(2)
2,339
7,158
548
2,339
–
–
–
–
–
–
7,158
548
$
94,656
$
86,950
$ –
$ 7,706
Balance at
March 31, 2009
Quoted Prices in
Active Markets For
Identical Assets (Level
1)
Signifi cant Other
Observable Inputs
(Level 2)
Unobservable Inputs
(Level 3)
Cash and cash equivalents
$
70,180
$
70,180
$ –
$ –
Restricted cash
Marketable securities(1)
ARS put option rights(3)
1,303
7,395
468
1,303
–
–
–
–
–
–
7,395
468
$
79,346
$
71,483
$ –
$ 7,863
(1) Marketable securities consist of ARS.
(2) ARS put option rights are included on the accompanying Consolidated Balance Sheets in other current assets as of March 31, 2010.
(3) ARS put option rights are included on the accompanying Consolidated Balance Sheets in other assets as of March 31, 2009.
72
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 participants would
use in pricing the asset in a current transaction, or Level 3
– unobservable inputs, in accordance with ASC 820, and
represents $7,706 and $7,863 or 8.1% and 9.9%, of total
fi nancial assets measured at fair value in accordance with
ASC 820 at March 31, 2010 and 2009, respectively.
Management used a model to estimate the fair value of
these securities that included certain Level 2 inputs as well
as assumptions, such as a liquidity discount and credit rat-
ing of the issuers, 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 ad-
ditional information on cash and cash equivalents, restricted
cash or marketable securities, see Note 2.
The following table presents activity in the Company’s assets
measured at fair value using signifi cant unobservable inputs
(Level 3), as defined by ASC 820, as of and for the year
ended March 31, 2010:
fi
Balance at March 31, 2009
$
7,863
Transfer in/(out) of Level 3
Proceeds from sales (at par)
Recognized gain
–
(425)
268
Balance at March 31, 2010
$
7,706
To determine the estimated fair values of the ARS at March 31,
2010 and 2009, factors including credit quality, assumptions
about the likelihood of redemption, observable market data
such as yields or spreads of fi xed rate municipal bonds and
other trading instruments issued by the same or comparable is-
suers, were considered. The Company has valued the ARS as
the approximate midpoint between various fair values, mea-
sured 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.
Interest income related to cash and cash equivalents and mar-
ketable securities for each of the three years ended March 31,
2010 is as follows:
Year ended March 31,
2010
2009
2008
Interest Income
$ 226
$ 1,203
$ 2,661
5. Business Combinations
On May 20, 2008, the Company acquired HSI, a full-service
healthcare RCM company, and on October 28, 2008, the
Company acquired PMP, a full-service healthcare RCM com-
pany. The Company accounted for these acquisitions as a
business combination using the purchase method of account-
ing. The purchase price was allocated to HSI and PMP’s tan-
gible and intangible assets acquired and liabilities assumed
based on their estimated fair values as of the respective acqui-
sitions dates. The fair value of the assets acquired and liabili-
ties assumed represent management’s estimate of fair value.
fi
During fi scal year 2010, the Company paid $3,000 in cash
and issued stock options with a fair value of $433 as part
of a contingent earn-out agreement relating to the acquisition
of PMP. The additional consideration was recorded as an in-
crease to goodwill. See Note 6.
Acquisition of Sphere
On August 12, 2009, the Company acquired certain assets
of Sphere. The Company accounted for this acquisition as
a purchase business combination as defined in ASC 805.
Under the acquisition method of accounting, the purchase
price was allocated to the tangible and intangible assets ac-
quired and liabilities assumed based on their estimated fair
values as of the acquisition date. The fair value of the assets
acquired and liabilities assumed represent management’s esti-
mate of fair value.
fi
The purchase price totaled $1,374, including contingent
consideration payable over a fi ve year period, consisting of
maintenance revenue and license fee payments, estimated at
approximately $1,074 based on the probability of achieving
certain business milestones, but which in no event shall exceed
$2,500. The total purchase price for Sphere is as follows:
Cash paid
Contingent consideration
Total purchase price
$
300
1,074
$
1,374
In connection with the acquisition, the Company recorded
$275 of intangible assets related to customer relationships and
software technology and $1,020 of goodwill. The Company
is amortizing the customer relationships intangible asset over 4
years and the software technology over 3 years.
73
The following table summarizes the final allocation of the pur-
chase price:
August 12, 2009
The Company recognized approximately $200 of acquisition
and integration related costs that were expensed in the year
ended March 31, 2010.
$
158
The purchase price totaled $20,581, including approximately
$11,516 in contingent consideration based primarily on Opus
achieving certain EBITDA and strategic goal targets. The total
purchase price for Opus is as follows:
Fair value of the net tangible assets
acquired and liabilities assumed:
Current assets (consisting of accounts
receivable only)
Current liabilities, including long-term
debt due within one year
Total tangible assets acquired and
liabilities assumed
Fair value of identifiable intangible
assets acquired:
Customer relationships
Software technology
Goodwill (including assembled
workforce of $84)
Total identifiable intangible assets
acquired
(79)
79
156
119
1,020
1,295
Total purchase price
$
1,374
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, 2010 and is therefore not presented.
Acquisition of Opus
On February 10, 2010, the Company acquired Opus.
The Company accounted for this acquisition as a purchase
business combination as defined in ASC 805. Under the
acquisition method of accounting, the purchase price was
allocated to the tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values as
of the acquisition date. The fair value of the assets acquired
and liabilities assumed represent management’s estimate of
fair value.
The estimated fair value of the acquired tangible and intan-
gible assets and liabilities assumed were determined using
multiple valuation approaches depending on the type of tan-
gible or intangible asset acquired, including but not limited to
the income approach, the excess earnings method as well as
the relief from royalty method approach.
Key assumptions used to determine the fair value of tangible
and intangible assets acquired were (a) expected cash flow
period of 5 to 10 years; (b) a weighted average cost of capi-
tal discount rate ranging from 24% to 26%, calculated using
the capital asset pricing model, the build-up and IRR method-
ologies; and (c) a risk free rate of 4.5%, which is based on the
rates of long-term treasury securities.
74
Cash paid
Common stock issued at fair value
Contingent consideration
Total purchase price
$
250
8,815
11,516
$ 20,581
In connection with the acquisition, the Company recorded
$13,250 of intangible assets related to customer relationships
and software technology and $13,005 of goodwill. The
Company is amortizing the customer relationships intangible
asset over 4 years and the software technology over 8 years.
The following table summarizes the final allocation of the pur-
chase price:
February 10, 2010
Fair value of the net tangible assets
acquired and liabilities assumed:
Cash and cash equivalents
$
2,036
Current assets (including accounts
receivable of $1,753)
Equipment and improvements and
other long-term assets
Accounts payable and
accrued liabilities
Deferred revenues
Total tangible assets acquired and
liabilities assumed
Fair value of identifiable intangible
assets acquired:
Customer relationships
Software technology
Goodwill (including assembled
workforce of $1,000)
g
Total identifiable intangible
assets acquired
Total purchase price
3,435
483
(7,678)
(3,950)
(5,674)
1,250
12,000
13,005
26,255
$ 20,581
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, 2010 and is therefore not presented.
6. Goodwill
In accordance with ASC 350-20, the Company does not amortize goodwill as the goodwill has been determined to have an
indefi nite useful life.
fi
Goodwill consists of the following:
Balance at
March 31, 2009
Additions to
Goodwill
Balance at
March 31, 2010
NextGen Division
Opus Healthcare Solutions, Inc.
$
NextGen Sphere, LLC
NextGen Healthcare Information Systems, Inc.
Total NextGen Division goodwill
Practice Solutions Division
Practice Management Partners, Inc
Healthcare Strategic Initiatives
Total Practice Solutions Division goodwill
Total goodwill
–
–
1,840
1,840
16,052
10,839
26,891
$ 13,005
$
13,005
1,020
–
14,025
3,433
–
3,433
1,020
1,840
15,865
19,485
10,839
30,324
$ 28,731
$ 17,458
$
46,189
7. Intangible Assets
The Company had the following intangible assets, other than capitalized software development costs, with determinable lives
as of March 31, 2010:
Gross carrying amount
Accumulated amortization
Net intangible assets
Customer
Relationships
Trade Name
Software
Technology
TT
Total
$ 10,206
$ 637
$ 12,119
$ 22,962
(2,357)
7,849
(269)
368
(191)
11,928
(2,817)
20,145
Aggregate amortization expense during the year
$ 1,434
$ 158
$
191
$ 1,783
Activity related to the intangible assets for the year ended March 31, 2010 is as follows:
Customer
Relationships
Trade Name
Software
Technology
TT
Total
Balance as of April 1, 2009
$
7,877
$ 526
$
–
$ 8,403
Acquisition
Amortization
1,406
(1,434)
–
(158)
12,119
(191)
13,525
(1,783)
Balance as of March 31, 2010
$
7,849
$ 368
$ 11,928
$ 20,145
The following table represents the remaining estimated amortization of intangible assets with determinable lives as
of March 31, 2010:
For the year ended March 31,
2011
2012
2013
2014
2015 and beyond
Total
$ 3,255
3,320
3,184
3,055
7,331
$20,145
75
8. Capitalized Software Costs
As of March 31, 2010 and 2009, 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, 2010
March 31, 2009
$
41,429
$
33,508
(29,883)
11,546
5,927
$
$
(23,956)
$
$
9,552
5,163
Activity related to net capitalized software costs for the years ended March 31, 2010 and 2009 is as follows:
Beginning of the year
Capitalization
Amortization
End of the year
March 31, 2010
March 31, 2009
$
9,552
$
8,852
7,921
(5,927)
5,863
(5,163)
$ 11,546
$
9,552
The following table represents the remaining estimated amortization of capitalized software costs as of March 31, 2010:
For the year ending March 31,
2011
2012
2013
2014
2015 and beyond
Total
$
5,729
3,783
1,768
266
–
$ 11,546
9. Composition of Certain Financial Statement Captions
Accounts receivable include amounts related to maintenance and services that were billed but not yet rendered as of the end
of the fiscal year. Undelivered maintenance and services are included on the accompanying Consolidated Balance Sheets as
part of the deferred revenue balance.
fi
March 31, 2010
March 31, 2009
Accounts receivable, excluding undelivered software, maintenance and services
$ 72,500
$ 64,003
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:
p
p
Computer systems and components, net of reserve for obsolescence of
$237 and $210, respectively
p
y
y
Miscellaneous parts and supplies
Inventories, net
76
39,447
111,947
(4,489)
29,944
93,947
(3,877)
$ 107,458
$ 90,070
March 31, 2010
March 31, 2009
$
1,322
$
1,105
18
20
$
1,340
$
1,125
Equipment and improvements are summarized as follows:
Computer and electronic test equipment
Furniture and fi xtures
Leasehold improvements
Accumulated depreciation and amortization
Equipment and improvements, net
Accrued compensation and related benefits are summarized as follows:
fi
Payroll, bonus and commission
Vacation
Accrued compensation and related benefi ts
Short and long-term deferred revenue are summarized as follows:
Maintenance
Implementation services
Annual license services
Undelivered software and other
Deferred revenue
Deferred revenue, net of current
Other current liabilities are summarized as follows:
Contingent consideration related to acquisition
Care services liabilities
Accrued EDI expenses
Customer deposits
Accrued royalties
Deferred rent
Self insurance reserve
Sales tax payable
Commission payable
Professional services
Other accrued expenses
Other accrued liabilities
March 31, 2010 March 31, 2009
$ 18,599
$ 15,384
5,136
1,969
25,704
(17,272)
3,520
1,595
20,499
(13,743)
$
8,432
$
6,756
March 31, 2010
March 31, 2009
$
4,185
4,766
$
8,951
$
$
5,768
3,743
9,511
March 31, 2010
March 31, 2009
$ 13,242
$
8,776
38,137
8,214
4,516
28,631
7,988
2,189
$ 64,109
$ 47,584
$
474
$
521
March 31, 2010
March 31, 2009
$
5,275
$
–
2,336
2,000
1,036
926
641
516
506
468
391
1,303
1,258
674
933
782
–
602
385
409
2,125
2,542
$ 16,220
$
8,888
77
10. Other Income (Expense)
Other income (expense) of $268 for the year ended March
31, 2010 consists predominantly of gains and losses in fair
value recorded on the Company’s ARS investments as well
as on its ARS put option rights. For the year ended March 31,
2010, the Company recognized a gain on the ARS of ap-
proximately $188 and a gain on the ARS put option rights of
approximately $80. See Note 2.
11. Income Taxes
During the years ended March 31, 2010, 2009 and 2008,
the Company claimed federal research and development tax
credits of $605, $859 and $779, respectively, and state re-
search and development tax credits of approximately $129,
$166 and $113, respectively. Due to the expiration of the
Internal Revenue Service (“IRS”) statute related to research and
development credits on December 31, 2009, the Company’s
research and development credits for the year ended March
31, 2010 represent credits for the nine-month period from
April 1, 2009 through December 31, 2009. The Company
also claimed the qualifi ed production activities deduction
under Section 199 of the Internal Revenue Code (“IRC”) for
$4,133, $2,747 and $3,069 during the years ended March
31, 2010, 2009 and 2008, respectively. The research and
development credits and the qualifi ed production activities
income deduction taken by the Company involve certain as-
sumptions and judgments regarding qualifi cation of expenses
under the relevant tax code provisions.
The provision (benefit) for income taxes consists of the following components:
fi
Current:
Federal taxes
State taxes
Deferred:
Federal taxes
State taxes
Total
Year ended March 31,
2010
2009
2008
$ 23,750
$ 18,818
$ 18,120
5,043
28,793
4,992
23,810
4,348
22,468
(768)
(186)
(954)
2,802
596
3,398
333
124
457
$ 27,839
$ 27,208
$ 22,925
The provision for income taxes differs from the amount computed at the federal statutory rate as follows:
Current:
Federal income tax statutory rate
Increase (decrease) resulting from:
State income taxes, net of Federal benefitfi
Research and development tax credits
Qualifi ed production activities income deduction
Other
Effective income tax rate
Year ended March 31,
2010
2009
2008
35.0%
35.0%
35.0%
4.3
(0.9)
(2.0)
0.1
5.2
(1.3)
(1.4)
(0.4)
4.8
(1.3)
(1.8)
(0.3)
36.5%
37.1%
36.4%
78
The net deferred tax assets (liabilities) in the accompanying Consolidated Balance Sheets consist of the following:
Deferred tax assets:
Deferred revenue and allowance for doubtful accounts
$
5,577
$
3,271
March 31, 2010
March 31, 2009
Inventory valuation
Purchased in-process research and development
Accrued compensation and benefitsfi
Deferred compensation
State income taxes
Compensatory stock option expense
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
115
601
2,325
783
640
252
125
100
912
1,955
789
185
125
779
10,418
8,116
(1,529)
(4,806)
(6,938)
(2,326)
(15,599)
(1,114)
(4,126)
(1,412)
(2,036)
(8,688)
$ (5,181)
$
(572)
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 that 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.
fi
Uncertain Tax Positions
A reconciliation of the beginning and ending amount of unrecognized tax benefi ts, which is recorded in income taxes payable
in the Company’s Consolidated Balance Sheet, is as follows:
fi
Balance at March 31, 2008
Additions for prior year tax positions
Reductions for prior year tax positions
Balance at March 31, 2009
Additions for prior year tax positions
Reductions for prior year tax positions
Balance at March 31, 2010
$ 613
15
(561)
$ 67
598
(9)
$ 656
The total amount of unrecognized tax benefi t that, if recognized, would decrease the income tax provision is $656.
fi
The Company’s continuing practice is to recognize estimated interest and/or penalties related to income tax matters in general
and administrative expenses. The Company had approximately $59 and $12 of accrued interest related to income tax matters
at March 31, 2010 and 2009, respectively. No penalties were accrued.
79
fi
The Company’s income tax returns filed for tax years 2006
through 2008 and 2005 through 2008 are subject to exami-
nation by the federal and state taxing authorities, respectively.
The Company is currently not under examination by the IRS
or any state income tax authority. 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.
fi
12. Employee Benefit Plans
fi
The Company has a 401(k) plan available to substantially all
of its employees. Participating employees may defer up to the
IRS limit based on the IRC per year. The annual contribution
is determined by a formula set by the Company’s Board of
Directors and may include matching and/or discretionary con-
tributions. The amount of the Company match is discretionary
and subject to change. The retirement plans may be amended
or discontinued at the discretion of the Board of Directors.
Contributions of $371, $357 and $317 were made by the
Company to the 401(k) plan for the fiscal years ended March
31, 2010, 2009 and 2008, respectively.
fi
fi
The Company has a deferred compensation plan (the
“Deferral Plan”) for the benefi t of those 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 par-
ticipating employees, and the amount of the Company match
is discretionary and subject to change. Each employee’s defer-
rals 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 mu-
tual funds. Deferred compensation liability was $1,883 and
$1,838 at March 31, 2010 and 2009, respectively. To offset
this liability, the Company has purchased life insurance poli-
cies on some of the participants. The Company is the owner
and benefi ciary of the policies and the cash values are in-
tended to produce cash needed to help make the benefitfi
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 com-
pensation was $2,670 and $1,715 at March 31, 2010 and
2009, respectively. The values of the life insurance policies
and the related Company obligation are included on the ac-
companying Consolidated Balance Sheets in long-term other
assets and long-term deferred compensation, respectively.
The Company made contributions of $48, $29 and $29 to
the Deferral Plan for the fi scal years ended March 31, 2010,
2009 and 2008, respectively.
fi
80
fi
The Company has a voluntary employee stock contribution
plan for the benefi t of full-time employees. The plan is de-
signed to allow qualifi ed 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 or 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 benefi t plan under the Employee Retirement Income
Security Act of 1974, and is therefore not required to comply
with that Act. Contributions of approximately $35, $14 and
$28 were made by the Company for the fi scal years ended
March 31, 2010, 2009 and 2008, respectively.
fi
fi
13. Share-Based Awards
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
options. The 1998 Plan provides that employees, directors
and consultants of the Company may, at the discretion of the
Board of Directors or a duly designated compensation com-
mittee, be granted options to purchase shares of Common
Stock. The exercise price of each option granted was de-
termined 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
exercisable in accordance with the terms of the agreement
pursuant to which they were granted. Certain option grants
to directors 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 ac-
celerated vesting under certain circumstances. The 1998 Plan
terminated on December 31, 2007. As of March 31, 2010,
there were 301,462 outstanding options related to this Plan.
In October 2005, the Company’s shareholders approved
a stock option and incentive plan (the “2005 Plan”) under
which 2,400,000 shares of Common Stock were reserved
for the issuance of awards, including stock options, incentive
stock options and non-qualifi ed stock options, stock apprecia-
tion rights, restricted stock, unrestricted stock, restricted stock
units, performance shares, performance units (including per-
formance options) and other share-based awards. The 2005
Plan provides that employees, directors and consultants of
the Company may, at the discretion of the Board of Directors
or a duly designated compensation committee, be granted
awards to acquire shares of Common Stock. The exercise
price of each option award 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 out-
standing option may be subject to accelerated vesting under
certain circumstances. The 2005 Plan terminates on May 25,
2015, unless terminated earlier by the Board of Directors. At
March 31, 2010, 1,771,185 shares were available for future
grant under the 2005 Plan. As of March 31, 2010, there were
570,501 outstanding options related to this Plan.
A summary of stock option transactions during the years ended March 31, 2010, 2009 and 2008 is as follows:
Number of Shares
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Life
Aggregate Intrinsic Value
(in thousands)
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
Outstanding, March 31, 2009
Granted
Exercised
Forfeited/Canceled
298,331
(697,083)
(84,900)
820,082
289,484
(237,603)
–
$ 18.46
$ 38.78
$ 14.64
$ 21.12
$ 22.81
$ 38.71
$ 17.96
$ 25.93
$ 32.39
$ 58.44
$ 24.64
–
Outstanding, March 31, 2010
871,963
$ 43.15
Vested and expected to vest,
March 31, 2010
861,701
$ 43.10
Exercisable, March 31, 2010
261,127
$ 31.92
–
–
–
–
–
–
–
–
3.63
7.75
2.49
–
4.51
4.50
2.49
–
–
$
4,955
–
–
–
$ 17,182
–
–
–
$
8,254
–
$ 15,945
$ 15,806
$
7,708
The Company continues to utilize the Black-Scholes valuation model for estimating the fair value of share-based compensation
after the adoption of ASC 718 with the following assumptions:
Expected life
Expected volatility
Expected dividends
Risk-free rate
Year Ended
March 31, 2009
4.42 - 4.75 years
45.49% - 47.65%
1.90% - 2.20%
0.82% - 2.41%
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%
During the years ended March 31, 2010 and 2009, 289,484
and 298,331 options were granted, respectively, under the
2005 Plan. The Company issues new shares to satisfy option
exercises. Based on historical experience of option cancel-
lations, the Company has estimated an annualized forfeiture
rate of 1.7% for employee options and 0.0% for director op-
tions. Forfeiture rates will be adjusted over the requisite service
period when actual forfeitures differ, or are expected to differ,
from the estimate. The weighted average grant date fair value
of stock options granted during the years ended March 31,
2010, 2009 and 2008 was $19.30, $11.22 and $12.41
per share, respectively. The expected dividend yield is the
average dividend rate during a period equal to the expected
life of the option.
On February 16, 2010, the Board of Directors granted a to-
tal of 121,059 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
81
($56.95 per share). Of the total options, 118,059 options vest
in fi ve equal annual installments beginning February 16, 2011
and expire on February 16, 2018 and 3,000 options vest in
two equal annual installments beginning February 16, 2011
and expire on February 16, 2013.
On December 7, 2009, the Board of Directors granted a
total of 63,425 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
($60.29 per share). The options vest in fi ve equal annual
installments beginning December 7, 2010 and expire on
December 7, 2017.
On November 30, 2009, the Board of Directors granted a
total of 75,000 options under the Company’s 2005 Plan,
of which 53,000 were granted to selected employees and
22,000 options were granted as part of an earn-out provision
relating to the acquisition of PMP (see Note 6), at an exercise
price equal to the market price of the Company’s common
stock on the date of grant ($59.49 per share). The options
vest in fi ve equal annual installments beginning November 30,
2010 and expire on November 30, 2017.
On September 17, 2009, the Board of Directors granted a to-
tal of 30,000 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 ($58.03 per
share). The options vest in fi ve equal annual installments begin-
ning September 17, 2010 and expire on September 17, 2017.
On November 5, 2008, the Board of Directors granted 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 annual
installments beginning November 5, 2009 and expire on
November 5, 2013.
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 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 ($45.61 per
share). The options vest in four equal annual installments begin-
ning September 9, 2009 and expire on September 9, 2015.
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.
On August 11, 2008, the Board of Directors granted a total of
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 ($40.71
per share). The options vest in four equal annual installments
beginning August 11, 2009 and expire on August 11, 2013.
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 installments
beginning June 13, 2009 and expire on June 13, 2013.
Performance-Based Awards
On May 27, 2009, the Board of Directors approved its
fi scal 2010 equity incentive program for employees to be
awarded options to purchase the Company’s common stock.
The maximum number of options available under the eq-
uity incentive program plan is 320,000, of which 105,000
are reserved for the Company’s Named Executive Offi cers
and 215,000 for non-executive employees of the Company.
Under the program, executives are eligible to receive op-
tions based on meeting certain target increases in earnings
per share performance and revenue growth during fi scal
year 2010 and for one executive, a portion of the options is
based on retention of employment status through the end of
fi scal 2010. Under the program, the non-executive employ-
ees are eligible to receive options based on recommenda-
tion of senior management. The options shall be issued pur-
suant to one of the Company’s shareholder approved option
plans, have an exercise price equal to the closing price of
the Company’s shares on the date of grant, a term of eight
years, vesting in fi ve equal annual installments commencing
one year following the date of grant. Compensation expense
for the non-executive options will commence when granted.
Compensation expense associated with the executive perfor-
mance based awards are initially based on the number of
options expected to vest after assessing the probability that
certain performance criteria will be met. Cumulative adjust-
ments are recorded quarterly to refl ect subsequent changes
in the estimated outcome of performance-related conditions.
The Company utilized the Black-Scholes option valuation
model and the recorded stock compensation expense re-
lated to the executive performance awards was approxi-
mately $35 during the year ended March 31, 2010.
82
The following assumptions were utilized for performance
based awards under the Company’s 2010 incentive plan
during the year ended March 31, 2010:
Expected life
Expected volatility
Expected dividends
Risk-free rate
Year Ended
March 31, 2010
4.42 years
45.49%
2.20%
2.32%
approximately $136 of compensation expense was recorded
under this Plan during the year ended March 31, 2010.
As of March 31, 2010, $295 of total unrecognized compen-
sation costs related to restricted stock units is expected to be
recognized over a weighted average period of 1.37 years.
This amount does not include the cost of new restricted stock
units that may be granted in future periods or any changes in
the Company’s forfeiture percentage. During the year ended
March 31, 2010, no restricted stock units became vested.
Non-vested stock option award activity, including employee
stock options and performance-based awards, for the year
ended March 31, 2010, is summarized as follows:
14. Commitments, Guarantees and
Contingencies
Rental Commitments
Non-Vested
Number of
Shares
Weighted
Average
Fair Value
Price
Outstanding, April 1, 2009
465,345
$ 11.74
Granted
Vested
289,484
$ 19.30
(143,993)
$ 12.03
Forfeited/Canceled
–
–
Outstanding, March 31, 2010
610,836
$ 15.26
As of March 31, 2010, $7,995 of total unrecognized com-
pensation costs related to stock options is expected to be rec-
ognized over a weighted average period of 5.38 years. This
amount does not include the cost of new options that may be
granted in future periods or any changes in the Company’s
forfeiture percentage. The total fair value of options vested
during years ended March 31, 2010, 2009 and 2008 was
$1,732, $3,236 and $1,345, respectively.
Restricted Stock Units
On May 27, 2009, the Board of Directors approved its
Outside Director Compensation Plan, whereby each non-
employee Director is to be awarded shares of restricted stock
units upon election or re-election to the Board. The restricted
stock units are awarded under the 2005 Plan. Such restricted
units vest in two equal, annual installments on the first and sec-
ond anniversaries of the grant date and are nontransferable for
one year following vesting. Upon each vesting of the award,
two shares of common stock shall be issued for each restricted
stock unit. The Company estimated the fair value of the re-
stricted stock units using the market price of its common stock
on the date of the grant ($53.86 per share on August 13,
2009, the grant date). The fair value of these restricted units is
amortized on a straight-line basis over the vesting period. As
of March 31, 2010, 8,000 restricted units were issued and
fi
The Company leases facilities and offi ces under irrevocable
operating lease agreements expiring at various dates through
May 2017 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,
2010, 2009 and 2008 was $4,264, $3,560 and $2,737,
respectively. Rental commitments under these agreements are
as follows:
Year Ended March 31,
2011
2012
2013
2014
2015 and beyond
$ 4,413
4,565
4,577
3,963
7,215
$ 24,733
Commitments and Guarantees
Software license agreements in both the QSI and NextGen
Divisions include a performance 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 signifi cant costs associated with its performance guaran-
tee or other related warranties and does not expect to incur
signifi cant warranty costs in the future. Therefore, no accrual
has been made for potential costs associated with these
warranties. Certain arrangements also include performance
guarantees related to response time, availability for opera-
tional use, and other performance-related guarantees. Certain
arrangements also include penalties in the form of mainte-
nance credits should the performance of the software fail to
meet the performance guarantees. To date, the Company
has not incurred any signifi cant costs associated with these
83
warranties and does not expect to incur signifi cant 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 re-
turn 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.
The Company’s standard sales agreements in the NextGen
Division contain an indemnifi cation provision pursuant to which
it shall indemnify, hold harmless, and reimburse the indemni-
fi ed party for losses suffered or incurred by the indemnifi ed
party in connection with any United States patent, any copy-
right or other intellectual property infringement claim by any
third party with respect to its software. The QSI Dental Division
arrangements occasionally utilize this type of language as
well. As the Company has not incurred any signifi cant costs to
defend lawsuits or settle claims related to these indemnifi cation
agreements, the Company believes that its estimated expo-
sure on these agreements is currently minimal. Accordingly, the
Company has no liabilities recorded for these indemnifi cation
obligations.
The Company has entered into marketing assistance agree-
ments with existing users of the Company’s products which
provide the opportunity for those users to earn commissions
if they host specifi c site visits upon the Company’s request
for prospective customers that 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 par-
ties asserting that it has infringed certain intellectual property
rights. The Company believes that these claims are without
merit and the Company has defended them vigorously.
However, in order to avoid the further legal costs and diver-
sion 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 diffi cult to predict.
15. Operating Segment Information
The Company has prepared operating segment information
in accordance with ASC 280 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.
As a result of certain organizational changes, the composi-
tion of the Company’s NextGen Division was revised to
exclude the former NextGen Practice Solutions unit and the
Company’s RCM entities (HSI and PMP), both of which are
now administered and aggregated in the Company’s Practice
Solutions Division. Following the reorganization, the Company
now operates three reportable operating segments (not includ-
ing Corporate), comprised of the NextGen Division, the QSI
Dental Division and the Practice Solutions Division.
Prior period segment results were revised to refl ect this reor-
ganization for the Company’s NextGen Division and Practice
Solution Division. The results of operations related to the HSI
and PMP acquisitions are included in the Practice Solutions
Division. The results of operations related to the Opus and
Sphere acquisitions are included in the NextGen Division.
The QSI Dental 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 signifi cant locations in Atlanta, Georgia
and Austin, Texas, focuses principally on developing and mar-
keting products and services for medical practices.
The Practice Solutions Division, with locations in St. Louis,
Missouri and Hunt Valley, Maryland, focuses primarily on
providing physician practices with RCM services, primarily bill-
ing and collection services for medical practices. This Division
combines a web-delivered SaaS model and the NextGenepm
software platform to execute its service offerings.
fi
The three Divisions operate largely as stand-alone operations,
with each Division maintaining its own distinct product lines,
product platforms, development, implementation and support
teams, sales staffi ng and branding. The three Divisions share
the resources of the Company’s “corporate offi ce” which in-
cludes a variety of accounting and other administrative func-
tions. Additionally, there are a small but growing number of
clients who are simultaneously utilizing software or services
from more than one of its three Divisions.
84
The accounting policies of the Company’s operating seg-
ments are the same as those described in Note 2 of the
Consolidated Financial Statements, “Summary of Signifi cant
Accounting Policies,” except that the disaggregated financial
results of the segments refl ect allocation of certain functional
expense categories consistent with the basis and manner in
which Company management internally disaggregates finan-
cial information for the purpose of assisting in making internal
operating decisions. Certain corporate overhead costs, such
fi
fi
Operating segment data is as follows:
Revenue:
QSI Dental Division
NextGen Division
Practice Solutions Division
Consolidated revenue
Operating income:
QSI Dental Division
NextGen Division
Practice Solutions Division
Unallocated corporate expense
Consolidated operating income
as executive and accounting department personnel-related
expenses, are not allocated to the individual segments by
management. Management evaluates performance 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.
March 31, 2010
March 31, 2009 March 31, 2008
$
17,128
$
15,851
$
16,037
231,621
43,062
$ 291,811
$
3,460
88,108
2,314
(18,158)
$
$
203,954
25,710
170,463
–
245,515
$ 186,500
3,385
$
3,662
81,323
2,455
66,558
–
(14,760)
(10,831)
$
75,724
$
72,403
$
59,389
All of the recorded goodwill at March 31, 2010 relates to the
Company’s NextGen Division and Practice Solutions Division.
As a result of the reorganization discussed above, the good-
will relating to the fiscal year 2009 acquisitions of HSI and
fi
PMP is now recorded in the Practice Solutions Division. The
goodwill relating to the acquisitions of Opus and Sphere is
recorded in the NextGen Division.
16. Subsequent Events
17. Selected Quarterly Operating Results
On May 26, 2010, the Board of Directors approved a quar-
terly cash dividend of $0.30 per share on the Company’s
outstanding shares of common stock, payable to shareholders
of record as of June 17, 2010 with an expected distribution
date on or about July 6, 2010.
(unaudited)
The following table presents quarterly unaudited consolidat-
ed fi nancial information for the eight quarters in the period
ended March 31, 2010. Such information is presented on
the same basis as the annual information presented in the
accompanying Consolidated Financial Statements. In man-
agement’s opinion, this information refl ects all adjustments
that are necessary for a fair presentation of the results for
these periods.
85
06/30/08
09/30/08
12/31/08
03/31/09
06/30/09
09/30/09
12/31/09
03/31/10
Quarter Ended (Unaudited)
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
$ 21,369 $ 21,297 $ 22,336 $ 20,384 $ 17,776 $22,856 $ 24,346 $ 24,783
4,226
29,009
23,938
9,181
3,313
27,659
22,139
8,897
3,486
24,783
17,234
6,985
2,675
25,011
19,152
8,008
3,380
26,236
21,475
8,796
3,629
24,013
19,340
7,859
3,457
21,233
21,640
8,161
3,585
24,954
17,136
6,670
1,957
4,507
4,527
5,452
6,835
6,473
8,112
6,507
8,992
6,612
8,888
6,303
9,602
6,665
9,183
7,202
30,270
34,198
40,468
41,818
45,405
45,462
47,303
49,504
Total revenues
55,224
58,981
65,479
65,831
66,638
71,698
74,962
78,513
Cost of revenue:
Software, hardware and supplies
3,486
3,395
3,030
3,273
2,704
3,737
2,810
Implementation and training services
3,015
2,626
2,143
2,502
2,881
3,296
2,898
Total cost of system sales
6,501
6,021
5,173
5,775
5,585
7,033
5,708
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 profi t
Operating expenses:
Selling, general and administrative
Research and development costs
Amortization of acquired
intangible assets
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
3,082
4,891
2,947
5,256
2,826
5,541
3,004
5,686
3,025
5,890
1,305
3,448
3,132
3,866
4,475
5,085
5,762
5,114
6,522
4,867
3,255
6,164
6,856
5,003
3,392
6,525
7,124
5,560
12,726
19,227
35,997
15,201
21,222
37,759
17,927
23,100
42,379
19,566
25,341
40,490
20,304
25,889
40,749
21,278
28,311
43,387
22,601
28,309
46,653
22,526
28,298
50,215
15,182
3,119
18,000
3,342
18,276
3,624
17,952
3,692
20,093
3,977
20,061
4,346
21,574
3,954
25,223
4,269
70
18,371
17,626
374
–
283
21,625
16,134
340
–
325
22,225
20,154
328
–
357
22,001
18,489
161
(279)
357
24,427
16,322
78
58
367
24,774
18,613
59
–
377
25,905
20,748
43
136
682
30,174
20,041
46
74
18,000
6,886
20,161
7,100
$ 11,114 $ 10,499 $ 13,150 $ 11,356 $ 10,346 $ 11,820 $ 13,152 $ 13,061
20,482
7,332
16,474
5,975
18,371
7,015
16,458
6,112
18,672
6,852
20,927
7,775
$ 0.40 $ 0.38 $ 0.46 $ 0.40 $ 0.36 $ 0.41 $ 0.46 $ 0.45
$ 0.40 $ 0.37 $ 0.46 $ 0.40 $ 0.36 $ 0.41 $ 0.46 $ 0.45
27,465
27,771
28,784
28,929
$ 0.25 $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.30
27,930
28,211
28,492
28,635
28,667
28,833
28,340
28,473
28,597
28,742
28,393
28,526
2,864
2,908
5,772
3,667
6,683
7,213
4,963
* Quarterly EPS will not sum to annual EPS due to rounding
86
Schedule II
Allowance For Doubtful Accounts
(in thousands)
Balance at
Beginning of Year
Additions Charged to
Costs and Expenses
$
$
$
3,877
2,528
2,438
$ 3,465
$ 2,089
$ 1,171
Allowance For Inventory Obsolescence
(in thousands)
Balance at
Beginning of Year
Additions Charged to
Costs and Expenses
$
$
$
210
223
324
$
$
$
27
–
52
Deductions
$ (2,853)
$
(740)
$ (1,081)
Deductions
$
$
$
–
(13)
(153)
Balance at
End of Year
$ 4,489
$ 3,877
$ 2,528
Balance at
End of Year
$
$
$
237
210
223
For the Year Ended
March 31, 2010
March 31, 2009
March 31, 2008
For the Year Ended
March 31, 2010
March 31, 2009
March 31, 2008
87
Exhibit 31.1
fi
Certification of Principal Executive Offi
fi
cer 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.
I have reviewed this Form 10-K of Quality Systems, Inc.;
2. 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;
fi
3. Based on my knowledge, the financial statements, and other fi
nancial information included in this report, fairly present in
all material respects the fi nancial condition, results of operations and cash fl ows of the registrant as of, and for, the periods
presented in this report;
fi
fi
4. The registrant’s other certifying offi cer(s) and I are responsible for establishing and maintaining disclosure controls and proce-
nedfi
fi
dures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over fi
nancial reporting (as defi
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
fi
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
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;
fi
(b) Designed such internal control over fi nancial reporting, or caused such internal control over fi
nancial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of fi nancial reporting and the
preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles;
fi
fi
fi
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclu-
sions 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 fi nancial reporting that occurred during the
registrant’s most recent fi scal quarter (the registrant’s fourth fi
fi
scal quarter in the case of an annual report) that has materi-
ally affected, or is reasonably likely to materially affect, the registrant’s internal control over fi nancial reporting; and
fi
fi
fi
5. The registrant’s other certifying offi cer(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
fi
performing the equivalent functions):
oo
(a) All signifi cant defi ciencies and material weaknesses in the design or operation of internal control over fi nancial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
fi
fi
(b) Any fraud, whether or not material, that involves management or other employees who have a signifi cant role in the
registrant’s internal control over fi nancial reporting.
fi
By: /s/ Steven T. Plochocki
Steven T. Plochocki,
Chief Executive Offi cer
(Principal Executive Offi cer)
Date: May 28, 2010
88
Exhibit 31.2
fi
Certifi cation of Principal Financial Offi
fi
cer 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.
I have reviewed this Form 10-K of Quality Systems, Inc.;
2. 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 mislead-
ing with respect to the period covered by this report;
fi
3. Based on my knowledge, the financial statements, and other fi
nancial information included in this report, fairly present in
all material respects the fi nancial condition, results of operations and cash fl ows of the registrant as of, and for, the periods
presented in this report;
fi
fi
4. The registrant’s other certifying offi cer(s) and I are responsible for establishing and maintaining disclosure controls and proce-
nedfi
dures (as defi ned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over fi
fi
nancial reporting (as defi
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
fi
(c) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
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;
fi
(d) Designed such internal control over fi nancial reporting, or caused such internal control over fi
nancial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of fi nancial reporting and the
preparation of fi nancial statements for external purposes in accordance with generally accepted accounting principles;
fi
fi
fi
(e) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclu-
sions 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
(f) Disclosed in this report any change in the registrant’s internal control over fi nancial reporting that occurred during the
fi
scal quarter in the case of an annual report) that has materi-
registrant’s most recent fi scal quarter (the registrant’s fourth fi
ally affected, or is reasonably likely to materially affect, the registrant’s internal control over fi nancial reporting; and
fi
fi
fi
5. The registrant’s other certifying offi cer(s) and I have disclosed, based on our most recent evaluation of internal control over
-rr
fi
fi nancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons per
forming the equivalent functions):
(a) All signifi cant defi ciencies 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
fi
fi
(b) Any fraud, whether or not material, that involves management or other employees who have a signifi cant role in the
registrant’s internal control over financial reporting.
fi
Date: May 28, 2010
By: /s/ Paul A. Holt
Paul A. Holt,
Chief Financial Offi cer
(Principal Accounting Offi cer)
89
Exhibit 32.1
fi
Certification of Chief Executive Offi
cer Pursuant to 18
fi
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
fi
cer and Chief Financial Offi
In connection with the annual report on Form 10-K of Quality Systems, Inc. (the “Company”) for the year ended March 31,
2010 (the “Report”), the undersigned hereby certify in their capacities as Chief Executive Offi cer and Chief Financial Offi cer 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 opera-
tions of the Company.
fi
Dated: May 28, 2010
Dated: May 28, 2010
By: /s/ Steven T. Plochocki
Steven T. Plochocki
Chief Executive Offi cer
(Principal Executive Offi cer)
By: /s/ Paul A. Holt
Paul A. Holt
Chief Financial Offi cer
(Principal Accounting Offi cer)
90
This page intentionally left blank
This page intentionally left blank
C O R P O R A T E I N F O R M A T I O N
L E G A L C O U N S E L
Rutan & Tucker, LLP
Costa Mesa, California
I N D E P E N D E N T A U D I T O R S
PricewaterhouseCoopers
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
Wednesday, August 11, 2010 at 1:00 pm, Pacific Time at:
Marriott Irvine
18000 Von Karman Avenue
Irvine, California 92612
F O R M 10 - K
A copy of the Company’s Annual Report on Form 10-K,
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
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
Chief Executive Officer, Quality Systems, Inc.
Craig A. Barbarosh
Managing Partner – Orange County
Pillsbury Winthrop Shaw Pittman, LLP
Murray Brennan, MD
Vice President, International Programs
Memorial Sloan Kettering Cancer Center
George Bristol
Independent Financial Consultant
Patrick B. Cline
President, Quality Systems, Inc.
Joseph Davis
Managing Partner, Triton Pacific Capital Partners
Ahmed Hussein
Director
Cairo, Egypt
Russell Pflueger
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
Chief Executive Officer, Quality Systems, Inc.
Patrick B. Cline
President, Quality Systems, Inc.
Paul A. Holt
Chief Financial Officer and Secretary, Quality Systems, Inc.
Scott Decker
President, NextGen Healthcare
Donn E. Neufeld
Executive Vice President, EDI and Dental
Monte L. Sandler
Executive Vice President, NextGen Practice Solutions
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 filed with the Securities and Exchange Commission (“Commission”), communications to shareholders, press releases
and oral statements made by our representatives that are not historical in nature, or that state our or management’s intentions, hopes, beliefs, expectations
or predictions of the future, may constitute “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934,
as amended. 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,” “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, financial condition or business, could differ materially
from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the risk
factors discussed in Item 1A of our Form 10-K as well as factors discussed elsewhere in this and other reports and documents we file with the Commission.
Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time
unless required by law. Interested persons are urged to review the risks described under Item 1A, “Risk Factors” and in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in our Form 10-K, as well as in our other public disclosures and filings with the Commission.
t
i
a
r
t
r
o
P
t
n
e
m
e
g
a
n
a
M
-
h
c
a
b
n
r
i
B
n
e
l
l
A
&
s
l
a
n
o
m
i
i
t
s
e
T
–
n
o
s
l
O
r
e
t
e
P
:
Y
H
P
A
R
G
O
T
O
H
P
e
n
w
o
B
:
G
N
I
T
N
R
P
I
.
c
n
I
,
n
g
i
s
e
D
r
e
k
r
a
B
:
I
N
G
S
E
D
C O R P O R AT E H E A D Q U A R T E R S / Q S I D E N TA L L O C AT I O N
18111 Von Karman Avenue, Suite 600
Irvine, California 92612
949.255.2600
www.qsii.com
N E X T G E N H E A LT H C A R E L O C AT I O N S
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
12301-B Riata Trace Parkway, Suite 200
Austin, Texas 78727
512.336.7200
www.nextgen.com