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 700
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
12301-B Riata Trace Parkway, Suite 200
Austin, Texas 78727
512.336.7200
3340 Peachtree Road NE, Suite 2700
2840 Hillcreek Drive
Atlanta, Georgia 30326
404.467.1500
Augusta, Georgia 30909
706.869.9960
2451 Cumberland Parkway Southeast
Atlanta, Georgia 30339
404.261.0401
5200 Stoneham Road, Suite 210
North Canton, Ohio 44720
330.470.3700
www.nextgen.com
115 Grand Avenue, Suite 213
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
Pritech Park SEZ
Block 11A, Second Floor
Outer Ring Road, Bellandur Post
Bangalore – 560103
Karnataka India
011.91.80.4907.2400
Q S I H E A LT H C A R E P R I VAT E L I M I T E D L O C AT I O N
Software and
Connectivity
Solutions
for the Next
Generation
of Healthcare
Providers
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2 0 1 3 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
C O R P O R A T E I N F O R M A T I O N
S T O C K T R A N S F E R A G E N T
Quality Systems, Inc. (NASDAQ:QSII) develops and markets computer-based
practice management, electronic health records and revenue cycle management
applications along with connectivity products and services. The Company serves
medical and dental group practices as well as rural and community hospitals.
President and Chief Executive Officer,
Time.
C O M P R E H E N S I V E P R O D U C T A N D S E R V I C E O F F E R I N G S
Quality Systems (QSI) and its NextGen Healthcare subsidiary (QSI/NextGen Healthcare) offer a
wide range of cutting-edge healthcare information technology solutions designed to address the
changing healthcare landscape and evolving models. Some of the Company’s innovative products,
services and solutions include:
NextGen® Ambulatory EHR
An electronic health record solution that
NextGen® Inpatient Clinicals
A comprehensive suite of clinical applications
enables anywhere, anytime access to
for hospitals that includes Computerized
accurate patient data for enhancing care.
Physician Order Entry (CPOE), clinical decision support,
NextGen® Practice Management
An integrated solution that helps accelerate
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and productivity, enabling providers to make better
order management, advanced reporting and clinical data
tools to improve care and outcomes.
NextGen® Inpatient Financials
(cid:269)(cid:3)(cid:86)(cid:156)(cid:147)(cid:171)(cid:143)(cid:105)(cid:204)(cid:105)(cid:3)(cid:195)(cid:213)(cid:136)(cid:204)(cid:105)(cid:3)(cid:156)(cid:118)(cid:3)(cid:119)(cid:152)(cid:62)(cid:152)(cid:86)(cid:136)(cid:62)(cid:143)(cid:3)(cid:62)(cid:171)(cid:171)(cid:143)(cid:136)(cid:86)(cid:62)(cid:204)(cid:136)(cid:156)(cid:152)(cid:195)(cid:3)(cid:62)(cid:195)(cid:3)
business decisions and improve patient care.
well as reporting and decision support tools
NextGen® Patient Portal
A secure online tool enabling patients to
Patient Portal
access their health records, which engages
and empowers them while aiding providers in meeting
Meaningful Use Stage 2 requirements.
NextGen® Revenue Cycle Management
Specialized professional services that
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(cid:171)(cid:105)(cid:192)(cid:118)(cid:156)(cid:192)(cid:147)(cid:62)(cid:152)(cid:86)(cid:105)(cid:93)(cid:3)(cid:195)(cid:204)(cid:192)(cid:105)(cid:62)(cid:147)(cid:143)(cid:136)(cid:152)(cid:105)(cid:3)(cid:220)(cid:156)(cid:192)(cid:142)(cid:121)(cid:156)(cid:220)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:105)(cid:143)(cid:136)(cid:147)(cid:136)(cid:152)(cid:62)(cid:204)(cid:105)(cid:3)
designed for hospitals, clinics and specialty centers to
enhance business decisions and results.
NextGen® Population Health
An automated, integrated outreach
tool that enables providers to engage
patients, improve outcomes and deliver collaborative,
accountable care across their patient panel.
NextGen® Health Information Exchange
A connectivity tool that enables electronic-
administrative problems, allowing providers to focus on
HIE
based, secure sharing of patient data across
patient care.
NextPen®
An electronic pen that digitally captures a
patient or provider’s handwriting on forms
and interprets it as discrete data. The information
multiple vendors and medical communities allowing
providers to deliver collaborative care.
NextGen® Electronic Data Interchange
A solution suite that automates data
transfer between NextGen Healthcare,
EDI
EDI
Services
Services
becomes part of a chart within the EHR and streamlines
other healthcare organizations and third party
data input while enhancing patient satisfaction.
payer entities helping providers reduce costs,
NextGen® EDR
An electronic-based dental record that
EDR
integrates with both NextGen Ambulatory
speed payments, and improve productivity.
NextGen® Surgical Management
A robust application that helps hospitals
EHR and NextGen Practice Management to provide
manage their operating room so they can
better patient care and safety, using a single patient
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record across medical and dental practices.
patient safety.
B O A R D O F D I R E C T O R S
Sheldon Razin
Chairman of the Board and Founder,
Quality Systems, Inc.
Steven T. Plochocki
Quality Systems, Inc.
Michael Aghajanian
Retired President and CEO,
PRTM Management Consulting
Craig A. Barbarosh
Partner, Katten Muchin Rosenman LLP
George H. Bristol
Managing Director, Janas Associates
Mark H. Davis
Healthcare IT & Technology Advisor
D. Russell Pflueger
(cid:10)(cid:133)(cid:62)(cid:136)(cid:192)(cid:147)(cid:62)(cid:152)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:3)(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:3)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)(cid:93)(cid:3)
Quiescence Medical, Inc.
Lance E. Rosenzweig
(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:3)(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:3)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)(cid:93)(cid:3)(cid:29)(cid:136)(cid:76)(cid:105)(cid:192)(cid:204)(cid:62)(cid:96)(cid:10)(cid:62)(cid:192)(cid:96)(cid:93)(cid:3)(cid:22)(cid:152)(cid:86)(cid:176)
O F F I C E R S O F T H E C O M P A N Y
Steven T. Plochocki
President and Chief Executive Officer
Paul A. Holt
Executive Vice President, Chief Financial Officer
Jocelyn A. Leavitt
Executive Vice President, General Counsel and Secretary
Daniel J. Morefield
Executive Vice President, Chief Operating Officer
Donn E. Neufeld
Executive Vice President, EDI and Dental
Stephen K. Puckett
Monte L. Sandler
Executive Vice President, NextGen RCM Services
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 LLP
Irvine, California
& 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 meeting will be held at:
The Marriott Hotel
18000 Von Karman Avenue
Irvine, California 92612
2013 Annual Shareholders’ Meeting is scheduled to be
held on Thursday, August 15, 2013 at 1:00 PM Pacific
The meeting may be subject to change or
postponement by Quality Systems’ Board of Directors.
F O R M 1 0 - 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:
Quality Systems, Inc.
Attention: Investor Relations
18111 Von Karman Avenue, Suite 700
Irvine, California 92612
949.255.2600
F O R W A R D - L O O K I N G S TAT 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
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(cid:173)(cid:186)(cid:10)(cid:156)(cid:147)(cid:147)(cid:136)(cid:195)(cid:195)(cid:136)(cid:156)(cid:152)(cid:187)(cid:174)(cid:93)(cid:3)(cid:86)(cid:156)(cid:147)(cid:147)(cid:213)(cid:152)(cid:136)(cid:86)(cid:62)(cid:204)(cid:136)(cid:156)(cid:152)(cid:195)(cid:3)(cid:204)(cid:156)(cid:3)(cid:195)(cid:133)(cid:62)(cid:192)(cid:105)(cid:133)(cid:156)(cid:143)(cid:96)(cid:105)(cid:192)(cid:195)(cid:93)(cid:3)(cid:171)(cid:192)(cid:105)(cid:195)(cid:195)(cid:3)(cid:192)(cid:105)(cid:143)(cid:105)(cid:62)(cid:195)(cid:105)(cid:195)(cid:3)
and oral statements made by our representatives that are not
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hopes, beliefs, expectations or predictions of the future, may
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(cid:156)(cid:118)(cid:3)(cid:45)(cid:105)(cid:86)(cid:204)(cid:136)(cid:156)(cid:152)(cid:3)(cid:211)(cid:163)(cid:13)(cid:3)(cid:156)(cid:118)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:45)(cid:105)(cid:86)(cid:213)(cid:192)(cid:136)(cid:204)(cid:136)(cid:105)(cid:195)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:13)(cid:221)(cid:86)(cid:133)(cid:62)(cid:152)(cid:125)(cid:105)(cid:3)(cid:386)(cid:86)(cid:204)(cid:3)(cid:156)(cid:118)(cid:3)(cid:163)(cid:153)(cid:206)(cid:123)(cid:93)(cid:3)(cid:62)(cid:195)(cid:3)
(cid:62)(cid:147)(cid:105)(cid:152)(cid:96)(cid:105)(cid:96)(cid:176)(cid:3)(cid:19)(cid:156)(cid:192)(cid:220)(cid:62)(cid:192)(cid:96)(cid:135)(cid:143)(cid:156)(cid:156)(cid:142)(cid:136)(cid:152)(cid:125)(cid:3)(cid:195)(cid:204)(cid:62)(cid:204)(cid:105)(cid:147)(cid:105)(cid:152)(cid:204)(cid:195)(cid:3)(cid:86)(cid:62)(cid:152)(cid:3)(cid:156)(cid:118)(cid:204)(cid:105)(cid:152)(cid:3)(cid:76)(cid:105)(cid:3)(cid:136)(cid:96)(cid:105)(cid:152)(cid:204)(cid:136)(cid:119)(cid:105)(cid:96)(cid:3)
(cid:76)(cid:222)(cid:3) (cid:204)(cid:133)(cid:105)(cid:3) (cid:213)(cid:195)(cid:105)(cid:3) (cid:156)(cid:118)(cid:3) (cid:118)(cid:156)(cid:192)(cid:220)(cid:62)(cid:192)(cid:96)(cid:135)(cid:143)(cid:156)(cid:156)(cid:142)(cid:136)(cid:152)(cid:125)(cid:3) (cid:204)(cid:105)(cid:192)(cid:147)(cid:136)(cid:152)(cid:156)(cid:143)(cid:156)(cid:125)(cid:222)(cid:93)(cid:3) (cid:195)(cid:213)(cid:86)(cid:133)(cid:3) (cid:62)(cid:195)(cid:3) (cid:186)(cid:86)(cid:156)(cid:213)(cid:143)(cid:96)(cid:93)(cid:187)(cid:3)
(cid:186)(cid:195)(cid:133)(cid:156)(cid:213)(cid:143)(cid:96)(cid:93)(cid:187)(cid:3)(cid:186)(cid:220)(cid:136)(cid:143)(cid:143)(cid:93)(cid:187)(cid:3)(cid:186)(cid:220)(cid:136)(cid:143)(cid:143)(cid:3)(cid:76)(cid:105)(cid:93)(cid:187)(cid:3)(cid:186)(cid:220)(cid:136)(cid:143)(cid:143)(cid:3)(cid:143)(cid:105)(cid:62)(cid:96)(cid:93)(cid:187)(cid:3)(cid:186)(cid:220)(cid:136)(cid:143)(cid:143)(cid:3)(cid:62)(cid:195)(cid:195)(cid:136)(cid:195)(cid:204)(cid:93)(cid:187)(cid:3)(cid:186)(cid:136)(cid:152)(cid:204)(cid:105)(cid:152)(cid:96)(cid:105)(cid:96)(cid:93)(cid:187)(cid:3)
“continue,” “believe,” “may,” “expect,” “hope,” “anticipate,”
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(cid:204)(cid:136)(cid:156)(cid:152)(cid:195)(cid:3)(cid:204)(cid:133)(cid:105)(cid:192)(cid:105)(cid:156)(cid:118)(cid:3)(cid:156)(cid:192)(cid:3)(cid:195)(cid:136)(cid:147)(cid:136)(cid:143)(cid:62)(cid:192)(cid:3)(cid:105)(cid:221)(cid:171)(cid:192)(cid:105)(cid:195)(cid:195)(cid:136)(cid:156)(cid:152)(cid:195)(cid:176)(cid:3)(cid:19)(cid:156)(cid:192)(cid:220)(cid:62)(cid:192)(cid:96)(cid:135)(cid:143)(cid:156)(cid:156)(cid:142)(cid:136)(cid:152)(cid:125)(cid:3)(cid:195)(cid:204)(cid:62)(cid:204)(cid:105)(cid:147)(cid:105)(cid:152)(cid:204)(cid:195)(cid:3)
(cid:195)(cid:204)(cid:62)(cid:204)(cid:105)(cid:147)(cid:105)(cid:152)(cid:204)(cid:195)(cid:3) (cid:136)(cid:152)(cid:219)(cid:156)(cid:143)(cid:219)(cid:105)(cid:3) (cid:192)(cid:136)(cid:195)(cid:142)(cid:195)(cid:93)(cid:3) (cid:213)(cid:152)(cid:86)(cid:105)(cid:192)(cid:204)(cid:62)(cid:136)(cid:152)(cid:204)(cid:136)(cid:105)(cid:195)(cid:3) (cid:62)(cid:152)(cid:96)(cid:3) (cid:62)(cid:195)(cid:195)(cid:213)(cid:147)(cid:171)(cid:204)(cid:136)(cid:156)(cid:152)(cid:195)(cid:176)(cid:3) (cid:22)(cid:204)(cid:3) (cid:136)(cid:195)(cid:3)
important to note that any such performance and actual results,
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(cid:204)(cid:133)(cid:156)(cid:195)(cid:105)(cid:3)(cid:105)(cid:221)(cid:171)(cid:192)(cid:105)(cid:195)(cid:195)(cid:105)(cid:96)(cid:3)(cid:136)(cid:152)(cid:3)(cid:195)(cid:213)(cid:86)(cid:133)(cid:3)(cid:118)(cid:156)(cid:192)(cid:220)(cid:62)(cid:192)(cid:96)(cid:135)(cid:143)(cid:156)(cid:156)(cid:142)(cid:136)(cid:152)(cid:125)(cid:3)(cid:195)(cid:204)(cid:62)(cid:204)(cid:105)(cid:147)(cid:105)(cid:152)(cid:204)(cid:195)(cid:176)(cid:3)(cid:19)(cid:62)(cid:86)(cid:204)(cid:156)(cid:192)(cid:195)(cid:3)
that could cause or contribute to such differences include, but
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(cid:156)(cid:204)(cid:133)(cid:105)(cid:192)(cid:3)(cid:171)(cid:213)(cid:76)(cid:143)(cid:136)(cid:86)(cid:3)(cid:96)(cid:136)(cid:195)(cid:86)(cid:143)(cid:156)(cid:195)(cid:213)(cid:192)(cid:105)(cid:195)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:119)(cid:143)(cid:136)(cid:152)(cid:125)(cid:195)(cid:3)(cid:220)(cid:136)(cid:204)(cid:133)(cid:3)(cid:204)(cid:133)(cid:105)(cid:3)(cid:10)(cid:156)(cid:147)(cid:147)(cid:136)(cid:195)(cid:195)(cid:136)(cid:156)(cid:152)(cid:176)
Executive Vice President, Chief Technology Officer
(cid:62)(cid:192)(cid:105)(cid:3) (cid:152)(cid:156)(cid:204)(cid:3) (cid:125)(cid:213)(cid:62)(cid:192)(cid:62)(cid:152)(cid:204)(cid:105)(cid:105)(cid:195)(cid:3) (cid:156)(cid:118)(cid:3) (cid:118)(cid:213)(cid:204)(cid:213)(cid:192)(cid:105)(cid:3) (cid:171)(cid:105)(cid:192)(cid:118)(cid:156)(cid:192)(cid:147)(cid:62)(cid:152)(cid:86)(cid:105)(cid:176)(cid:3) (cid:19)(cid:156)(cid:192)(cid:220)(cid:62)(cid:192)(cid:96)(cid:135)(cid:143)(cid:156)(cid:156)(cid:142)(cid:136)(cid:152)(cid:125)(cid:3)
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letter to shareholders
The changing models currently emerging within
our nation’s healthcare system, coupled with
healthcare reform and rapid adoption of elec-
tronic-based health records, are transforming
today’s healthcare information technology
sector (HCIT). We view these changes as oppor-
tunities that created new avenues for Quality
Systems, Inc. (QSI) as we shift from primarily a
software company to an integrated services-
based provider.
The transformation from paper to Electronic
Health Records (EHR) forever changed our
nation’s healthcare system, and this new environ-
ment served as the catalyst for the organizational
restructuring the Company underwent during
fiscal 2013.
QSI and its NextGen Healthcare subsidiary
(QSI/NextGen Healthcare) spent this past fiscal
year realigning the Company to better meet the
Sheldon Razin
Chairman of the Board
and Founder
Steven T. Plochocki
President and
Chief Executive Officer
needs of this new landscape by making signifi-
improvement and rapid reimbursement become
cant changes within our organization. To this
necessary to successfully operate under health-
end, in fiscal 2013, we created new leadership
care reform.
positions and restructured our sales efforts.
As the adoption of EHR stabilizes, the rise
We appointed a seasoned technology
of a new model takes center stage. Accountable
executive to the post of chief operating officer
Care Organizations (ACOs) – networks of health-
to oversee company-wide operations and also
care professionals all focused on providing
reorganized the sales and marketing functions
timely access to patient-centered, cost-effective
under a veteran sales executive who has been
qualitative care – are driving the future of
with the Company for more than a decade. In
healthcare. We are helping our ACO-based
addition, we centralized our technology efforts
clients meet the needs of tomorrow by
by establishing a new chief technology officer
providing them with the right tools today.
position to better manage our development
resources. We also restructured sales efforts to
further leverage our multi-product offering and
take advantage of cross-selling opportunities.
And we began placing additional emphasis
on Revenue Cycle Management (RCM) through
our NextGen RCM Services business unit. Our
RCM business is growing rapidly as revenue
Our repositioning efforts during fiscal 2013
are also laying a solid foundation for a successful
fiscal 2014 and beyond. We’ve worked hard
to achieve the latest certification status and,
as a result, ended the year as one of the
first companies certified as an Office of the
National Coordinator for Health Information
Technology (ONC HIT) Complete EHR by the
Q u a l i t y S y s t e m s , I n c . | 1
“NextGen’s extensive portfolio and depth
of its emerging technologies affords PRN a
scalable EHR platform and practice manage-
ment solution as well as RCM services that
streamline our processes while enhancing
quality of care. NextGen’s fully integrated
solutions and services offer us flexibility,
customization and scalability, ensuring our
400 therapists can practice more efficiently
and cost-effectively as they strive to achieve
the best possible outcomes.”
Patient Portal
Jim Ripp
Chief Executive Officer
Physical Rehabilitation Network
Client since 2013
(in implementation phase)
Certification Commission for Health Information
various stages of MU. In fact, the Company ranks
Technology (CCHIT®). NextGen® Ambulatory
among the top four for MU attestations for physi-
EHR version 5.8 and NextGen® Electronic Dental
cians, and is one of only four organizations among
Record (NextGen EDR) version 4.3 are both
the top 12 for attestations for both the in-patient
ONC HIT 2014 Edition certified as a Complete
and ambulatory markets. Moreover, in the
EHR. Additionally, NextGen® Inpatient Clinicals
first quarter of the 2013 calendar year, NextGen
version 2.6 is ONC HIT 2014 Edition certified as
Healthcare ranked number one in terms of the
an EHR Module.
improvement for new physicians reaching attes-
These milestones fortify our market position
tation stages.
as we are the only company to achieve Stage 2
All these initiatives, along with our ability
Meaningful Use (MU) certification for physicians,
to help clients improve patient outcomes
dentists and hospitals. MU refers to standards
and enhance financial performance, have
defined by the Centers for Medicare & Medicaid
better positioned the Company for continued
Services (CMS) EHR Incentive Programs that
participation in this exciting period within the
govern use of electronic health records and
healthcare industry.
allow eligible providers and hospitals to earn
incentive payments by meeting specific criteria.
QSI/NextGen Healthcare is committed to
helping its clients meet the demands of this
evolving market by guiding them through the
*“CCHIT” and CCHIT Certified® are registered trademarks of the Certification
Commission for Health Information Technology
*Full product certification details available at www.cchit.org; NextGen®
Ambulatory EHR version 5.8 https://www.cchit.org/show-onc-cert?certid=a055
000000Oib5bAAB; NextGen® EDRversion 4.3 https://www.cchit.org/show-onc-
cert?certid=a055000000OqbMKAAZ; and NextGen®Inpatient Clinicals version
2.6 https://www.cchit.orgshow-onc-cert?certid=a055000000OrXhhAAF
2 | 2 0 1 3 A n n u a l R e p o r t
new healthcare models
Over the years, QSI/NextGen Healthcare
has secured a distinct advantage in the HCIT
marketplace, based on the depths of our
innovative software and product offerings,
successful services solutions and unparalleled
industry expertise.
All this expertise converges in the
NextGen® Ecosystem, which encompasses our
ambulatory and hospital solutions as well as
RCM and consulting services. The NextGen
Ecosystem was built to seamlessly link patients
and providers to critical data and aid in the
delivery of value-based care. Value-based care
incorporates costs, quality and outcomes. Our
The NextGen Ecosystem helps clients
patient-centric NextGen Ecosystem is designed to
connect with health systems, communities,
support our clients and their patients as they
patients, payers and other providers; improve the
become more involved, connected, healthier and
collaboration, coordination and quality of care
successful at managing care. It incorporates four
they deliver; and, to thrive financially.
key elements influencing value-based medicine
and driving healthcare organizations today:
interoperability, whereby systems and devices
exchange and interpret shared data; collabora-
tive care, meaning the coordination of all
healthcare constituents on behalf of the patient;
population health, a protocol-based health
management platform that evaluates outcomes
of groups of individuals to improve care quality;
In an ACO-emerging market, other models
such as Patient Centered Medical Home (PCMH)
and Pay for Performance (P4P) are also prevalent
in the new landscape. PCMH encourages patients’
involvement in their own health and well-being;
and, P4P compensates providers when quality
metrics targets are met. Our leadership position
in addressing all these models is evidenced by
the nearly 150 ACO clients and more than 2,300
and, data analytics for accessing key data points
PCMH providers we serve in 26 states.
and improving performance while managing
compliance and incentive programs.
This patient-centric, value-based approach
to care is the direction toward which our nation’s
integrated healthcare system is moving. The
NextGen Ecosystem enables provider organi-
zations to connect, care and thrive within this
dynamic environment.
As the industry experiences the downside
of the bell curve for EHR adoption, the upside lies
in our abilities to assist clients as they plot their
course for participation in these new emerging
models and connect, care and thrive using the
NextGen Ecosystem.
Q u a l i t y S y s t e m s , I n c . | 3
connect. care. thrive.
“We immediately recognized the value of
connecting the NextGen solutions we
employ shortly after implementation. One
of our physicians was able to access an
emergency room patient’s record directly
from the ER in real time. This saved us
time, ultimately improving the level of care
we delivered.”
Scott Bailey
Chief Executive Officer
Cardiology Clinic of San Antonio
Client since 2006
QSI/NextGen Healthcare helps clients connect
with patients, payers, practices and other
providers such as clinics, hospitals, networks,
health systems and communities. This interaction
fosters connectivity amongst these types
of entities while bringing flexibility, value of inte-
gration and interoperability to support patient
engagement and satisfaction. With anytime,
anywhere access, our solutions make it easy to
stay connected to any relevant party involved in
the delivery of care.
Some of our key connectivity solutions include:
• NextGen® EHR Connect – Promotes the
sharing of medical records and vital patient
data across care electronically, in real time and
within the existing workflow.
• NextGen® Patient Portal – Allows physicians to
connect and communicate with patients online
and seamlessly import captured data directly
into the NextGen Ambulatory EHR in a secure
and compliant manner. Through the deployment
4 | 2 0 1 3 A n n u a l R e p o r t
of web-based tools, patients are engaged in
award-winning HIE solution is currently in
their care and providers’ administrative require-
operation in more than 30 communities, used
ments are reduced.
by more than 34,000 providers and improving
• NextGen® Health Information Exchange
(NextGen HIE) – Fosters the electronic-based,
secure sharing of patient data across multiple
vendors and medical communities. Our
care for 12.7 million patients.
“With the NextGen Enterprise Chart feature
that resides within the NextGen Ambulatory
EHR, we have the ability to share patient
records across the enterprise – between
our specialists and primary care providers –
breaking down barriers of care. This level of
connectivity definitely helps set our care
and patient experience apart within the
community we serve.”
Patient Portal
Gustin Ho, MD FACP
Internal Medicine and Cardiology
Past President
Chinese Community
Health Care Association
Client since 2007
Q u a l i t y S y s t e m s , I n c . | 5
connect. care. thrive.
QSI/NextGen Healthcare helps improve both the
collaboration and coordination of care to reach
quality patient outcomes. With an emerging
movement to shift America’s focus from illness to
wellness, we have developed a comprehensive
approach to helping our clients easily and
seamlessly make that change.
Our care solutions span several innovative
offerings, including:
• NextGen Ambulatory EHR - Enables complete,
accurate documentation for managing
patient care electronically. Improves clinical
processes and patient outcomes through
point-of-care electronic charting. Our newly
We work closely with a variety of health-
released 8 Series EHR provides users an intui-
care organizations to improve the health of their
tive and simple experience.
patients through better coordination and to
reduce the cost of care. This helps in the delivery
of more collaborative, patient-centric care.
• NextGen® Population Health (NextGen PH)
–
Features an integrated, protocol-based
patient engagement, communications and
“With NextGen’s Population Health solution,
we can better manage our patient base
– particularly those with chronic conditions –
who are oftentimes hard to reach. In fact,
NextGen’s Population Health is helping us
to physically get these types of patients
into the office for their regularly scheduled
visits, allowing us to stay on top of their
care plans.”
Patient Portal
Patrick Stevenson
Director of IT
Infinity Primary Care
Client since 2005
6 | 2 0 1 3 A n n u a l R e p o r t
“We are both more effective and efficient
in caring for our patients with the help
of NextGen. Its solutions allow us to
clearly identify where we can cut costs
in our procedures, thus passing those
savings along.”
Wendy Bitner
Chief Nursing Officer
Animas Surgical Hospital
Client since 2009
measurement tool that empowers providers in
• NextGen Inpatient Clinicals – Utilized by
the delivery of collaborative care. It evaluates
critical access and community hospitals nation-
outcomes of groups of individuals to promote
wide, this comprehensive clinical system
wellness. NextGen PH closely integrates with
features Computerized Physician Order
NextGen Ambulatory EHR and NextGen®
Entry (CPOE), clinical decision support, order
Practice Management (NextGen PM).
management, advanced reporting, a clinical
data repository and other capabilities for
tracking clinical data.
• NextGen® Health Quality Measures (NextGen
HQM) – Serves as a clinical data repository for
automating clinical outcomes, reporting and
quality measures required by P4P programs,
such as the Economic Stimulus, whereby
incentives are distributed for transition to EHR
platforms.
Q u a l i t y S y s t e m s , I n c . | 7
connect. care. thrive.
“Thanks to NextGen RCM Services, Beacon
thrives in today’s evolving regulatory
environment, which is driven by constant
governmental and insurance reimbursement
changes. Despite these challenges, NextGen
RCM Services has helped us lower our days
in accounts receivable and decrease first-time
denial rates to less than one percent.”
Patient Portal
Andy Blankemeyer
Director of Operations and
Revenue Cycle Management
Beacon Orthopaedics & Sports Medicine
Client since 2006
QSI/NextGen Healthcare helps clients thrive
financially by leveraging intelligence and using
information to optimize reimbursement. Analyzing
data to extract useful clinical information is key to
this process. We apply best practices and novel
technologies to achieve accurate reimbursements.
Our RCM expertise gives clients a financial
advantage and competitive edge, freeing them
up to focus on what they do best – delivering
quality care – while we support the business side
of their practices. This is of particular importance
as billing becomes more complex amid changing
models and healthcare reform.
Solutions we offer to help our clients thrive
include:
• NextGen RCM Services – Offers technology-
driven, revenue improvement services for
realizing significant business efficiencies and
fostering timely and accurate reimbursement.
RCM has become an increasingly important
function for providers today.
8 | 2 0 1 3 A n n u a l R e p o r t
• NextGen PM – Automates numerous admin-
• NextGen® Electronic Data Interchange
istrative functions and streamlines workflow
(NextGen EDI) – Securely moves electronic data
across entire practices. NextGen PM improves
within the NextGen® system. Our EDI experts
productivity and enhances both revenue and
simplify complex business tasks on behalf of
cash flow for medical practices.
clients, allowing them to attain sustainable
• NextGen® Inpatient Financials – Provides hospi-
tals and clinics a fully integrated, feature-rich
solution with financial applications and reporting
capabilities as well as decision support.
financial rewards.
“We significantly reduced days in accounts
receivable and picked up dollars that were
left on the table before we were using
NextGen RCM Services. NextGen RCM
Services has significantly contributed to
enhancing our bottom-line performance.”
Patient Portal
Breanna Krebs
Manager of Development
Muir Medical Group
Client since 2006
Q u a l i t y S y s t e m s , I n c . | 9
“Within one year of implementing
NextGen solutions, our days in accounts
receivable declined by 89 percent
and have remained there for three years
now. With EDR, EHR and EPM all
working in concert, our claims follow-up is
remarkable since everything we need
to succeed is right at our fingertips.”
Antonia Hayworth
Billing Supervisor
Greenville Rancheria
Client since 2009
EDR
Dental practices and various types of community
QSI/NextGen Healthcare dental solutions
health centers also recognize the many benefits
include:
of an integrated EHR platform.
• NextGen EDR – Acts as the dental comple-
QSIDental® solutions help these providers
ment to the NextGen Ambulatory EHR and
move beyond paper charting and toward
NextGen PM platform. NextGen EDR aids in
accurate and intuitive electronic recording.
improving patient care, reducing costs and
Whether integrating NextGen EDR with NextGen
increasing revenue for Federally Qualified
Ambulatory EHR in a medical or dental clinic
Health Centers (FQHCs), Community Health
setting or using the QSIDental Web™ at group
Centers (CHCs) or Rural Health Centers.
dental organizations, they improve the safety,
efficiency and financial performance of practices,
regardless of size.
• QSIDental Web – Delivers anytime, anywhere
cloud-based access to information necessary
for increasing revenue, decreasing costs and
maximizing efficiency.
1 0 | 2 0 1 3 A n n u a l R e p o r t
the financial perspective
Revenues
(in millions)
Total Shareholder Equity
(in millions)
Recurring Revenue
(in millions)
$460.2
$429.8
$307.0
$295.2
$353.4
$291.8
$245.5
$224.7
$188.3
$155.6
$336.6
$281.0
$228.8
$187.7
$146.8
09
10
11
12
13
09
10
11
12
13
09
10
11
12
13
For the fiscal 2013 year ended March 31, 2013, QSI
goodwill, the Company recorded a goodwill
reported revenue of $460.2 million, an increase of
impairment charge to income of $17.4 million for
seven percent when compared with $429.8 million
the fiscal 2013 fourth quarter.
reported in the 2012 fiscal year. Net income for
fiscal 2013 was $42.7 million, a decrease of 44
percent versus net income of $75.7 million for
fiscal 2012. Fully diluted earnings per share for
the 2013 fiscal year was $0.72, down 44 percent
from $1.28 for the 2012 fiscal year.
During the fiscal 2013 fourth quarter,
management deemed it necessary to perform
a comprehensive operational review of its
NextGen Hospital Solutions division, based on
the unit’s operating results to date. Accordingly,
the Company decided to allow for additional
investments in development, implementation
and support for its hospital solutions unit, as we
remain confident in the strength of our offering.
While this is expected to impact near-term
profitability, QSI is committed to pursuing the
considerable opportunity it believes exists in the
small hospital market segment. As a result of
this operational review and an updated assess-
ment of the fair value of the business unit’s
QSI continued to generate cash flows
from operations during fiscal 2013, resulting in
payments of $41.5 million in dividends and a
cash and marketable securities position of $118.0
million versus $139.4 million for fiscal 2012.
As we look ahead, we will further empha-
size our RCM solutions to meet the needs and
conditions of the changing marketplace. During
fiscal 2013, revenue for NextGen RCM Services
grew 28 percent. We anticipate this growth will
continue, based on the influential forces of
healthcare reform.
Our management team remains committed
to the benefits it expects to see from the reorga-
nization and continues to reach more than 80,000
doctors and dentists across 4,800+ group prac-
tices currently utilizing QSI/NextGen Healthcare’s
software, services and solutions.
Q u a l i t y S y s t e m s , I n c . | 1 1
opportunity and gratitude
Pictured from left to right: Donna Greene, Senior Vice President, Human Resources; Steven T. Plochocki, President and Chief Executive Officer;
Daniel J. Morefield, Executive Vice President, Chief Operating Officer; Sheldon Razin, Chairman of the Board and Founder; and, Paul A. Holt,
Executive Vice President, Chief Financial Officer.
QSI/NextGen Healthcare continues to capitalize on
varying sizes, in virtually all industries, for nearly
the many opportunities presented by this changing
every organizational quality and function.
HCIT landscape. Through the introduction of new
products and the offering of pioneering solutions
and cutting-edge tools, every day we help clients
adapt to evolving healthcare models.
These extraordinary achievements would not
be possible without the support of our share-
holders, the loyalty of our clients, the guidance
from our Board of Directors and the tireless
This innovation is noticed time and again.
efforts of our most important asset – our 2,300
During fiscal 2013, QSI/NextGen Healthcare earned
employees worldwide. Contributions by all
various third-party acknowledgements for a wide
these stakeholders have allowed QSI/NextGen
range of functional areas throughout the Company,
Healthcare to continue to occupy a strong
validating its scope, scale and breadth.
leadership role in the HCIT marketplace.
For example, for the past decade, Forbes
has ranked QSI among America’s 200 Best Small
Companies (with an improved position each year
QSI/NextGen Healthcare solutions make it
possible for clients to connect, care and thrive
within this rapidly advancing industry – one
Forbes
for the past 10 years). Forbes also included QSI in
Forbes also included QSI in
that spans new healthcare models, emphasizes
its top 25 fastest-growing tech companies list for
increased patient involvement and brings together
the third consecutive year.
a community of providers, all striving to deliver
During fiscal 2013, the Company earned
three gold Stevie® Awards in The American
Business AwardsSM competition and four gold
Stevies in the International Business AwardsSM
program, receiving recognition across the full
spectrum of its business operations. Both of
these competitions recognize companies of
1 2 | 2 0 1 3 A n n u a l R e p o r t
qualitative, patient-centric, cost-effective care. We
believe we are building a solid platform for long-
term participation in the modern era of healthcare.
Sheldon Razin
Steven T. Plochocki
Chairman of the Board
and Founder
President and
Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2013
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-12537
QUALITY
SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-2888568
(IRS Employer Identification No.)
18111 Von Karman Avenue, Suite 700, Irvine, California
(Address of principal executive offices)
92612
(Zip Code)
(949) 255-2600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 Par Value
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2012: $737,323,000 (based
on the closing sales price of the Registrant’s common stock as reported on the NASDAQ Global Select Market on that date of $18.53
per share).*
The Registrant has no non-voting common equity.
The number of outstanding shares of the Registrant’s common stock as of May 24, 2013 was 59,552,380 shares.
* For purposes of this Annual Report on Form 10-K, in addition to those shareholders which fall within the definition of
“affiliates” under Rule 405 of the Securities Act of 1933, as amended, holders of ten percent or more of the Registrant’s
common stock are deemed to be affiliates for purposes of this Report.
Portions of the Proxy Statement for the 2013 annual meeting of shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
QUALITY SYSTEMS, INC.
TABLE OF CONTENTS
2013 ANNUAL REPORT ON FORM 10-K
Item
Page
PART I
PART II
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Properties
Legal Proceedings
Mine and Safety Disclosures
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risks
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
3
13
23
24
24
24
24
27
28
49
49
49
49
50
50
50
50
50
50
51
54
CAUTIONARY STATEMENT
This Annual Report on Form 10-K (this "Report") and certain information incorporated herein by reference contain forward-looking
statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included or
incorporated by reference in this Report, other than statements that are purely historical, are forward-looking statements. Words
such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “seek,” “estimate,” “will,” “should,” “would,” “could,” “may,” and similar
expressions also identify forward-looking statements. These forward-looking statements include, without limitation, discussions of
our product development plans, business strategies, future operations, financial condition and prospects, developments in and the
impacts of government regulation and legislation and market factors influencing our results. Our expectations, beliefs, objectives,
intentions and strategies regarding our future results are not guarantees of future performance and are subject to risks and
uncertainties, both foreseen and unforeseen, that could cause actual results to differ materially from results contemplated in our
forward-looking statements. These risks and uncertainties include, but are not limited to, our ability to continue to develop new
products and increase systems sales in markets characterized by rapid technological evolution, consolidation, and competition
from larger, better-capitalized competitors. Many other economic, competitive, governmental and technological factors could affect
our ability to achieve our goals, and interested persons are urged to review the risks factors discussed in “Item 1A. Risk Factors”
of this Report, as well as in our other public disclosures and filings with the Securities and Exchange Commission (“SEC”). Because
of these risk factors, as well as other variables affecting our financial condition and results of operations, past financial performance
may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future
periods. We assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date of the filing of this Report.
ITEM 1. BUSINESS
Company Overview
PART I
Quality Systems, Inc. and its wholly-owned subsidiaries operate as four business divisions (each, a "Division") which are comprised
of: (i) the QSI Dental Division, (ii) the NextGen Division, (iii) the Hospital Solutions Division (formerly Inpatient Solutions) and (iv)
the RCM Services Division (formerly Practice Solutions). In fiscal year 2011, we opened a captive entity in India called Quality
Systems India Healthcare Private Limited (“QSIH”). We derive revenue primarily by developing and marketing healthcare information
systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations
(“PHOs”), independent practice associations ("IPAs") and management service organizations (“MSOs”), ambulatory care centers,
community health centers and medical and dental schools along with comprehensive systems implementation, maintenance and
support and add on complementary services such as revenue cycle management (“RCM”) and electronic data interchange (“EDI”).
Our systems and services provide our clients with the ability to redesign patient care and other workflow processes while improving
productivity through the facilitation of managed access to patient information. Utilizing our proprietary software in combination with
third-party hardware and software solutions, our products enable the integration of a variety of administrative and clinical information
operations.
Quality Systems, Inc. was incorporated in California in 1974. Our principal offices are located at 18111 Von Karman Ave., Suite
700, Irvine, California, 92612. We operate on a fiscal year ending on March 31.
The Company was founded with an early focus on providing information systems to dental group practices. This focus area would
later become the QSI Dental Division. In the mid-1980s, we capitalized on the increasing focus on medical cost containment and
further expanded our information processing systems to serve the ambulatory market. In the mid-1990s, we made two acquisitions
that accelerated our penetration of the ambulatory market and formed the basis for the NextGen Division. More recently in the last
few years, we acquired several companies, which operate under the Hospital Solutions Division, as part of our strategy to expand
into the small and specialty hospital market. Today, we serve the dental, ambulatory, hospital and RCM services markets through
our QSI Dental Division, NextGen Division, Hospital Solutions Division and RCM Services Division.
The Divisions have historically operated as stand-alone operations, with each Division maintaining its own distinct product lines,
product platforms, development, implementation and support teams and branding. However, there are a growing number of
customers who are simultaneously utilizing software or services from more than one of our Divisions. In an effort to encourage this
cross selling of our products and services between Divisions, we are in the process of further integrating our ambulatory and inpatient
products to provide a more robust and comprehensive platform to offer our customers. The Divisions also share the resources of
our “corporate office,” which includes a variety of accounting and other administrative functions.
In September 2012, we announced certain organizational changes to achieve greater efficiency and integration in our operations
as well as to enhance our ability to cross sell products and services to our customers. The changes consolidated Sales, Marketing,
Information Technology, and Software Development responsibilities into separate Company-wide roles. We also announced the
hiring of a Chief Operating Officer, reporting directly to the Chief Executive Officer responsible for the operations of the Company
across all Divisions. We are continuing to evaluate the organizational structure of the Company with the objective to achieve greater
synergies and further integration of our products and services.
The QSI Dental Division, NextGen Division and Hospital Solutions Division develop and market software that is designed to automate
and streamline a number of the administrative functions required for operating a medical, dental, or hospital practice, such as patient
3
scheduling and billing. It is important to note that since in both the medical and dental environments, practice management software
systems have already been implemented by the vast majority of practices, we actively compete for the replacement market. These
Divisions also develop and market software that automates patient records in physician practices, community health centers (CHCs)
and hospital settings. In this patient records area of our business, we are typically competing to replace paper-based patient record
alternatives as opposed to replacing previously purchased systems. The Hospital Solutions Division develops and markets financial
management and billing software products, which perform administrative functions required for operating small and specialty
hospitals as well as clinical offerings such as multi-disciplinary clinical documentation and computerized physician order entry
(CPOE). The RCM Services Division provides technology solutions and consulting services to cover the full spectrum of healthcare
providers' RCM needs, with a primary focus on billing and collection services.
In January 2011, QSIH was formed in Bangalore, India to function as our India-based captive to offshore technology application
development and business processing services. As of March 31, 2013, we had 219 full time employees in our Bangalore facility
primarily engaged in software development and quality assurance activities.
We continue to pursue product and service enhancement initiatives within each of our Divisions. The majority of such expenditures
are currently targeted to the NextGen and Hospital Solutions Division product lines and client bases.
The following table breaks down our reported segment revenue and segment revenue growth by Division for the fiscal years ended
March 31, 2013, 2012 and 2011:
Segment Revenue Breakdown
Fiscal Year Ended March 31,
2012
2011
2013
Segment Revenue Growth
Fiscal Year Ended March 31,
2012
2011
2013
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
4.3%
74.9%
6.8%
14.0%
4.6%
75.7%
8.0%
11.7%
5.7%
75.3%
5.1%
13.9%
100.0%
100.0%
100.0%
2.0 %
5.8 %
(8.9)%
28.2 %
7.1 %
(1.9)%
22.1 %
92.6 %
2.8 %
21.6 %
16.6%
16.5%
519.1%
13.7%
21.1%
QSI Dental Division. The QSI Dental Division, co-located with our corporate headquarters in Irvine, California, focuses on
developing, marketing and supporting software suites sold to dental group organizations located throughout the United States. The
QSI Dental Division sells additional licenses to its legacy products as existing clients expand their operations, and sells its Web-
based SaaS model practice management and clinical software solutions to new customers. This software solution, QSIDental™
Web™, is marketed primarily to multi-location dental group practices in which the QSI Dental Division has historically been a
dominant player. Further, QSI Dental sells its Electronic Dental Chart in conjunction with NextGen PM ("Practice Management")
and EHR ("Electronic Health Record") and marketed as NextGen EDR (“Electronic Dental Record”) to Federally Qualified Health
Centers (“FQHC”) and other safety net entities further defined below.
The QSI Dental Division participates jointly with the NextGen Division in providing software and services to safety-net clinics like
FQHCs and other “safety net” health centers, including Public Health Centers, Community Health Centers, Free Clinics, as well as
Rural and Tribal Health Centers. FQHCs are community-based organizations and are funded by the federal government, which
provide medical and dental services to underprivileged and underserved communities. The Patient Protection and Affordable Care
Act, which was signed into law in March 2010, reserved $11 billion over a multi-year period for FQHCs, creating unprecedented
opportunities for FQHCs growth and the formation of new FQHCs. When combined and used in tandem, NextGen® Ambulatory
EHR, NextGen® Electronic Dental Record and NextGen® Practice Management provides a unique product in this marketplace -
an integrated patient record accessible by both physicians and dentists. On May 9, 2012, NextGen® EDR version 4.2 was ONC-
ATCB certified by the Certification Commission for Health Information (CCHIT®) as a complete EHR and complies with all clinical
quality measures for Eligible Providers. The additional software NextGen® EDR version 4.2 relied on to demonstrate compliance
was NextGen® Ambulatory EHR version 5.6 SP1.
The QSI Dental Division's legacy practice management software suite uses a UNIX® operating system. It's Clinical Product Suite
(“CPS”) can be fully integrated with the client server-based practice management software offered from each of our Divisions. When
integrated and delivered with the NextGen® Practice Management solution, CPS is re-branded as NextGen® EDR. CPS/EDR
incorporates a wide range of clinical tools including, but not limited to, periodontal charting and digital imaging of X-ray and inter-
oral camera images as part of the electronic patient record. The QSI Dental Division also develops, markets, and provides EDI
services to dental practices, including electronic submission of claims to insurance providers as well as automated patient statements.
4
NextGen Division. The NextGen Division, with headquarters in Horsham, Pennsylvania and a significant location in Atlanta, Georgia,
provides integrated clinical, financial and connectivity solutions for ambulatory and dental provider organizations. The NextGen
Division's major product categories include the NextGen® Ambulatory product suite and NextGen Community Connectivity.
The NextGen® Ambulatory product suite streamlines patient care with standardized, real-time clinical and administrative workflows
within a physician’s practice, and consists of:
•
•
•
•
•
•
NextGen® Electronic Health Records to ensure complete, accurate documentation to manage patient care
electronically and to improve clinical processes and patient outcomes with electronic charting at the point of care;
NextGen® Practice Management to automate business processes, from front-end scheduling to back-end
collections and financial and administrative processes for increased performance and efficiencies;
NextGen® Dashboard, which allows providers to view patient data in a visually rich graphical format. Using bar
charts, pie charts, gauges and more, the system displays information at the practice or single provider level;
NextGen Mobile, which improves patient care through anytime, anywhere access of patient data. In addition,
NextGen Mobile has the capability to increase revenue by easily capturing charges at the point of care resulting in
potential reduction of medical liability through better documentation of out-of-office actions; and
NextGen NextPen ("NextPen"), which is a revolutionary digital pen that quickly captures manually-entered data into
NextGen Ambulatory EHR. NextPen captures structured data and graphic drawings as part of the patient record
without scanning or transcription. This technology requires no learning curve for adoption.
NextGen® Population Health, introduced in 2012, is an integrated set of communication tools designed to enhance
collaborative care. It includes interactive voice response (IVR), texting, email, NextGen® Patient Portal, and clinical
data from NextGen® Ambulatory EHR. It can be fully integrated with NextGen® Health Quality Measures (HQM)
and has a built-in population profiler for patient outreach.
NextGen® Community Connectivity consists of:
•
•
•
NextGen® Health Information Exchange (“HIE”) to exchange patient data securely with community healthcare
organizations;
NextGen® Patient Portal (“NextMD.com”) is 2014 ONC Certified for Meaningful Use 2; allows providers to
communicate with patients online and import information directly into NextGen Ambulatory EHR; allows patients
access to their clinical data; and
NextGen® Health Quality Measures (“HQM”) to allow seamless quality measurement and reporting for practice
and physician performance initiatives.
The NextGen Division products utilize Microsoft Windows technology and can operate in a client-server environment as well as via
private intranet, the Internet, or in an ASP environment.
Services provided by the NextGen Division include:
•
•
•
•
EDI services that are intended to automate the entire patient statement process, reducing labor and printing costs
associated with producing statements in-house. In addition, the NextGen Division's EDI works with the most
innovative clearinghouses to transform electronic claims submissions into payments;
Hosting services that allow practices seeking the benefits of IT automation without the burden of maintaining in-
house hardware and networking;
NextGen® NextGuard, a data protection service that provides an off-site, data archiving, restoration and disaster
recovery preparedness solution for practices to protect clinical and financial data; and
Consulting services, including:
strategic governance models and operational transformation;
technical consulting, such as data conversions or interface development, which allow practices to build
custom add-on features;
physician consulting resources that allow practices to consult with the NextGen Division’s physician team;
and
eHealth consulting services that assist in connecting communities of practices for data sharing.
5
Hospital Solutions Division. The Hospital Solutions Division, with its primary location in Austin, Texas, provides integrated clinical,
financial and connectivity solutions for rural, community and specialty hospitals. This Hospital Solutions Division also develops and
markets an equivalent revenue cycle management and clinical information systems software products for the small and specialty
hospital market, which perform the administrative functions required for operating hospitals.
In the last few years, we have continued to acquire companies that were established developers of software and services for the
inpatient market to operate under the Hospital Solutions Division. On May 1, 2012, we acquired The Poseidon Group ("Poseidon"),
a provider of emergency department software. On July 26, 2011, we acquired CQI Solutions, Inc. ("CQI"), a provider of hospital
systems for surgery management. On April 29, 2011, we acquired IntraNexus, Inc. ("IntraNexus"), a provider of Web-based integrated
clinical and hospital information systems. On February 10, 2010, we acquired Opus Healthcare Solutions, LLC ("Opus"), a provider
of Web-based clinical solutions to hospital systems and integrated health networks nationwide and on August 12, 2009 we acquired
Sphere Health Systems, Inc. ("Sphere"), a provider of financial information systems to the small hospital inpatient market. These
acquisitions are part of our strategy to continue to expand in the small and specialty hospital market and to add new clients by
taking advantage of cross selling opportunities between the ambulatory and inpatient markets.
The Hospital Solutions Division's products deliver secure, highly adaptable and easy to use applications to patient centered hospitals
and health systems. These products consist of:
•
•
•
•
•
NextGen® Inpatient Clinicals, a system which resides on an active web platform, and is designed to initiate
widespread work efficiency and communication, reduce errors, time-to-chart, and improve care. Our comprehensive
clinical solutions include CPOE, clinical decision support, order management, clinical documentation, clinical data
repository and more.
NextGen® Inpatient Financials, a financial management and revenue cycle solution that helps hospitals improve
the operations, financial and regulatory management of their facilities.
NextGen® Enterprise Scheduling, a system designed to provide hospital-wide, conflict-free patient scheduling for
easier, more efficient patient, resource, and staff management.
NextGen® Surgical Management, a system designed to help hospitals optimize OR throughput, quality, efficiency,
patient safety, revenue, and compliance.
NextGen® Emergency Department Solution, a comprehensive Emergency Department Information System (EDIS)
designed to help hospitals reduce costs and medical errors, enhance care, and ensure proper documentation for
reimbursement and regulatory compliance.
RCM Services Division. The RCM Services Division, with locations in St. Louis, Missouri, North Canton, Ohio and Hunt Valley,
Maryland, provides technology solutions and consulting services to cover the full spectrum of healthcare providers' RCM needs,
from patient access through claims denials, with a primary focus on billing and collection services. The RCM Services Division
combines a Web-delivered SaaS model and the NextGen® Practice Management software platform to execute its service offerings.
Execution of the plan to transition our client base onto the NextGen platform is being implemented. On April 15, 2012, we acquired
Matrix Management Solutions, LLC (“Matrix”). Since 1998, North Canton, Ohio-based Matrix, a value-added reseller for NextGen
Healthcare, has provided RCM services, healthcare IT solutions and training, implementation and support centered on NextGen®
technology, to its clients nationwide. The acquisition has enabled our RCM Services Division to expand its footprint among private
and hospital-based physicians and groups by leveraging Matrix's RCM expertise.
Industry Background
The turbulence in the worldwide economy has impacted almost all industries. While healthcare is not immune to economic cycles,
we believe it is more heavily influenced by US-based regulatory and national health projects than by the economic cycles of our
economy. The impact of the current economic conditions on our existing and prospective clients has been mixed. While we continue
to see organizations that are doing fairly well operationally, some organizations, especially those with a large dependency on
Medicaid populations, have been impacted by the challenging financial conditions faced by many state governments. Various factors
have had, and are anticipated to continue to have, a meaningful impact on the U.S. healthcare industry, including the Obama
Administration's broad healthcare reform efforts (particularly the HITECH portion of the American Recovery and Reinvestment Act
and the Patient Protection and Affordable Care Act), the individual state responses to the government-requested Medicaid expansion
to address new insureds, and the increasing focus of private businesses on moving their employee health benefit offerings to a
more wellness-based health platform.
Moreover, to compete in the continually changing healthcare environment, providers are increasingly using technology to help
maximize the efficiency of their business practices, to assist in enhancing patient care, and to maintain the privacy of patient
information.
As the reimbursement environment continues to evolve, more healthcare providers enter into contracts, often with multiple entities,
which define the terms under which care is administered and paid. The diversity of payer organizations, as well as additional
government regulation and changes in reimbursement models, have greatly increased the complexity of pricing, billing,
reimbursement and records management for medical and dental practices. To operate effectively, healthcare provider organizations
must efficiently manage patient care and other information and workflow processes, which increasingly extend across multiple
locations, disparate systems, and business entities.
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In response, healthcare provider organizations have placed increasing demands on their information systems. Initially, these
information systems automated financial and administrative functions. As it became necessary to manage patient flow processes,
the need arose to integrate “back-office” data with such clinical information as patient test results and office visits. We believe
information systems must facilitate management of patient information incorporating administrative, financial and clinical information
from multiple entities. In addition, large healthcare organizations increasingly require information systems that can deliver high
performance in environments with multiple concurrent computer users.
Many existing healthcare information systems were designed for limited administrative tasks such as billing and scheduling and
can neither accommodate multiple computing environments nor operate effectively across multiple locations and entities. We believe
that practices that leverage technology to more efficiently handle patient clinical data as well as administrative, financial and other
practice management data will be best able to enhance patient flow, pursue cost efficiencies and improve quality of care. As
healthcare organizations transition to new computer platforms and newer technologies, we believe such organizations will be
migrating toward the implementation of enterprise-wide, patient-centric computing systems embedded with automated clinical
patient records.
Our Strategy
Our strategy is to focus on addressing upcoming needs of accountable care organizations around interoperability, patient
engagements, population health and data analytics. We believe that our core strength lies in the central role our software products
and services play in the delivery of healthcare by the primary physician in an ambulatory setting. We intend to remain at the forefront
of upcoming new regulatory requirements including ICD-10 and meaningful use requirements for stimulus payments. We believe
that the expanded requirements for continued eligibility for incentive payments under meaningful use rules will result in an expanded
replacement market for electronic health records software. We intend to continue the development and enhancement of our software
solutions to support healthcare reform and the transition from fee for service to pay for performance/quality initiatives such as
collaborative accountable care organizations. Key elements of our future software development will be to continue to integrate our
ambulatory and inpatient products, making our products more intuitive and easy to use, expanding on our interoperability and
enhancing our ability to deliver our software over the cloud with the latest technology.
We are also focusing on capitalizing on the significant cross selling opportunities within our customer base for RCM and other
services. We believe that the increased complexity related to the billing and collections process, which goes into effect with ICD-10
in October of 2014, will create additional opportunities for our RCM Services Division.
We want to continue investments in our infrastructure, including but not limited to product development, sales, marketing,
implementation and support, to continue efforts to make infrastructure investments within an overall context of maintaining reasonable
expense discipline, to add new clients through maintaining and expanding sales, marketing and product development activities and
to expand our relationship with existing clients through delivery of add-on and complementary products and services while continuing
our gold-standard commitment of service in support of our client satisfaction programs. We believe that our growing customer base
that is using our software on a daily basis is a strategic asset, and we intend to expand our product and service offerings towards
this customer base in order to leverage this strategic asset. We believe there is a significant long term opportunity in the small
hospital market (under 100 beds) and are making significant investments to build infrastructure and capabilities to support our
growing base of small hospital customers with a high degree of customer satisfaction.
Products and Services
In response to the growing need for more comprehensive, cost-effective healthcare information solutions for medical practices,
dental practices, hospitals, health centers and other healthcare providers, our systems and services provide our clients with the
ability to redesign patient care and other workflow processes while improving care quality and productivity through facilitation of
managed access to patient information. Utilizing our proprietary software in combination with third party hardware and software
solutions, our products enable the integration of a variety of administrative clinical and financial operations. Leveraging more than
30 years of experience in the healthcare information services industry, we believe we continue to add value by providing our clients
with sophisticated, full-featured software systems along with comprehensive systems implementation, training, consultation, revenue
cycle management, maintenance and support services.
NextGen® Ambulatory Practice Management Systems. Our products consist primarily of proprietary healthcare software
applications together with third party hardware and other non-industry specific software. The systems range in capacity from one
to thousands of users, allowing us to address the needs of both small and large organizations. The systems are modular in design
and may be expanded to accommodate changing client requirements. We offer both standard licenses and SaaS arrangements in
our software offerings; although to date, SaaS arrangements do not represent a significant portion of our arrangements.
NextGen® Practice Management (PM) is the NextGen Division’s practice management offering. NextGen® PM has been developed
with a functional graphical user interface (“GUI”) certified for use with Windows 2000 and Windows XP operating systems. The
product leverages a relational database (Microsoft SQL Server) with support on both 32 and 64 bit enterprise servers. NextGen®
PM is a scalable, multi-module solution that includes a master patient index, enterprise-wide appointment scheduling with referral
tracking, clinical support and centralized or decentralized patient financial management based on either a managed care or fee-
for-service model. The NextGen® PM product is a highly configurable, cost-effective proven solution that enables the effective
management of both single and multi-practice settings.
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NextGen® Ambulatory Clinical Systems. The NextGen Division provides clinical software applications that are complementary
to, and are integrated with, our medical practice management offerings and interface with many of the other leading practice
management software systems on the market. The applications incorporated into our practice management solutions and others
such as scheduling, eligibility, billing and claims processing are augmented by clinical information captured by NextGen® Ambulatory
EHR, including services rendered, clinical documentation and diagnoses used for billing purposes. We believe that we currently
provide a comprehensive information management solution for the ambulatory marketplace.
NextGen® Ambulatory EHR version 5.8 is compliant with the ONC 2014 Edition criteria and was certified as a Complete EHR on
March 1, 2013 by the Certification Commission for Health Information Technology (CCHIT®), an ONC-ACB, in accordance with the
applicable Eligible certification criteria adopted by the Secretary of Health and Human Services (HHS). The ONC 2014 Edition
criteria support both Stage 1 and 2 meaningful use measures required to qualify eligible providers and hospitals for funding under
the American Recovery and Reinvestment Act ("ARRA").
NextGen® Ambulatory EHR was developed with client-server architecture, GUI and utilizes Microsoft Windows 2000, Windows NT
or Windows XP on each workstation and either Windows 2000, Windows NT, Windows XP or UNIX on the database server. NextGen®
Ambulatory EHR maintains data using industry standard relational database engines such as Microsoft SQL Server or Oracle. The
system is scalable from one to thousands of workstations. NextGen® Ambulatory EHR stores and maintains clinical data including:
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Data captured using user-customizable input “templates”;
Scanned or electronically acquired images, including X-rays and photographs;
Data electronically acquired through interfaces with clinical instruments or external systems;
Other records, documents or notes, including electronically captured handwriting and annotations; and
Digital voice recordings.
NextGen® Ambulatory EHR also offers a workflow module, prescription management, automatic document and letter generation,
patient education, referral tracking, interfaces to billing and lab systems, physician alerts and reminders and powerful reporting and
data analysis tools. In 2012, a population health management solution named NextGen® Population Health was introduced to
enhance collaborative care capabilities. It features integrated, multi-modal cascading communication tools including interactive
voice response (IVR), texting, email, NextGen® Patient Portal, and clinical data from NextGen® Ambulatory EHR. NextGen®
Population Health can be fully integrated with NextGen® Health Quality Measures (HQM) and has an easy-to-use, built-in population
profiler to define protocols for patient outreach using billing data from NextGen® Practice Management and clinical data from
NextGen® Ambulatory EHR.
QSI Dental Division Practice Management and Clinical Systems. In fiscal year 2010, QSI began selling hosted Software as a
Service (SaaS) practice management and clinical software solutions to the dental industry. This software solution is marketed
primarily to the multi-location dental group practice market for which the Division has remains a dominate player. This software
solution, formerly called NextDDS and now named QSIDental™Web™ to better identify it as a web-based solution, moves the QSI
Dental Division to the forefront of the emergence of Internet-based applications and cloud computing and represents a significant
growth opportunity for us to sell to both our existing client base and new clients.
In addition to the SaaS clinical offering, QSI's dental charting software system, known as the Clinical Product Suite (CPS), provides
a comprehensive solution designed specifically for the dental group practice environment. CPS integrates QSI's dental practice
management product with a computer-based clinical information system that incorporates a wide range of clinical tools, including
electronic charting of dental procedures, treatment planning, existing conditions, periodontal charting via light-pen, voice-activation
or keyboard entry for full periodontal examinations and PSR scoring. In addition, digital imaging of X-ray and intra-oral camera
images, computer-based patient education modules are viewable chair-side to enhance case presentation, full access to patient
information, treatment plans and insurance plans via a fully integrated interface with our dental practice management product. All
this is supported by document and image scanning for digital storage and linkage to the electronic patient record.
The result is a comprehensive clinical information management system that helps practices save time, reduce costs, improve case
presentation and enhance the delivery of dental services and quality of care. Clinical information is managed and maintained
electronically, thus forming an electronic patient record that allows for the implementation of the “chartless” office.
CPS incorporates Windows-based client-server technology consisting of one or more file servers and is scalable from one to
thousands of workstations. The hardware components, including the requisite operating system licenses, are purchased from third
party manufacturers or distributors either directly by the client or by us for resale to the customer.
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Hospital Solutions. The Hospital Solutions Division provides clinical, financial, enterprise scheduling, surgery management,
emergency department, and EHR-related applications and services to provide value based solutions for rural, community and
specialty hospitals. These solutions are designed to help improve patient safety, automate order entry and facilitate real-time
communication of patient information throughout the hospital and across the patient care continuum. The Inpatient solutions are
highly scalable, secure and easy to use with a Web 2.0-based clinical component that leverages full “cloud computing” capabilities.
In May, 2012, QSI announced it had acquired the Poseidon Group Inc. to extend its suite of solutions and footprint across hospitals
and to integrate their emergency department solutions into the NextGen Healthcare product offerings. Key Inpatient products consist
of:
NextGen® Inpatient Clinicals - a suite of CCHIT ONC 2011-certified solutions based on a scalable, secure and web-based enterprise
platform that leverages mobile and 'cloud computing' technology. Clinicians can enter and retrieve relevant inpatient clinical
information (patient vitals, lab results, allergies, medications, and imaging results) from bedside or remote locations. NextGen
Inpatient Clinicals' CPOE, Clinical Documentation, and Clinical Decision support capabilities and help enable hospitals to achieve
Stage 1 through Stage 4 adoption for ARRA meaningful use reimbursement and the HIMSS® EMR Adoption Model. The NextGen®
Inpatient Clinicals version 2.6 is compliant with the ONC 2014 Edition criteria and was certified as an electronic health record (EHR)
Module on May 1, 2013 by the Certification Commission for Health Information Technology (CCHIT®), in accordance with the
applicable Hospital certification criteria adopted by the Secretary of Health and Human Services. The ONC 2014 Edition criteria
support both Stage 1 and 2 Meaningful Use measures required to qualify eligible providers and hospitals for funding under ARRA.
NextGen® Inpatient Financials - a financial and administrative system that helps hospitals streamline operations and improve
financial and regulatory management of their facilities. The system is designed to automate and consolidate financials processes
at single or multiple facilities, including critical access, rural community and specialty hospitals and physician offices. NextGen®
Inpatient Financials uses a common patient database and community-based master patient index. It is designed to help optimize
revenue management and claims results.
NextGen® Emergency Department Solution - a comprehensive, web-based emergency department information system (EDIS) for
hospital emergency departments. It consists of nurse, physician, administration, coding, and billing functionality to reduce costs
and medical errors, enhance care, and ensure proper documentation. It offers templates and forms to streamline workflow and
augment and enhance a hospital's existing forms set. The NextGen Emergency Department Solutions is interoperable and integrates
with other hospital systems.
NextGen® Enterprise Scheduling - a system designed to provide hospital-wide, conflict-free patient scheduling for easier, more
efficient patient, resource, and staff management. It can be used as a single module or integrated with any combination of NextGen®
Inpatient Clinical Applications. It is designed so that, whether used as a single module or integrated with clinical applications,
hospital operations can benefit with better use of resources for increased capacity and patient throughput.
NextGen® Surgical Management - a system designed to help hospitals optimize OR throughput, quality, efficiency, patient safety,
revenue, and compliance. Detailed reporting provides surgery directors and hospital administrators with information to fine tune
surgical processes, quickly identify cases where costs have exceeded a normal range, and improve use of precious OR resources.
Hidden surgical procedure cost drivers can be identified and eliminated. The system also helps ensure compliance with Surgical
Care Improvement Project (SCIP) and National Healthcare Safety Network (NHSN) reporting requirements.
Revenue Cycle Management Services. RCM Services Division partners with private and hospital-based physicians and groups
to implement the NextGen® product suite with best practice, customizable RCM services in order to help them optimize revenue,
better leverage automation, and help them focus on practicing medicine. RCM services capabilities include:
Billing and Collections - A robust set of internal controls, best practice methodologies and comprehensive reporting ensures accuracy
and addresses the entire revenue cycle: from patient registration and charge capture, to claim submission, payment posting, denial
management and accounts receivable resolution.
Electronic Claims Submission - These services generate HIPAA-compliant insurance transactions to submit client insurance claims
electronically to insurance payers nationwide. Automating the electronic claims submission ("ECS") process using the NextGen
EPM application is another best practice that reduces costly manual labor. Our solutions support the CMS-1500, UB-04 and ADA
Dental Claim Forms and also accommodate proprietary claim formats.
Electronic Remittance & Payment Posting - These automated services help ensure payments are posted accurately and promptly.
Using the NextGen® Document Management, we link an image of each explanation of benefit (“EOB”) to the corresponding
encounter at the time of payment posting to minimize the need for storage of paper EOBs. The services also use electronic remittance
and digital lockboxes to post payments and capture specific denial information for management and tracking.
Accounts Receivable Follow-Up - An accounts receivable management methodology designed in cooperation with our clients helps
establish joint follow-up parameters, adjustment rules, standards for account elevation, as well as customized follow-up activities.
The RCM Services team will work with the client to replace costly manual processes with workflow automation tools and best
practices to reduce denials and improve collections.
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Expertise and Support - Our team of experts consists of analysts, billing and coding specialists, auditors, customer service
professionals, and account managers - all working for our clients to answer patients' billing questions, monitor RCM performance
and trends, provide credentialing assistance and identify opportunities for improvement to optimize collected revenue.
Electronic Data Interchange. We make available EDI capabilities and connectivity services to our clients. The EDI/connectivity
capabilities encompass direct interfaces between our products and external third party systems, as well as transaction-based
services. EDI products are intended to automate a number of manual, often paper-based or telephony intensive communications
between patients and/or providers and/or payers. Two of the more common EDI services are forwarding insurance claims
electronically from providers to payers and assisting practices with issuing statements to patients. Most client practices utilize at
least some of these services from us or one of our competitors. Other EDI/connectivity services are used more sporadically by
client practices. We typically compete to displace incumbent vendors for claims and statements accounts and attempt to increase
usage of other elements in our EDI/connectivity product line. In general, EDI services are only sold to those accounts utilizing
software from either the QSI Dental or NextGen Divisions. On November 14, 2011, the Company acquired ViaTrack, a developer
and provider of information technologies that enhance EDI offerings. This acquisition has provided the Company with in house EDI
capabilities at less cost to the Company compared to third party providers. We believe that significant opportunities exist to add
EDI services to our portfolio of service offerings in the inpatient market and ViaTrack will provide a platform to pursue this opportunity.
Services include:
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Electronic claims submission through our relationships with a number of payers and national claims clearinghouses;
Electronic patient statement processing, appointment reminder cards and calls, recall cards, patient letters and
other correspondence;
Electronic insurance eligibility verification; and
Electronic posting of remittances from insurance carriers into the accounts receivable application.
Community Connectivity. The NextGen Division also markets NextGen® HIE to facilitate cross-enterprise data sharing, enabling
individual physician practices in a given community to selectively share critical data, such as demographics, referrals, medications
lists, allergies, diagnoses, lab results, histories and more. This is accomplished through a secure, community-wide data repository
that links health care providers, whether they have the NextGen® Ambulatory EHR system, another compatible electronic health
records system, together with hospitals, payers, labs and other entities. The product is designed to facilitate data exchange within
an Integrated Delivery Network (IDN) or Regional Health Information Organization (“RHIO”). The result is that for every health care
encounter in the community, a patient-centric and complete record is accessible for the provider. The availability, accuracy and
completeness of information plus the elimination of duplicate data entry can lead to significantly improved patient safety, enhanced
decision making capabilities, time efficiencies and cost savings. Our NextGen Division maintains an internet-based patient health
portal, NextGen® Patient Portal. NextMD.com is the URL for our vertical portal for the healthcare industry, linking patients with their
physicians, while providing a centralized source of health-oriented information for both consumers and medical professionals.
Patients whose physicians are linked to the portal are able to request appointments, send appointment changes or cancellations,
receive test results on-line, request prescription refills, view and/or pay their statements, and communicate with their physicians,
all in a secure, on-line environment. Our NextGen® suite of information systems are or can be linked to NextMD.com, integrating
a number of these features with physicians’ existing systems.
Proprietary Rights
We rely on a combination of patents, copyrights, trademarks, service marks, trade secret laws and contractual restrictions to establish
and protect proprietary rights in our products and services. To protect our proprietary rights, we enter into confidentiality agreements
and invention assignment agreements with our employees with whom such controls are relevant. Certain qualified employees enter
into additional agreements that permit them access under certain circumstances, to software matters that are both confidential and
more strictly controlled. In addition, we include intellectual property protective provisions in many of our client contracts.
We rely on software that we license from third parties for certain components of our products and services to enhance our products
and services, and meet evolving customer needs. The failure to license any necessary technology, or to maintain our existing
licenses, could result in reduced demand for our products.
Because the software industry is characterized by rapid technological change, we believe such factors as the technological and
creative skills of our personnel, new product developments, frequent product enhancements, name recognition, and reliable product
maintenance are more important to establishing and maintaining a technology leadership position than the various legal protections
of our technology.
Although we believe our products and services, and other proprietary rights, do not infringe upon the proprietary rights of third
parties, third parties may assert intellectual property infringement claims against us in the future. Any such claims may result in
costly, time-consuming litigation and may require us to enter into royalty or cross-license arrangements.
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Sales and Marketing
We sell and market our products nationwide primarily through a direct sales force and a reseller channel. Software license sales
to resellers represented less than 10% of total revenue for the years ended March 31, 2013, 2012 and 2011.
Our direct sales force typically makes presentations to potential clients by demonstrating the system and our capabilities on the
prospective client’s premises. Sales efforts aimed at smaller practices can be performed on the prospective clients’ premises, or
remotely via telephone or Internet-based presentations. Both the direct and reseller channel sales force is concentrating on more
multi-product sales opportunities. These are opportunities where we might sell our ambulatory, inpatient, dental and RCM services
or some combination thereof to prospective clients.
Our sales and marketing employees identify prospective clients through a variety of means, including referrals from existing clients,
industry consultants, contacts at professional society meetings, trade shows and web-based seminars, trade journal advertising,
online advertising, direct mail and email advertising and telemarketing. Resources have shifted more heavily to Web-based marketing
to take advantage of buyers that now tend to do more Web research before contacting a vendor. In addition, we focus on more
thought leadership marketing to highlight our industry knowledge, expertise and the success of our client base.
Our sales cycle can vary significantly and typically ranges from six to twenty-four months from initial contact to contract execution.
Software licenses are normally delivered to a client almost immediately upon receipt of an order. Implementation and training
services are normally rendered based on a mutually agreed upon timetable. As part of the fees paid by our clients, we normally
receive up-front licensing fees. Clients have the option to purchase maintenance services which, if purchased, are invoiced on a
monthly, quarterly or annual basis.
Several clients have purchased our suite of enterprise products and, in turn, are providing either time-share or billing services to
single and group practice practitioners. Under the time-share or billing service agreements, the client provides the use of our software
for a fee to one or more practitioners. Although we typically do not receive a fee directly from the distributor’s clients, implementation
of such arrangements has, from time to time, resulted in the purchase of additional software capacity by the distributor, as well as
new software purchases made by the distributor’s customers should such customers decide to perform the practice management
functions in-house.
We continue to concentrate our direct sales and marketing efforts on medical and dental practices, networks of such practices
including IPAs and PHOs, professional schools, community health centers, hospitals and other ambulatory care settings.
IPAs, PHOs and similar networks to which we have sold systems provide use of our software to those group and single physician
practices associated with the organization or hospital on either a service basis or by directing us to contract with those practices
for the sale of stand-alone systems.
We have also entered into marketing assistance agreements with certain of our clients pursuant to which the clients allow us to
demonstrate to potential clients the use of systems on the existing clients’ premises.
From time to time we assist prospective clients in identifying third party sources for financing the purchase of our systems. The
financing is typically obtained by the client directly from institutional lenders and typically takes the form of a loan from the institution
secured by the system to be purchased or a leasing arrangement. We do not guarantee the financing nor retain any continuing
interest in the transaction.
We have numerous clients and do not believe that the loss of any single client would adversely affect us. No client accounted for
10% or more of our net revenue during the fiscal years ended March 31, 2013, 2012 or 2011.
Client Service and Support
We believe our success is attributable in part to our client service and support departments. We offer support to our clients seven
days a week, 24 hours a day.
Our client support staff is comprised of specialists who are knowledgeable in the areas of software and hardware as well as in the
day-to-day operations of a practice or hospital. System support activities range from correcting minor procedural problems in the
client’s system to performing complex database reconstructions or software updates.
We utilize automated online support systems which assist clients in resolving minor problems and facilitate automated electronic
retrieval of problems and symptoms following a client’s call to the automated support system. Additionally, our online support systems
maintain call records, available at both the client’s facility and our offices.
We offer our clients support services for most system components, including hardware and software, for a fixed monthly, quarterly
or annual fee. Clients also receive access to future unspecified versions of the software, on a when-available basis, as part of
support services.
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 and implementation specialist trained in the specifics of the client's business.
The implementation team is assigned to assist the client in the installation of the system and the training of appropriate practice
staff. Implementation and Training is responsible for ensuring proficiency in the use of the system which ultimately improves the
practice's performance and quality of care. Implementation services include loading the software, training client personnel, data
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conversion, running test data and assisting in the development and documentation of procedures. Implementation and training
services are provided by our employees as well as certified third parties and certain resellers.
Training may include a combination of computer assisted instruction (“CAI”) for certain of our products, remote training techniques
and training classes conducted at the client’s or our office(s). CAI consists of workbooks, computer interaction and self-paced
instruction. CAI is also offered to clients, for an additional charge, after the initial training program is completed for the purpose of
training new and additional employees. Remote training allows a trainer at our offices to train one or more people at a client site
via telephone and computer connection, thus allowing an interactive and client-specific mode of training without the expense and
time required for travel. In addition, our on-line “help” and other documentation features facilitate client training as well as ongoing
support.
The Company has relationships with third party implementation providers to supplement the Company's in house implementation
resources.
In addition, NextGen® “E-learning” is an on-line learning subscription service which allows end users to train on the software on
the internet. E-learning allows end users to self manage their own learning with their personal learning path and pace. The service
allows users to track the status of courses taken.
At present, our training facilities are located in (i) Horsham, Pennsylvania, (ii) Atlanta, Georgia and (iii) Irvine, California. We are in
the process of building a fourth training center in Austin, Texas which is scheduled to open late summer 2013.
Competition
The markets for healthcare information systems and services are intensely competitive. The industry is highly fragmented and
includes numerous competitors, none of which we believe dominates these markets. Our principal existing competitors in the
healthcare information systems and services market include: eClinicalWorks, GE Healthcare (“GE”), Allscripts Healthcare Solutions,
Inc. (“Allscripts”), EPIC, athenahealth, Inc., Cerner, Greenway, McKesson and other competitors. In addition, our entry into the small
hospital market has introduced new competitors, including Computer Programs and Systems, Inc., Healthland and Healthcare
Management Systems, Inc.
The electronic patient records and connectivity markets, in particular, are subject to rapid changes in technology, and we expect
that competition in these market segments will increase as new competitors enter the market. We believe our principal competitive
advantages are the features and capabilities of our products and services, our high level of client support and our extensive
experience in the industry.
The RCM market is also intensely competitive as other healthcare information systems companies, such as GE, McKesson and
Allscripts, are also in the market of selling both practice management and electronic health records software and medical billing
and collection services.
Product Enhancement and Development
The healthcare information management and computer software and hardware industries are characterized by rapid technological
change requiring us to engage in continuing investments to update, enhance and improve our systems. During fiscal years 2013,
2012 and 2011, we expended approximately $60.4 million, $44.5 million and $32.5 million, respectively, on research and development
activities, including capitalized software amounts of $29.5 million, $13.1 million and $10.7 million, respectively. In addition, a portion
of our product enhancements have resulted from software development work performed under contracts with our clients.
Employees
As of March 31, 2013, we employed approximately 2,333 persons, of which 2,295 were full-time employees. We believe that our
future success depends in part upon recruiting and retaining qualified sales, marketing and technical personnel as well as other
employees.
Available Information
Our website address is www.qsii.com. We make our periodic and current reports, together with amendments to these reports, filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available on our website, free
of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. You may access
such filings under the “Investor Relations” button on our website. Members of the public may also read and copy any materials we
file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. To obtain
information on the operation of the Public Reference Room, please call the SEC at 1-800-SEC-0330. The SEC maintains an Internet
site at www.sec.gov that contains the reports, proxy statements and other information that we file electronically with the SEC. Our
website and the information contained therein or connected thereto is not intended to be incorporated into this Report or any other
report or information we file with the SEC.
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ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as the other cautionary statements and risks described elsewhere
and the other information contained in this Report and in our other filings with the SEC, including subsequent Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K. We operate in a rapidly changing environment that involves a number of risks. The
risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also affect our business operations. If any of these known or unknown risks actually
occur, our business, financial condition or results of operations could be materially and adversely affected, in which case the trading
price of our common stock may decline and you may lose all or part of your investment.
Risks Related to Our Business
The ongoing uncertainty in global economic conditions may negatively impact our business, operating results or financial
condition. The continuing unfavorable global economic conditions and uncertainty have caused a general tightening in the credit
markets, lower levels of liquidity, increases in the rates of default and bankruptcy and extreme volatility in credit, equity and fixed
income markets. These macroeconomic conditions could negatively affect our business, operating results or financial condition in
a number of ways. For example, current or potential clients may be unable to fund software purchases, which could cause them
to delay, decrease or cancel purchases of our products and services or to not pay us or to delay paying us for previously purchased
products and services. Our clients may cease business operations or conduct business on a greatly reduced basis. Finally, our
investment portfolio is generally subject to general credit, liquidity, counterparty, market and interest rate risks that may be
exacerbated by these global financial conditions. If the banking system or the fixed income, credit or equity markets continue to
deteriorate or remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be
adversely affected as well.
We face significant, evolving competition which, if we fail to properly address, could adversely affect our business, results
of operations, financial condition and price of our stock. The markets for healthcare information systems are intensely
competitive, and we face significant competition from a number of different sources. Several of our competitors have substantially
greater name recognition and financial, technical, product development and marketing resources than we do. There has been
significant merger and acquisition activity among a number of our competitors in recent years. Transaction induced pressures, or
other related factors may result in price erosion or other negative market dynamics that could adversely affect our business, results
of operations, financial condition and price of our stock.
We compete in all of our markets with other major healthcare related companies, information management companies, systems
integrators and other software developers. Competitive pressures and other factors, such as new product introductions by us or
our competitors, may result in price or market share erosion that could adversely affect our business, results of operations and
financial condition. Also, there can be no assurance that our applications will achieve broad market acceptance or will successfully
compete with other available software products.
Saturation or consolidation in the healthcare industry could result in the loss of existing customers, a reduction in our
potential customer base and downward pressure on the prices for our products and services. As the healthcare information
systems market evolves, saturation of this market with our products or our competitors' products could limit our revenues and
opportunities for growth. There has also been increasing consolidation amongst healthcare industry participants in recent years,
creating integrated healthcare delivery systems with greater market power. As provider networks and managed care organizations
consolidate, the number of market participants decreases and competition to provide products and services like ours will become
more intense. The importance of establishing relationships with key industry participants will become greater and our inability to
make initial sales of our systems to, or maintain relationships with, newly formed groups and/or healthcare providers that are
replacing or substantially modifying their healthcare information systems could adversely affect our business, results of operations
and financial condition. These consolidated industry participants may also try to use their increased market power to negotiate
price reductions for our products and services. If we were forced to reduce our prices, our business would become less profitable
unless we were able to achieve corresponding reductions in our expenses.
Many of our competitors have greater resources than we do. In order to compete successfully, we must keep pace with
our competitors in anticipating and responding to the rapid changes involving the industry in which we operate, or our
business, results of operations and financial condition may be adversely affected. The software market generally is
characterized by rapid technological change, changing client needs, frequent new product introductions and evolving industry
standards. The introduction of products incorporating new technologies and the emergence of new industry standards could render
our existing products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketing
new products that respond to technological changes or evolving industry standards. New product development depends upon
significant research and development expenditures which depend ultimately upon sales growth. Any material shortfall in revenue
or research funding could impair our ability to respond to technological advances or opportunities in the marketplace and to remain
competitive. If we are unable, for technological or other reasons, to develop and introduce new products in a timely manner in
response to changing market conditions or client requirements, our business, results of operations and financial condition may be
adversely affected.
In response to increasing market demand, we are currently developing new generations of targeted software products. There can
be no assurance that we will successfully develop these new software products or that these products will operate successfully, or
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that any such development, even if successful, will be completed concurrently with or prior to introduction of competing products.
Any such failure or delay could adversely affect our competitive position or could make our current products obsolete.
We face risk and/or the possibility of claims from activities related to strategic partners, which could be expensive and
time-consuming, divert personnel and other resources from our business and result in adverse publicity that could harm
our business. We rely on third parties to provide services for our business. For example, we use national clearinghouses in the
processing of some insurance claims and we outsource some of our hardware maintenance services and the printing and delivery
of patient statements for our clients. These third parties could raise their prices and/or be acquired by our competitors, which could
potentially create short and long-term disruptions to our business, negatively impacting our revenue, profit and/or stock price. We
also have relationships with certain third parties where these third parties serve as sales channels through which we generate a
portion of our revenue. Due to these third-party relationships, we could be subject to claims as a result of the activities, products,
or services of these third-party service providers even though we were not directly involved in the circumstances leading to those
claims. Even if these claims do not result in liability to us, defending and investigating these claims could be expensive and time-
consuming, divert personnel and other resources from our business and result in adverse publicity that could harm our business.
We may engage in future acquisitions, which may be expensive, time consuming, subject to inherent risks and from which
we may not realize anticipated benefits. We may acquire additional businesses, technologies and products if we determine that
these additional businesses, technologies and products are likely to serve our strategic goals. We acquired Opus and Sphere during
fiscal year 2010, IntraNexus and CQI during fiscal year 2012 and Poseidon during fiscal year 2013, all of which are developers of
software and services for the inpatient market. We also acquired ViaTrack Systems, LLC ("ViaTrack") during fiscal year 2012 which
develops information technologies that enhance EDI offerings, and Matrix during fiscal year 2013 which provides revenue cycle
management services. Acquisitions have inherent risks, which may have a material adverse effect on our business, financial
condition, operating results or prospects, including, but not limited to the following:
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failure to achieve projected synergies and performance targets;
potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities and amortization
expenses related to intangible assets with indefinite useful lives, which could adversely affect our results of operations
and financial condition;
using cash as acquisition currency may adversely affect interest or investment income, which may in turn adversely
affect our earnings and /or earnings per share;
difficulty in fully or effectively integrating the acquired technologies, software products, services, business practices
or personnel, which would prevent us from realizing the intended benefits of the acquisition;
failure to maintain uniform standard controls, policies and procedures across acquired businesses;
difficulty in predicting and responding to issues related to product transition such as development, distribution and
client support;
the possible adverse effect of such acquisitions on existing relationships with third party partners and suppliers of
technologies and services;
the possibility that staff or clients of the acquired company might not accept new ownership and may transition to
different technologies or attempt to renegotiate contract terms or relationships, including maintenance or support
agreements;
the assumption of known and unknown liabilities;
the possibility that the due diligence process in any such acquisition may not completely identify material issues
associated with product quality, product architecture, product development, intellectual property issues, key personnel
issues or legal and financial contingencies, including any deficiencies in internal controls and procedures and the
costs associated with remedying such deficiencies;
difficulty in entering geographic and/or business markets in which we have no or limited prior experience;
difficulty in integrating acquired operations due to geographical distance and language and cultural differences;
diversion of management's attention from other business concerns; and
the possibility that acquired assets become impaired, requiring us to take a charge to earnings which could be
significant.
A failure to successfully integrate acquired businesses or technology could, for any of these reasons, have an adverse effect on
our financial condition and results of operations.
Our failure to manage growth could harm our business, results of operations and financial condition. We have in the past
experienced periods of growth which have placed, and may continue to place, a significant strain on our non-cash resources. We
also anticipate expanding our overall software development, marketing, sales, client management and training capacity. In the event
we are unable to identify, hire, train and retain qualified individuals in such capacities within a reasonable timeframe, such failure
could have an adverse effect on the operation of our business. In addition, our ability to manage future increases, if any, in the
scope of our operations or personnel will depend on significant expansion of our research and development, marketing and sales,
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management and administrative and financial capabilities. The failure of our management to effectively manage expansion in our
business could have an adverse effect on our business, results of operations and financial condition.
Our operations are dependent upon our key personnel. If such personnel were to leave unexpectedly, we may not be able
to execute our business plan. Our future performance depends in significant part upon the continued service of our key
development and senior management personnel and successful recruitment of new talent. These personnel have specialized
knowledge and skills with respect to our business and our industry. 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 and
successful recruiting is particularly significant.
The industry in which we operate is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel.
There can be no assurance that our current employees will continue to work for us. Loss of services of key employees could have
an adverse effect on our business, results of operations and financial condition. Furthermore, we may need to grant additional
equity incentives to key employees and provide other forms of incentive compensation to attract and retain such key personnel.
Equity incentives may be dilutive to our per share financial performance. Failure to provide such types of incentive compensation
could jeopardize our recruitment and retention capabilities.
Continuing worldwide political and economic uncertainties may adversely affect our revenue and profitability. The last
several years have been periodically marked by concerns including but not limited to inflation, decreased consumer confidence,
the lingering effects of international conflicts, energy costs and terrorist and military activities. Although certain indices and economic
data have shown signs of stabilization in the United States and certain global markets, there can be no assurance that these
improvements will be broad-based or sustainable. This instability can make it extremely difficult for our clients, our vendors and us
to accurately forecast and plan future business activities, and could cause constrained spending on our products and services,
delays and a lengthening of our sales cycles and/or difficulty in collection of our accounts receivable. Bankruptcies or similar
insolvency events affecting our clients may cause us to incur bad debt expense at levels higher than historically experienced.
Further, an ongoing economic stability in the global markets could limit our ability to access the capital markets at a time when we
would like, or need, to raise capital, which could have an impact on our ability to react to changing business conditions or new
opportunities. Accordingly, if worldwide political and economic uncertainties continue or worsen, our business, results of operations
and financial condition could be materially and adversely affected.
If we are unable to manage our growth in the new markets we may enter, our business and financial results could suffer.
Our future financial results will depend in part on our ability to profitably manage our business in new markets that we may enter.
We are engaging in the strategic identification of, and competition for, growth and expansion opportunities in new markets or
offerings, including but not limited to the areas of interoperability, patient engagements, data analytics and population health. In
order to successfully execute on these future initiatives, we will need to, among other things, manage changing business conditions
and develop expertise in areas outside of our business's traditional core competencies. Difficulties in managing future growth in
new markets could have a significant negative impact on our business, financial condition and results of operations.
We may not be successful in developing or launching our new software products and services, which could have a negative
impact on our financial condition and results of operations. We invest significant resources in the research and development
of new and enhanced software products and services. Over the last few years we have incurred, and will continue to incur, significant
internal research and development expenses that are recorded as capitalized software costs. We cannot provide assurances that
we will be successful in our efforts to develop or sell new software products, which could result in an impairment of the value of the
related capitalized software costs, an adverse effect on our financial condition and operating results and a negative impact the
future of our business.
We have implemented a new company-wide enterprise resource planning (“ERP”) system. The implementation process
is complex and involves a number of risks that may adversely affect our business and results of operations. During fiscal
2013, we replaced our multiple legacy business systems at different sites with a new company-wide, integrated ERP system to
handle various business, operating and financial processes. The new system will enhance a variety of important functions, such
as order entry, invoicing, accounts receivable, accounts payable, financial consolidation, and internal and external financial and
management reporting matters.
ERP implementations are complex and time-consuming projects that involve substantial expenditures on system hardware and
software and implementation activities that often continue for several years. Such an integrated, wide-scale implementation is
extremely complex and requires transformation of business and financial processes in order to reap the benefits of the ERP system.
Significant efforts are required for requirements identification, functional design, process documentation, data conversion, user
training and post implementation support. Problems in any of these areas could result in operational issues including delayed billing
and accounting errors and other operational issues. System delays or malfunctioning could also disrupt our ability to timely and
accurately process and report results of our operations, financial position and cash flows, which could impact our ability to timely
complete important business processes such as the evaluation of its internal controls and attestation activities pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002.
We own a captive facility, located in India that subjects us to regulatory, economic, social and political uncertainties in
India. We are subject to several risks associated with having a portion of our assets and operations located in India. Many US
companies have benefited from many policies of the Government of India and the Indian state governments in the states in which
we operate, which are designed to promote foreign investment generally and the business process services industry in particular,
including significant tax incentives, relaxation of regulatory restrictions, liberalized import and export duties and preferential rules
on foreign investment and repatriation. There is no assurance that such policies will continue. Various factors, such as changes in
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the current Government of India, could trigger significant changes in India’s economic liberalization and deregulation policies and
disrupt business and economic conditions in India generally and our business in particular. In addition, our financial performance
and the market price of our common stock may be adversely affected by general economic conditions and economic and fiscal
policy in India, including changes in exchange rates and controls, interest rates and taxation policies, as well as social stability and
political, economic or diplomatic developments affecting India in the future. In particular, India has experienced significant economic
growth over the last several years, but faces major challenges in sustaining that growth in the years ahead. These challenges
include the need for substantial infrastructure development and improving access to healthcare and education. Our ability to recruit,
train and retain qualified employees, develop and operate our captive facility could be adversely affected if India does not successfully
meet these challenges.
We could suffer further charges due to asset impairment that could reduce our income. We test our goodwill for impairment
annually during our first fiscal quarter, and on interim dates should events or changes in circumstances indicate the carrying value
of goodwill may not be recoverable in accordance with provisions of ASC 350, Intangibles - Goodwill and Other. During the quarter
ended March 31, 2013, we recorded a $17.4 million goodwill impairment charge relating to our Hospital Solutions Division (see
“Management's Discussion and Analysis of Financial Condition and Results of Operations” section for additional information
regarding this charge). Declines in business performance or other factors could cause the fair value of our Hospital Solutions
Division, or any of our other operating segments to be further revised downward, resulting in further impairment charges. If the
financial outlook for any of our operating segments warrants additional impairments of goodwill, the resulting write-downs could
materially affect our reported net earnings.
Risks Related to Our Products and Service
If our principal products, new product developments or implementation, training and support services fail to meet the
needs of our clients, we may fail to realize future growth, suffer reputational harm and face the risk of losing existing
clients. We currently derive substantially all of our net revenue from sales of our healthcare information systems and related
services. We believe that a primary factor in the market acceptance of our systems has been our ability to meet the needs of users
of healthcare information systems. Our future financial performance will depend in large part on our ability to continue to meet the
increasingly sophisticated needs of our clients through the timely development and successful introduction of new and enhanced
versions of our systems and other complementary products, as well as our ability to provide high quality implementation, training
and support services for our products. We have historically expended a significant percentage of our net revenue on product
development and believe that significant continuing product development efforts will be required to retain our existing clients and
sustain our growth. Continued investment in our sales staff and our client implementation, training and support staffs will also be
required to retain and grow our client base.
There can be no assurance that we will be successful in our customer satisfaction or product development efforts, that the market
will continue to accept our existing products and services, or that new products or product enhancements will be developed and
implemented in a timely manner, meet the requirements of healthcare providers, or achieve market acceptance. If new products
or product enhancements are delayed or do not achieve market acceptance, or if our implementation, training and support services
do not achieve a high degree of customer satisfaction, our reputation, business, results of operations and financial condition could
be adversely affected. At certain times in the past, we have also experienced delays in purchases of our products by clients
anticipating our launch, or the launch of our competitors, of new products. There can be no assurance that material order deferrals
in anticipation of new product introductions from ourselves or other entities will not occur.
If the emerging technologies and platforms of Microsoft and others upon which we build our products do not gain or
continue to maintain broad market acceptance, or if we fail to develop and introduce in a timely manner new products
and services compatible with such emerging technologies, we may not be able to compete effectively and our ability to
generate revenue will suffer. Our software products are built and depend upon several underlying and evolving relational database
management system platforms such as those developed by Microsoft. To date, the standards and technologies upon which we
have chosen to develop our products have proven to have gained industry acceptance. However, the market for our software
products is subject to ongoing rapid technological developments, quickly evolving industry standards and rapid changes in client
requirements, and there may be existing or future technologies and platforms that achieve industry standard status, which are not
compatible with our products.
We are dependent on our license rights and other services from third parties, which may cause us to discontinue, delay
or reduce product shipments. We depend upon licenses for some of the technology used in our products as well as other services
from third-party vendors. Most of these arrangements can be continued/renewed only by mutual consent and may be terminated
for any number of reasons. We may not be able to continue using the products or services made available to us under these
arrangements on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce product shipments
or services provided until we can obtain equivalent technology or services. Most of our third-party licenses are non-exclusive. Our
competitors may obtain the right to use any of the business elements covered by these arrangements and use these elements to
compete directly with us. In addition, if our vendors choose to discontinue providing their technology or services in the future or are
unsuccessful in their continued research and development efforts, we may not be able to modify or adapt our own products.
We may experience interruption at our data centers or client support facilities. We perform data center and/or hosting services
for certain clients, including the storage of critical patient and administrative data at company-owned facilities and through third-
party hosting arrangements. In addition, we provide support services to our clients through various client support facilities. We have
invested in reliability features such as multiple power feeds, multiple backup generators and redundant telecommunications lines,
as well as technical (such as multiple overlapping security applications, access control and other countermeasures) and physical
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security safeguards, and structured our operations to reduce the likelihood of disruptions. However, complete failure of all local
public power and backup generators, impairment of all telecommunications lines, a concerted denial of service cyber-attack, a
significant data breach, damage, injury or impairment (environmental, accidental, intentional or pandemic) to the buildings, the
equipment inside the buildings housing our data centers, the personnel operating such facilities or the client data contained therein,
or errors by the personnel trained to operate such facilities could cause a disruption in operations and negatively impact clients
who depend on us for data center and system support services. Any interruption in operations at our data centers and/or client
support facilities could damage our reputation, cause us to lose existing clients, hurt our ability to obtain new clients, result in
significant revenue loss, create potential liabilities for our clients and us and increase insurance and other operating costs.
We face the possibility of having to adopt new pricing strategies, such as subscription pricing or bundling. In April 2009,
we announced a new subscription based software as a service delivery model which includes monthly subscription pricing. This
model is designed for smaller practices to quickly access the NextGen® Ambulatory EHR or NextGen® PM products at a modest
monthly per provider price. We currently derive substantially all of our systems revenue from traditional software license,
implementation and training fees, as well as the resale of computer hardware. Today, the majority of our clients pay an initial license
fee for the use of our products, in addition to a periodic maintenance fee. While the intent of the new subscription based delivery
model is to further penetrate the smaller practice market, there can be no assurance that this delivery model will not become
increasingly popular with both small and large clients. In addition, we have experienced a recent increase in the demand for bundling
our software and systems with RCM service arrangements, which has also caused us to modify our standard upfront license fee
pricing model. If the marketplace increasingly demands subscription or bundled pricing, we may be forced to further adjust our
sales, marketing and pricing strategies accordingly, by offering a higher percentage of our products and services through these
means. Shifting to a significantly greater degree of subscription or bundled pricing could adversely affect our financial condition,
cash flows and quarterly and annual revenue and results of operations, as our revenue would initially decrease substantially.
We face the possibility of claims based upon our website content, which may cause us expense and management
distraction. We could be subject to third party claims based on the nature and content of information supplied on our website by
us or third parties, including content providers or users. We could also be subject to liability for content that may be accessible
through our website or third party websites linked from our website or through content and information that may be posted by users
in chat rooms, bulletin boards or on websites created by professionals using our applications. Even if these claims do not result in
liability to us, investigating and defending against these claims could be expensive and time consuming and could divert
management’s attention away from our operations.
If our security measures are breached or fail and unauthorized access is obtained to a client’s data, our services may be
perceived as not being secure, clients may curtail or stop using our services, and we may incur significant liabilities. Our
services involve the storage and transmission of clients’ proprietary information and protected health information of patients. Because
of the sensitivity of this information, security features of our software are very important. If our security measures are breached or
fail as a result of third-party action, employee error, malfeasance, insufficiency, defective design, or otherwise, someone may be
able to obtain unauthorized access to client or patient data. As a result, our reputation could be damaged, our business may suffer,
and we could face damages for contract breach, penalties for violation of applicable laws or regulations and significant costs for
remediation and remediation efforts to prevent future occurrences. We rely upon our clients as users of our system for key activities
to promote security of the system and the data within it, such as administration of client-side access credentialing and control of
client-side display of data. On occasion, our clients have failed to perform these activities. Failure of clients to perform these activities
may result in claims against us that this reliance was misplaced, which could expose us to significant expense and harm to our
reputation. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are
not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive
measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures
could be harmed and we could lose sales and clients. In addition, our clients may authorize or enable third parties to access their
client data or the data of their patients on our systems. Because we do not control such access, we cannot ensure the complete
propriety of that access or integrity or security of such data in our systems.
Failure by our clients to obtain proper permissions and waivers may result in claims against us or may limit or prevent
our use of data, which could harm our business. We require our clients to provide necessary notices and to obtain necessary
permissions and waivers for use and disclosure of the information that we receive, and we require contractual assurances from
them that they have done so and will do so. If they do not obtain necessary permissions and waivers, then our use and disclosure
of information that we receive from them or on their behalf may be limited or prohibited by state or federal privacy laws or other
applicable laws. This could impair our functions, processes and databases that reflect, contain, or are based upon such data and
may prevent use of such data. In addition, this could interfere with or prevent creation or use of rules and analyses or limit other
data-driven activities that are beneficial to our business. Moreover, we may be subject to claims or liability for use or disclosure of
information by reason of lack of valid notice, permission or waiver. These claims or liabilities could subject us to unexpected costs
and adversely affect our operating results.
We face the possibility of damages resulting from internal and external security breaches. In the course of our business
operations, we compile and transmit confidential information, including patient health information, in our processing centers and
other facilities. A breach of security in any of these facilities could damage our reputation and result in damages being assessed
against us. In addition, the other systems with which we may interface, such as the Internet and related systems may be vulnerable
to security breaches, viruses, programming errors, or similar disruptive problems. The effect of these security breaches and related
issues could disrupt our ability to perform certain key business functions and could potentially reduce demand for our services.
Accordingly, we have expended significant resources toward establishing and enhancing the security of our related infrastructures,
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although no assurance can be given that they will be entirely free from potential breach. Maintaining and enhancing our infrastructure
security may require us to expend significant capital in the future.
The success of our strategy to offer our EDI services and Internet solutions depends on the confidence of our clients in our ability
to securely transmit confidential information. Our EDI services and Internet solutions rely on encryption, authentication and other
security technology licensed from third parties to achieve secure transmission of confidential information. We may not be able to
stop unauthorized attempts to gain access to or disrupt the transmission of communications by our clients. Anyone who is able to
circumvent our security measures could misappropriate confidential user information or interrupt our, or our clients’, operations. In
addition, our EDI and Internet solutions may be vulnerable to viruses, physical or electronic break-ins and similar disruptions.
Any failure to provide secure infrastructure and/or electronic communication services could result in a lack of trust by our clients
causing them to seek out other vendors and/or damage our reputation in the market, making it difficult to obtain new clients.
Our business depends on continued and unimpeded access to the Internet by us and our customers, which is not within
our control. We deliver Internet-based services and, accordingly, depend on our ability and the ability of our customers to access
the Internet. This access is currently provided by third parties that have significant market power in the broadband and Internet
access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and
government-owned service provides -- all of whom are outside of our control. In the event of any difficulties, outages and delays
by Internet service providers, we may be impeded from providing services, resulting in a loss of potential or existing customers.
We may be subject to claims for system errors, warranties or product liability, which could have an adverse effect on our
business, results of operations and financial condition. Our software solutions are intended for use in collecting, storing and
displaying clinical and healthcare-related information used in the diagnosis and treatment of patients and in related healthcare
settings such as admissions and billing. Therefore, users of our software solutions have a greater sensitivity to errors than the
market for software products generally. Any failure by our products to provide accurate and timely information concerning patients,
their medication, treatment and health status, generally, could result in claims against us which could materially and adversely
impact our financial performance, industry reputation and ability to market new system sales. In addition, a court or government
agency may take the position that our delivery of health information directly, including through licensed practitioners, or delivery of
information by a third party site that a consumer accesses through our websites, exposes us to assertions of malpractice, other
personal injury liability, or other liability for wrongful delivery/handling of healthcare services or erroneous health information. We
maintain insurance to protect against claims associated with the use of our products as well as liability limitation language in our
end-user license agreements, but there can be no assurance that our insurance coverage or contractual language would adequately
cover any claim asserted against us. A successful claim brought against us in excess of or outside of our insurance coverage could
have an adverse effect on our business, results of operations and financial condition. Even unsuccessful claims could result in our
expenditure of funds for litigation and management time and resources.
Certain healthcare professionals who use our Internet-based products will directly enter health information about their patients
including information that constitutes a record under applicable law that we may store on our computer systems. Numerous federal
and state laws and regulations, the common law and contractual obligations, govern collection, dissemination, use and confidentiality
of patient-identifiable health information, including:
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state and federal privacy and confidentiality laws;
our contracts with clients and partners;
state laws regulating healthcare professionals;
Medicaid laws;
the HIPAA and related rules proposed by the Health Care Financing Administration; and
Health Care Financing Administration standards for Internet transmission of health data.
HIPAA establishes elements including, but not limited to, federal privacy and security standards for the use and protection of
Protected Health Information. Any failure by us or by our personnel or partners to comply with applicable requirements may result
in a material liability to us.
Although we have systems and policies in place for safeguarding Protected Health Information from unauthorized disclosure, these
systems and policies may not preclude claims against us for alleged violations of applicable requirements. Also, third party sites
and/or links that consumers may access through our web sites may not maintain adequate systems to safeguard this information,
or may circumvent systems and policies we have put in place. In addition, future laws or changes in current laws may necessitate
costly adaptations to our policies, procedures, or systems.
There can be no assurance that we will not be subject to product liability claims, that such claims will not result in liability in excess
of our insurance coverage, that our insurance will cover such claims or that appropriate insurance will continue to be available to
us in the future at commercially reasonable rates. Such product liability claims could adversely affect our business, results of
operations and financial condition.
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We are subject to the effect of payer and provider conduct which we cannot control and accordingly, there is no assurance
that revenue for our services will continue at historic levels. We offer certain electronic claims submission products and services
as part of our product line. While we have implemented certain product features designed to maximize the accuracy and completeness
of claims submissions, these features may not be sufficient to prevent inaccurate claims data from being submitted to payers.
Should inaccurate claims data be submitted to payers, we may be subject to liability claims.
Electronic data transmission services are offered by certain payers to healthcare providers that establish a direct link between the
provider and payer. This process reduces revenue to third party EDI service providers such as us. As a result of this, and other
market factors, we are unable to ensure that we will continue to generate revenue at or in excess of prior levels for such services.
A significant increase in the utilization of direct links between healthcare providers and payers could adversely affect our transaction
volume and financial results. In addition, we cannot provide assurance that we will be able to maintain our existing links to payers
or develop new connections on terms that are economically satisfactory to us, if at all.
We face the risks and uncertainties that are associated with litigation against us, which may adversely impact our marketing,
distract management and have a negative impact upon our business, results of operations and financial condition. We
face the risks associated with litigation concerning the operation of our business. The uncertainty associated with substantial
unresolved litigation may have an adverse effect on our business. In particular, such litigation could impair our relationships with
existing clients and our ability to obtain new clients. Defending such litigation may result in a diversion of management's time and
attention away from business operations, which could have an adverse effect on our business, results of operations and financial
condition. Such litigation may also have the effect of discouraging potential acquirers from bidding for us or reducing the consideration
such acquirers would otherwise be willing to pay in connection with an acquisition.
There can be no assurance that such litigation will not result in liability in excess of our insurance coverage, that our insurance will
cover such claims or that appropriate insurance will continue to be available to us in the future at commercially reasonable rates.
Proprietary rights are material to our success, and the misappropriation of these rights could adversely affect our business
and our financial condition. We are heavily dependent on the maintenance and protection of our intellectual property and we rely
largely on technical security measures, license agreements, confidentiality procedures and employee nondisclosure agreements
to protect our intellectual property. The majority of our software is not patented and existing copyright laws offer only limited practical
protection.
There can be no assurance that the legal protections and precautions we take will be adequate to prevent misappropriation of our
technology or that competitors will not independently develop technologies equivalent or superior to ours. Further, the laws of some
foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States and are often not
enforced as vigorously as those in the United States.
We do not believe that our operations or products infringe on the intellectual property rights of others. However, there can be no
assurance that others will not assert infringement or trade secret claims against us with respect to our current or future products
or that any such assertion will not require us to enter into a license agreement or royalty arrangement or other financial arrangement
with the party asserting the claim. Responding to and defending any such claims may distract the attention of our management
and adversely affect our business, results of operations and financial condition. In addition, claims may be brought against third
parties from which we purchase software, and such claims could adversely affect our ability to access third party software for our
systems.
If we are deemed to infringe on the proprietary rights of third parties, we could incur unanticipated expense and be
prevented from providing our products and services. We have been, and may be in the future, subject to intellectual property
infringement claims as the number of our competitors grows and our applications' functionality is viewed as similar or overlapping
with competitive products. We do not believe that we have infringed or are infringing on any proprietary rights of third parties.
However, claims are occasionally asserted against us, and we cannot assure you that infringement claims will not be asserted
against us in the future. Also, we cannot assure you that any such claims will be unsuccessful. We could incur substantial costs
and diversion of management resources defending any infringement claims - even if we are ultimately successful in the defense
of such matters. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well
as injunctive or other equitable relief that could effectively block our ability to provide products or services. In addition, we cannot
assure you that licenses for any intellectual property of third parties that might be required for our products or services will be
available on commercially reasonable terms, or at all.
Risks Related to Regulation
We may not see the benefits from government funding programs initiated to accelerate the adoption and utilization of
health information technology. While government programs have been implemented to improve the efficiency and quality of the
healthcare sector, including expenditures to stimulate business and accelerate the adoption and utilization of healthcare technology,
we may not see the anticipated benefits of such programs. In February 2009, President Obama signed the American Recovery and
Reinvestment Act (“ARRA”), which allocates over $20 billion dollars to healthcare IT over the next several years. The provision of
the legislation that addresses health information technology specifically is known as the Health Information Technology for Economic
and Clinical Health Act (“HITECH Act”). In 2010 the Obama Administration enacted the Patient Protection and Affordable Care Act
(“PPACA”), which mandates insurance for all US citizens and significant reform of the healthcare delivery system. Under the ARRA
and the PPACA, unprecedented government financial resources are being invested in healthcare, including significant financial
incentives to healthcare providers who can demonstrate meaningful use of certified EHR technology since 2011. While we expect
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the ARRA and the PPACA to continue to create significant sales opportunities over the next several years, we are unsure of the
immediate or long-term impact of these government actions.
Although we believe that our service offerings will meet the requirements of the HITECH Act to allow our customers to qualify for
financial incentives for implementing and using our services, there can be no guaranty that our customers will achieve meaningful
use or actually receive such planned financial incentives for our services. We also cannot predict the speed at which healthcare
providers will adopt electronic health record systems in response to these government incentives, whether healthcare providers
will select our products and services or whether healthcare providers will implement an electronic health record system at all. Any
delay in the purchase and implementation of electronic health records systems by healthcare providers in response to government
programs, or the failure of healthcare providers to purchase an electronic health record system, could have an adverse effect on
our business, financial condition and results of operations. It is also possible that additional regulations or government programs
related to electronic health records or an amendment or repeal of the HITECH Act could require us to undertake additional efforts
to meet meaningful use standards, materially impact our ability to compete in the evolving healthcare IT market or have other
impacts that would be unfavorable to our business.
There is significant uncertainty in the healthcare industry in which we operate, and we are subject to the possibility of
changing government regulation, which may adversely impact our business, financial condition and results of operations.
The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement
processes and operation of healthcare facilities. During the past several years, the healthcare industry has been subject to an
increase in governmental regulation of, among other things, reimbursement rates and certain capital expenditures.
Recently enacted public laws reforming the U.S. healthcare system may have an impact on our business. The Patient Protection
and Affordable Care Act (H.R. 3590; Public Law 111-148) (“PPACA”) and The Health Care and Education Reconciliation Act of 2010
(H.R. 4872) (the “Reconciliation Act”), which amends the PPACA (collectively the “Health Reform Laws”), were signed into law in
March 2010. The Health Reform Laws contain various provisions which may impact us and our customers. Some of these provisions
may have a positive impact, by expanding the use of electronic health records in certain federal programs, for example, while others,
such as reductions in reimbursement for certain types of providers, may have a negative impact due to fewer available resources.
Increases in fraud and abuse penalties may also adversely affect participants in the health care sector, including us.
Various legislators have announced that they intend to examine further proposals to reform certain aspects of the U.S. healthcare
system. Healthcare providers may react to these proposals, and the uncertainty surrounding such proposals, by curtailing or deferring
investments, including those for our systems and related services. Cost-containment measures instituted by healthcare providers
as a result of regulatory reform or otherwise could result in a reduction in the allocation of capital funds. Such a reduction could
have an adverse effect on our ability to sell our systems and related services. On the other hand, changes in the regulatory
environment have increased and may continue to increase the needs of healthcare organizations for cost-effective data management
and thereby enhance the overall market for healthcare management information systems. We cannot predict what effect, if any,
such proposals or healthcare reforms might have on our business, financial condition and results of operations.
As existing regulations mature and become better defined, we anticipate that these regulations will continue to directly affect certain
of our products and services, but we cannot fully predict the effect at this time. We have taken steps to modify our products, services
and internal practices as necessary to facilitate our compliance with the regulations, but there can be no assurance that we will be
able to do so in a timely or complete manner. Achieving compliance with these regulations could be costly and distract management’s
attention and divert other company resources, and any noncompliance by us could result in civil and criminal penalties.
Developments of additional federal and state regulations and policies have the potential to positively or negatively affect our business.
Our software may potentially be subject to regulation by the U.S. Food and Drug Administration (“FDA”) as a medical device. Such
regulation could require the registration of the applicable manufacturing facility and software and hardware products, application
of detailed record-keeping and manufacturing standards, and FDA approval or clearance prior to marketing. An approval or clearance
requirement could create delays in marketing, and the FDA could require supplemental filings or object to certain of these applications,
the result of which could adversely affect our business, financial condition and results of operations.
We may be subject to false or fraudulent claim laws. There are numerous federal and state laws that forbid submission of false
information or the failure to disclose information in connection with submission and payment of physician claims for reimbursement.
In some cases, these laws also forbid abuse of existing systems for such submission and payment. Any failure of our RCM services
to comply with these laws and regulations could result in substantial liability including, but not limited to, criminal liability, could
adversely affect demand for our services and could force us to expend significant capital, research and development and other
resources to address the failure. Errors by us or our systems with respect to entry, formatting, preparation or transmission of claim
information may be determined or alleged to be in violation of these laws and regulations. Determination by a court or regulatory
agency that our services violate these laws could subject us to civil or criminal penalties, invalidate all or portions of some of our
client contracts, require us to change or terminate some portions of our business, require us to refund portions of our services fees,
cause us to be disqualified from serving clients doing business with government payers and have an adverse effect on our business.
In most cases where we are permitted to do so, we calculate charges for our RCM services based on a percentage of the collections
that our clients receive as a result of our services. To the extent that violations or liability for violations of these laws and regulations
require intent, it may be alleged that this percentage calculation provides us or our employees with incentive to commit or overlook
fraud or abuse in connection with submission and payment of reimbursement claims. The U.S. Centers for Medicare and Medicaid
Services has stated that it is concerned that percentage-based billing services may encourage billing companies to commit or to
overlook fraudulent or abusive practices.
20
A portion of our business involves billing of Medicare claims on behalf of its clients. In an effort to combat fraudulent Medicare
claims, the federal government offers rewards for reporting of Medicare fraud which could encourage others to subject us to a
charge of fraudulent claims, including charges that are ultimately proven to be without merit.
If our products fail to comply with evolving government and industry standards and regulations, we may have difficulty
selling our products. We may be subject to additional federal and state statutes and regulations in connection with offering services
and products via the Internet. On an increasingly frequent basis, federal and state legislators are proposing laws and regulations
that apply to Internet commerce and communications. Areas being affected by these regulations include user privacy, pricing,
content, taxation, copyright protection, distribution, and quality of products and services. To the extent that our products and services
are subject to these laws and regulations, the sale of our products and services could be harmed.
We are subject to changes in and interpretations of financial accounting matters that govern the measurement of our
performance, one or more of which could adversely affect our business, financial condition, cash flows, revenue and
results of operations. Based on our reading and interpretations of relevant guidance, principles or concepts issued by, among
other authorities, the American Institute of Certified Public Accountants, the Financial Accounting Standards Board and the
Commission, we believe our current sales and licensing contract terms and business arrangements have been properly reported.
However, there continue to be issued interpretations and guidance for applying the relevant standards to a wide range of sales and
licensing contract terms and business arrangements that are prevalent in the software industry. Future interpretations or changes
by the regulators of existing accounting standards or changes in our business practices could result in changes in our revenue
recognition and/or other accounting policies and practices that could adversely affect our business, financial condition, cash flows,
revenue and results of operations.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could
have an adverse effect on our business, and our per share price may be adversely affected. Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 (“Section 404”) and the rules and regulations promulgated by the SEC to implement Section 404, we
are required to include in our Form 10-K a report by our management regarding the effectiveness of our internal control over financial
reporting. The report includes, among other things, an assessment of the effectiveness of our internal control over financial reporting.
The assessment must include disclosure of any material weakness in our internal control over financial reporting identified by
management.
As part of the ongoing evaluation being undertaken by management and our independent registered public accountants pursuant
to Section 404, our internal control over financial reporting was effective as of March 31, 2013. However, if we fail to maintain an
effective system of disclosure controls or internal controls over financial reporting, we may discover material weaknesses that we
would then be required to disclose. Any material weaknesses identified in our internal controls could have an adverse effect on our
business. We may not be able to accurately or timely report on our financial results, and we might be subject to investigation by
regulatory authorities. This could result in a loss of investor confidence in the accuracy and completeness of our financial reports,
which may have an adverse effect on our stock price.
No evaluation process can provide complete assurance that our internal controls will detect and correct all failures within our
company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could
also be limited by simple errors or faulty judgments. In addition, if we continue to expand, through either organic growth or through
acquisitions (or both), the challenges involved in implementing appropriate controls will increase and may require that we evolve
some or all of our internal control processes.
It is also possible that the overall scope of Section 404 may be revised in the future, thereby causing ourselves to review, revise or
reevaluate our internal control processes which may result in the expenditure of additional human and financial resources.
Risks Related to Ownership of Our Common Stock
The unpredictability of our quarterly operating results may cause the price of our common stock to fluctuate or decline.
Our revenue may fluctuate in the future from quarter to quarter and period to period, as a result of a number of factors including,
without limitation:
•
•
•
•
•
•
•
•
•
•
the size and timing of orders from clients;
the specific mix of software, hardware and services in client orders;
the length of sales cycles and installation processes;
the ability of our clients to obtain financing for the purchase of our products;
changes in pricing policies or price reductions by us or our competitors;
the timing of new product announcements and product introductions by us or our competitors;
changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial
Accounting Standards Board ("FASB") or other rule-making bodies;
accounting policies concerning the timing of the recognition of revenue;
the availability and cost of system components;
the financial stability of clients;
21
•
•
•
•
•
•
•
market acceptance of new products, applications and product enhancements;
our ability to develop, introduce and market new products, applications and product enhancements;
our success in expanding our sales and marketing programs;
deferrals of client orders in anticipation of new products, applications, product enhancements, or public/private sector
initiatives;
execution of or changes to our strategy;
personnel changes; and
general market/economic factors.
Our software products are generally shipped as orders are received and accordingly, we have historically operated with a minimal
backlog of license fees. As a result, revenue in any quarter is dependent on orders booked and shipped in that quarter and is not
predictable with any degree of certainty. Furthermore, our systems can be relatively large and expensive, and individual systems
sales can represent a significant portion of our revenue and profits for a quarter such that the loss or deferral of even one such sale
can adversely affect our quarterly revenue and profitability.
Clients often defer systems purchases until our quarter end, so quarterly results generally cannot be predicted and frequently are
not known until after the quarter has concluded.
Our sales are dependent upon clients’ initial decisions to replace or substantially modify their existing information systems, and
subsequently, their decision concerning which products and services to purchase. These are major decisions for healthcare providers
and, accordingly, the sales cycle for our systems can vary significantly and typically ranges from six to twenty-four months from
initial contact to contract execution/shipment.
Because a significant percentage of our expenses are relatively fixed, a variation in the timing of systems sales, implementations
and installations can cause significant variations in operating results from quarter to quarter. As a result, we believe that interim
period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indications
of future performance. Further, our historical operating results are not necessarily indicative of future performance for any particular
period.
We currently recognize revenue in accordance with the applicable accounting guidance as defined by the FASB.
There can be no assurance that application and subsequent interpretations of these pronouncements will not further modify our
revenue recognition policies, or that such modifications would not adversely affect our operating results reported in any particular
quarter or year.
Due to all of the foregoing factors, it is possible that our operating results may be below the expectations of public market analysts
and investors. In such event, the price of our common stock would likely be adversely affected.
Our common stock price has been volatile, which could result in substantial losses for investors purchasing shares of
our common stock and in litigation against us. Volatility may be caused by a number of factors including but not limited to:
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated quarterly variations in operating results;
rumors about our performance, software solutions, or merger and acquisition activity;
changes in expectations of future financial performance or changes in estimates of securities analysts;
governmental regulatory action;
health care reform measures;
client relationship developments;
purchases or sales of company stock;
activities by one or more of our major shareholders concerning our policies and operations;
changes occurring in the markets in general;
macroeconomic conditions, both nationally and internationally; and
other factors, many of which are beyond our control.
Furthermore, the stock market in general, and the market for software, healthcare and high technology companies in particular,
has experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of our common stock, regardless of actual operating
performance.
Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in
the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial
costs and divert management’s attention and resources.
22
Two current and former directors are significant shareholders, which makes it possible for them to have significant
influence over the outcome of all matters submitted to our shareholders for approval and which influence may be alleged
to conflict with our interests and the interests of our other shareholders. One of our directors is a significant shareholder who
beneficially owns approximately 17.1% of the outstanding shares of our common stock at March 31, 2013. Another former director,
who owns approximately 9.6% (based on publicly filed information) of the outstanding shares of our common stock at March 31,
2013, recently resigned from our Board of Directors, but likely maintains a large enough ownership stake to reelect himself to our
Board of Directors under cumulative voting. California law and our Bylaws permit our shareholders to cumulate their votes, the
effect of which is to provide shareholders with sufficiently large concentrations of our shares the opportunity to assure themselves
one or more seats on our Board of Directors. The amounts required to assure a seat on our Board of Directors can vary based
upon the number of shares outstanding, the number of shares voting, the number of directors to be elected, the number of “broker
non-votes,” and the number of shares held by the shareholder exercising the cumulative voting rights. In the event that cumulative
voting is invoked, it is likely that these two individuals that are significant shareholders will each have sufficient votes to assure
themselves of one or more seats on our Board of Directors. With or without cumulative voting, these two significant shareholders
will have substantial influence over the outcome of all matters submitted to our shareholders for approval, including the election of
our directors and other corporate actions. This influence may be alleged to conflict with our interests and the interests of our other
shareholders. For example, in fiscal year 2013, the former director launched a proxy contest to elect a different slate of directors
than what our Company proposed to shareholders. We spent approximately $1.3 million to defend against the proxy contest and
elect the Company's slate of directors. In addition, such influence by one or both of these shareholders could have the effect of
discouraging others from attempting to acquire our Company or create actual or perceived governance instabilities that could
adversely affect the price of our common stock.
Our future policy concerning the payment of dividends is uncertain, which could adversely affect the price of our stock.
We announced our intention to pay a quarterly dividend commencing with the conclusion of our first fiscal quarter of 2008 (June 30,
2007) and pursuant to this policy our Board of Directors has declared a quarterly cash dividend ranging from $0.125 to its most
recent level of $0.175 per share on our outstanding shares of common stock, each quarter thereafter. We anticipate that future
quarterly dividends, if and when declared by our Board of Directors pursuant to this policy, would likely be distributable on or about
the fifth day of each of the months of October, January, April and July. There can be no guarantees that we will have the financial
ability to fund this dividend in perpetuity or to pay it at historic rates. Further, our Board of Directors may decide not to pay the
dividend at some future time for financial or non-financial reasons. Unfulfilled expectations regarding future dividends could adversely
affect the price of our stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
23
ITEM 2. PROPERTIES
Our corporate headquarters, the QSI Dental Division and the NextGen Division training operations are located in Irvine, California.
We believe that our present facilities are adequate for our current needs. Should we continue to grow, we may be required to lease
or acquire additional space. We believe that suitable additional or substitute space is available, if needed, at market rates.
As of March 31, 2013, we leased an aggregate of approximately 436,800 square feet of space with lease agreements expiring at
various dates. Significant locations are as follows:
QSI Dental Division (including Corporate Headquarters)
Irvine, California
Augusta, Georgia
Other locations
NextGen Division
Horsham, Pennsylvania
Atlanta, Georgia
Other locations
Hospital Solutions Division
Austin, Texas
Other locations
RCM Services Division
St. Louis, Missouri
Hunt Valley, Maryland
North Canton, Ohio
Other locations
India Healthcare Private Limited
Total leased properties
ITEM 3. LEGAL PROCEEDINGS
Square Feet
54,500
7,300
1,800
110,000
34,800
9,300
45,000
3,200
55,000
33,500
22,100
6,900
53,400
436,800
We have experienced legal claims by customers regarding product and contract disputes, by other third parties asserting that we
have infringed their intellectual property rights and by current and former employees regarding certain employment matters. We
believe that these claims are without merit and intend to defend against them vigorously; however, we could incur substantial costs
and diversion of management resources defending any such claim, even if we are ultimately successful in the defense of such
matter. Litigation is inherently uncertain and always difficult to predict. We refer you to the discussion of infringement and litigation
risks within “Item 1A. Risk Factors".
ITEM 4. MINE AND SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Price and Holders
Our common stock is traded on the NASDAQ Global Select Market under the symbol “QSII.”
On July 27, 2011, our Board of Directors approved a two-for-one split of our common stock and a proportional increase in the
number of our common shares authorized from 50 million to 100 million. Each shareholder of record at the close of business on
October 6, 2011 received one additional share for every outstanding share held on the record date. The additional shares were
distributed October 26, 2011 and trading began on a split-adjusted basis on October 27, 2011. All share and per share amounts
have been restated for all periods presented to reflect the two-for-one split of our common stock.
24
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:
Three Months Ended
June 30, 2011
September 30, 2011
December 31, 2011
March 31, 2012
June 30, 2012
September 30, 2012
December 31, 2012
March 31, 2013
High
Low
$45.79
$50.70
$49.22
$45.00
$44.19
$28.22
$19.14
$20.96
$38.64
$37.05
$33.08
$35.82
$23.93
$15.04
$16.02
$17.16
At May 20, 2013, there were approximately 85 holders of record of our common stock.
Dividends
In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend on our
outstanding common stock, subject to further review and approval and the establishment of record and distribution dates by our
Board of Directors prior to the declaration of each such quarterly dividend. We anticipate that future quarterly dividends, if and
when declared by our Board of Directors pursuant to this policy, would likely be distributable on or about the fifth day of each of
the months of October, January, April and July.
On May 22, 2013, the Board of Directors approved a quarterly cash dividend of $0.175 per share on the Company’s outstanding
shares of Common Stock, payable to shareholders of record as of June 14, 2013 with an expected distribution date on or about
July 5, 2013.
Our Board of Directors declared the following dividends during the periods presented:
Declaration Date
May 24, 2012
July 25, 2012
October 25, 2012
January 23, 2013
Fiscal year 2013
May 25, 2011
July 27, 2011
October 26, 2011
January 25, 2012
Fiscal year 2012
May 26, 2010
July 28, 2010
October 25, 2010
January 26, 2011
Fiscal year 2011
Record Date
June 15, 2012
September 14, 2012
December 14, 2012
March 15, 2013
June 17, 2011
September 19, 2011
December 20, 2011
March 20, 2012
June 17, 2010
September 17, 2010
December 17, 2010
March 17, 2011
Payment Date
July 3, 2012
October 5, 2012
December 28, 2012
April 5, 2013
July 5, 2011
October 5, 2011
January 5, 2012
April 5, 2012
July 6, 2010
October 5, 2010
January 5, 2011
April 5, 2011
Per Share
Dividend
0.175
0.175
0.175
0.175
0.700
0.175
0.175
0.175
0.175
0.700
0.150
0.150
0.150
0.175
0.625
$
$
$
$
$
$
Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors,
including without limitation, our financial condition, operating results, current and anticipated cash needs and plans for
expansion.
25
Performance Graph
The following graph compares the cumulative total returns of our common stock, the NASDAQ Composite Index and the
NASDAQ Computer & Data Processing Services Stock Index over the five-year period ended March 31, 2013 assuming $100
was invested on March 31, 2008 with all dividends, if any, reinvested. This performance graph shall not be deemed to be
“soliciting material” or “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any
filing of the Company under the Securities Act of 1933, as amended or the Exchange Act.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Quality Systems, Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
____________________
*
$100 invested on 3/31/2008 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, 2009, 2010, 2011, 2012 and 2013 was published by NASDAQ and,
accordingly for the periods ended March 31, 2009, 2010, 2011, 2012 and 2013, the reported last trade price was utilized to compute
the total cumulative return for our common stock for the respective periods then ended. Shareholder returns over the indicated
periods should not be considered indicative of future stock prices or shareholder returns.
26
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to our consolidated statements of income data for each of the five years in the
period ended March 31, 2013 and the consolidated balance sheets data as of the end of each such fiscal year are derived from
our audited consolidated financial statements. The following information should be read in conjunction with our consolidated financial
statements and the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” included elsewhere herein.
Consolidated Financial Data
(In thousands, except per share data)
Statements of Income Data
Revenue
Cost of revenue
Gross profit
Selling, general and administrative
Research and development costs
Amortization of acquired intangible assets
Impairment of goodwill
Income from operations
Interest income (expense), net
Other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Basic net income per share
Diluted net income per share
Basic weighted average shares outstanding
Diluted weighted average shares outstanding
2013
Fiscal Year Ended March 31,
2011
2010
2012
2009
$ 460,229
$ 429,835
$ 353,363
$ 291,811
$ 245,515
189,652
151,223
127,482
110,807
88,890
270,577
278,612
225,881
181,004
156,625
148,353
128,846
108,310
30,865
4,859
17,400
69,100
(107)
(79)
68,914
26,190
42,724
0.72
0.72
59,392
59,462
$
$
$
31,369
2,198
—
21,797
1,682
—
86,951
16,546
1,783
—
116,199
94,092
75,724
247
(139)
116,307
40,650
75,657
1.29
1.28
58,729
59,049
$
$
$
$
$
$
263
61
94,416
32,810
61,606
1.06
1.06
57,894
58,236
$
$
$
226
268
76,218
27,839
48,379
0.84
0.84
57,270
57,592
$
$
$
69,410
13,777
1,035
—
72,403
1,203
(279)
73,327
27,208
46,119
0.82
0.81
56,062
56,792
Dividends declared per common share
$
0.700
$
0.700
$
0.625
$
0.600
$
0.575
Balance Sheet Data
Cash and cash equivalents
Working capital
Total assets
Total liabilities
March 31,
2013
March 31,
2012
March 31,
2011
March 31,
2010
March 31,
2009
$ 105,999
$ 134,444
$ 116,617
$
84,611
$ 170,297
$ 183,277
$ 145,758
$ 118,935
$
$
70,180
98,980
$ 443,055
$ 440,352
$ 378,686
$ 310,180
$ 242,101
$ 136,006
$ 145,175
$ 154,016
$ 121,891
$
86,534
Total shareholders’ equity
$ 307,049
$ 295,177
$ 224,670
$ 188,289
$ 155,567
27
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in this management’s discussion and analysis of
financial condition and results of operations (“MD&A”), including discussions of our product development plans, business strategies
and market factors influencing our results, may include forward-looking statements that involve certain risks and uncertainties.
Actual results may differ from those anticipated by us as a result of various factors, both foreseen and unforeseen, including, but
not limited to, our ability to continue to develop new products and increase systems sales in markets characterized by rapid
technological evolution, consolidation and competition from larger, better-capitalized competitors. Many other economic, competitive,
governmental and technological factors could affect our ability to achieve our goals and interested persons are urged to review any
risks that may be described in “Item 1A. Risk Factors” as set forth herein, as well as in our other public disclosures and filings with
the Securities and Exchange Commission ("SEC").
Overview
This MD&A, is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this
Report in order to enhance your understanding of our results of operations and financial condition and should be read in conjunction
with, and is qualified in its entirety by, the consolidated financial statements and related notes thereto included elsewhere in this
Report. Historical results of operations, percentage margin fluctuations and any trends that may be inferred from the discussion
below are not necessarily indicative of the operating results for any future period.
Our MD&A is organized as follows:
•
•
•
•
•
•
Management Overview. This section provides a general description of our Company and operating segments, a
discussion as to how we derive our revenue, background information on certain trends and developments affecting
our Company, a summary of our acquisition transactions and a discussion on management’s strategy for driving
revenue growth.
Critical Accounting Policies and Estimates. This section discusses those accounting policies that are considered
important to the evaluation and reporting of our financial condition and results of operations, and whose application
requires us to exercise subjective or complex judgments in making estimates and assumptions. In addition, all of our
significant accounting policies, including our critical accounting policies, are summarized in Note 2, “Summary of
Significant Accounting Policies,” of our notes to consolidated financial statements included elsewhere in this Report.
Company Overview. This section provides a more detailed description of our Company, operating segments, products
and services offered.
Overview of Results of Operations and Results of Operations by Operating Divisions. These sections provide our
analysis and outlook for the significant line items on our consolidated statements of income, as well as other information
that we deem meaningful to understand our results of operations on both a consolidated basis and an operating
division basis.
Liquidity and Capital Resources. This section provides an analysis of our liquidity and cash flows and discussions of
our contractual obligations and commitments as of March 31, 2013.
New Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting
standards and guidance that have either been recently adopted by our Company or may be adopted in the future.
Management Overview
Quality Systems, Inc. and its wholly-owned subsidiaries operate as four business divisions (each, a "Division") which are comprised
of: (i) the QSI Dental Division, (ii) the NextGen Division, (iii) the Hospital Solutions Division (formerly Inpatient Solutions) and (iv)
the RCM Services Division (formerly Practice Solutions). In fiscal year 2011, we opened a captive entity in India called Quality
Systems India Healthcare Private Limited (“QSIH”). We primarily derive revenue by developing and marketing healthcare information
systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations
(“PHOs”) and management service organizations (“MSOs”), ambulatory care centers, community health centers and medical and
dental schools along with comprehensive systems implementation, maintenance and support and add on complementary services
such as revenue cycle management (“RCM”) and electronic data interchange (“EDI”). Our systems and services provide our clients
with the ability to redesign patient care and other workflow processes while improving productivity through the facilitation of managed
access to patient information. Utilizing our proprietary software in combination with third-party hardware and software solutions,
our products enable the integration of a variety of administrative and clinical information operations.
In the last few years, we have continued to acquire companies that were established developers of software and services for the
inpatient market to operate under the Hospital Solutions Division. On May 1, 2012, we acquired Poseidon, a provider of emergency
department software. On July 26, 2011, we acquired CQI, a provider of hospital systems for surgery management. On April 29,
2011, we acquired IntraNexus, a provider of Web-based integrated clinical and hospital information systems. On February 10, 2010,
we acquired Opus, a provider of Web-based clinical solutions to hospital systems and integrated health networks nationwide and
on August 12, 2009 we acquired Sphere, a provider of financial information systems to the small hospital inpatient market. These
28
acquisitions are part of our strategy to continue to expand in the small hospital market and to add new clients by taking advantage
of cross selling opportunities between the ambulatory and inpatient markets.
On November 14, 2011, we acquired ViaTrack, a developer and provider of information technologies that enhance EDI offerings.
This acquisition provides a platform to pursue significant opportunities that exist to add EDI services to our portfolio of offerings in
the Inpatient market and is operating under the QSI Dental Division.
On April 15, 2012, we acquired Matrix, a value-added reseller for NextGen Healthcare, that provides RCM services, healthcare IT
solutions and training, implementation and support centered on NextGen® technology, to its clients nationwide. The acquisition will
enable our RCM Services Division to expand its footprint among private and hospital-based physicians and groups by leveraging
Matrix's RCM expertise.
In January 2011, QSIH was formed in Bangalore, India to function as our India-based captive to offshore technology application
development and business processing services.
We have benefited and hope to continue to benefit from the increased demands on healthcare providers for greater efficiency and
lower costs, financial incentives from the ARRA to physicians who adopt electronic health records, as well as increased adoption
rates for electronic health records and other technology in the healthcare arena. We also believe that healthcare reform and the
movement towards pay for performance/quality initiatives will also stimulate demand for robust electronic health record solutions
as well as new HIT solutions from bundled billing capabilities to patient engagement and population health management.
While we expect to benefit from the increasing demands for greater efficiency as well as government support for increased adoption
of electronic health records, the market for physician based electronic health records software is becoming increasingly saturated
while physician group practices are rapidly being consolidated by hospital, insurance payers and other entities. Hospital software
providers are leveraging their position with their hospital customers to gain market share with hospital owned physician practices.
Insurance providers and large physician groups are also consolidating physician offices creating additional opportunity for ambulatory
software providers such as NextGen. Our strategy is to focus addressing upcoming needs of accountable care organizations around
interoperability, patient engagements, population health, and data analytics. We believe that our core strength lies in the central
role our software products and services play in the delivery of healthcare by the primary physician in an ambulatory setting. We
intend to remain at the forefront of upcoming new regulatory requirements including ICD-10 and meaningful use requirements for
stimulus payments. We believe that the expanded requirements for continued eligibility for incentive payments under meaningful
use rules will result in an expanded replacement market for electronic health records software. We intend to continue the development
and enhancement of our software solutions to support healthcare reform and the transition from fee for service to pay for performance/
quality initiatives such as accountable care organizations. Key elements of our future software development will be to continue to
integrate our ambulatory and inpatient products, making our products more intuitive and easy to use, and enhancing our ability to
deliver our software over the cloud with the latest technology.
We also want to continue investments in our infrastructure including but not limited to product development, sales, marketing,
implementation and support, to continue efforts to make infrastructure investments within an overall context of maintaining reasonable
expense discipline, to add new clients through maintaining and expanding sales, marketing and product development activities and
to expand our relationship with existing clients through delivery of add-on and complementary products and services while continuing
our gold-standard commitment of service in support of our client satisfaction programs. We believe that our growing customer base
that is using our software on a daily basis is a strategic asset, and we intend to expand our product and service offerings towards
this customer base in order to leverage this strategic asset.
Critical Accounting Policies and Estimates
The discussion and analysis of our consolidated financial statements and results of operations is based upon our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. On
an on-going basis, we evaluate estimates (including but not limited to those related to revenue recognition, uncollectible accounts
receivable, software development cost, intangible assets and self-insurance accruals) for reasonableness. We base our estimates
on historical experience and on various other assumptions that management believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the significant accounting policies, as described in Note 2 of our consolidated financial statements, “Summary of
Significant Accounting Policies” should be read in conjunction with management’s discussion and analysis of financial condition
and results of operations. We believe the following table depicts the most critical accounting policies that affect our consolidated
financial statements:
29
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
software,
hardware
third
and
implementation,
software
customization, EDI, post-contract support
(maintenance) and other services, including
RCM and hosting services, performed for
clients who license our products.
training,
party
Revenue from implementation and training
services is recognized as the corresponding
services are performed. Maintenance revenue
is recognized ratably over the contractual
maintenance period. RCM revenue is derived
from services fees, which include amounts
charged for ongoing billing and other related
services and are generally billed to the client as
a percentage of total collections. We do not
recognize revenue for services fees until these
collections are made as the services fees are
not fixed or determinable until such time.
Contract accounting is applied where services
include significant software modification,
development or customization.
A typical system contract contains multiple elements of the items discussed.
Revenue earned on software arrangements involving multiple elements is
allocated to each element based on the relative fair values of those elements.
The fair value of an element is based on vendor-specific objective evidence
(“VSOE”). The Company limits its assessment of VSOE for each element to
either the price charged when the same element is sold separately or the
price established by management having the relevant authority to do so, for
an element not yet sold separately. VSOE calculations are updated and
reviewed quarterly or annually depending on the nature of the product or
service. The Company generally establishes VSOE for the related
undelivered elements based on the bell-shaped curve method. Maintenance
VSOE for the Company's largest clients is based on stated renewal rates
only if the rate is determined to be substantive and falls within the Company's
customary pricing practices.
When evidence of fair value exists for the delivered and undelivered elements
of a transaction, then discounts for individual elements are aggregated and
the total discount is allocated to the individual elements in proportion to the
elements' fair value relative to the total contract fair value.
When evidence of fair value exists for the undelivered elements only, the
residual method is used. Under the residual method, the Company defers
revenue related to the undelivered elements in a system sale based on VSOE
of fair value of each of the undelivered elements and allocates the remainder
of the contract price net of all discounts to revenue recognized from the
delivered elements. If VSOE of fair value of any undelivered element does
not exist, all revenue is deferred until VSOE of fair value of the undelivered
element is established or the element has been delivered.
Provided the fees are fixed or determinable and collection is considered
probable, revenue from licensing rights and sales of hardware and third-party
software is generally recognized upon physical or electronic shipment and
transfer of title. In certain transactions where collection risk is high, the
revenue is deferred until collection occurs or becomes probable. If the fee is
not fixed or determinable, then the revenue recognized in each period
(subject to application of other revenue recognition criteria) will be the lesser
of the aggregate of amounts due and payable or the amount of the
arrangement fee that would have been recognized if the fees were being
recognized using the residual method. Fees which are considered fixed or
determinable at the inception of the Company's arrangements must include
the following characteristic:
¤ The fee must be negotiated at the outset of an arrangement and generally
be based on the specific volume of products to be delivered without being
subject to change based on variable pricing mechanisms such as the number
of units copied or distributed or the expected number of users.
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.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts
for estimated losses resulting from the inability
of our clients to make required payments. We
perform credit evaluations of our clients and
maintain reserves for estimated credit losses.
Reserves
losses are
for potential credit
determined by establishing both specific and
general reserves.
Judgments and Uncertainties
Specific reserves are based on management’s estimate of the probability of
collection for certain troubled accounts. General reserves are established
based on our historical experience of bad debt expense and the aging of our
accounts receivable balances net of deferred revenue and specifically
reserved accounts. If the financial condition of our clients were to deteriorate
resulting in an impairment of their ability to make payments, additional
allowances would be required.
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to increases or decreases in required reserves that could be
material.
30
Software Development Costs
Judgments and Uncertainties
Development costs incurred in the research
and development of new software products and
enhancements to existing software products for
external use are expensed as incurred until
technological feasibility has been established.
After technological feasibility is established,
any additional external software development
costs are capitalized and amortized on a
straight-line basis over the estimated economic
life of the related product, which is typically
three years.
We periodically reassess the estimated economic life and the recoverability
of such capitalized software costs. If a determination is made that capitalized
amounts are not recoverable based on the estimated cash flows to be
generated from the applicable software, any remaining capitalized amounts
are written off.
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to increases or decreases in revenue that could be material.
Goodwill
Judgments and Uncertainties
The Company tests goodwill for impairment annually during its first fiscal
quarter, referred to as the annual test date. The Company will also test for
impairment between annual test dates if an event occurs or circumstances
change that would indicate the carrying amount may be impaired. Impairment
testing for goodwill is performed at a reporting-unit level, which is defined as
an operating segment or one level below an operating segment (referred to
as a component). A component of an operating segment is a reporting unit
if the component constitutes a business for which discrete financial
information is available and segment management regularly reviews the
operating results of that component.
Effect if Actual Results Differ from Assumptions
In fiscal 2013 we adopted the new provisions issued by the Financial
Accounting Standards Board ("FASB"), that intended to simplify goodwill
impairment testing. The updated guidance permits us to first assess
qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. If we conclude that
it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, we conduct a two-step quantitative goodwill impairment
test. The first step of the impairment test involves comparing the fair values
of the applicable reporting units with their carrying values. If the carrying
amount of the reporting unit exceeds the reporting unit's fair value, we perform
the second step of the goodwill impairment test. The second step of the
goodwill impairment test involves comparing the implied fair value of the
affected reporting unit's goodwill with the carrying value of that goodwill. The
amount by which the carrying value of the goodwill exceeds its implied fair
value, if any, is recognized as an impairment loss. During the quarter ended
December 31, 2012 and subsequently at March 31, 2013, certain events and
circumstances indicated the possibility that the carrying value of goodwill
could potentially be impaired. Refer to the "Impairment of Goodwill" section
within the "Comparison of the Fiscal Years Ended March 31, 2013 and March
31, 2012" discussion below for information regarding the impairment of
goodwill at March 31, 2013.
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. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to future impairment charges
that could be material.
31
Business Combinations — Purchase Price
Allocations
During the last three fiscal years, we completed
five acquisitions: Poseidon, Matrix, ViaTrack,
CQI and IntraNexus.
Judgments and Uncertainties
In accordance with the accounting for business combinations, we allocate
the purchase price of acquired businesses to the tangible and intangible
assets acquired and liabilities assumed based on estimated fair values. Our
purchase price allocation methodology contains uncertainties because it
requires management to make assumptions and to apply judgment to
estimate the fair value of acquired assets and liabilities. Management
estimates the fair value of assets and liabilities based upon quoted market
prices, the carrying value of the acquired assets and widely accepted
valuation techniques, including discounted cash flows and market multiple
analyses. Unanticipated events or circumstances may occur which could
affect the accuracy of our fair value estimates, including assumptions
regarding industry economic factors and business strategies.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood that there will be a material
change in the future estimates or assumptions we use to complete the
purchase price allocation and estimate the fair value of acquired assets and
liabilities. However, if actual results are not consistent with our estimates or
assumptions, we may be exposed to losses or gains that could be material.
Intangible Assets
Judgments and Uncertainties
customer
Intangible assets consist of trade names and
contracts,
and
software technology, all is which arose in
connection with the acquisitions completed
during the last three fiscal years.
relationships,
These intangible assets are recorded at fair value and are stated net of
accumulated amortization. The Company currently amortizes the intangible
assets using a method that reflects the pattern in which the economic benefits
of the intangible asset are consumed.
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to decreases in the fair value of our intangible assets, resulting in
impairment charges that could be material. We test intangible assets for
impairment if we believe indicators of impairment exist.
Share-Based Compensation
Judgments and Uncertainties
Our stock-based compensation plans consist
of stock options and restricted stock. See Note
9 of our consolidated financial statements for a
complete discussion of our stock-based
compensation programs.
The Company estimates the fair value of share-based payment awards on
the date of grant using an option-pricing model. Expected term is estimated
using historical exercise experience. Volatility is estimated by using the
weighted-average historical volatility of the Company’s common stock, which
approximates expected volatility. The risk free rate is the implied yield
available on the U.S Treasury zero-coupon issues with remaining terms equal
to the expected term. The expected dividend yield is the average dividend
rate during a period equal to the expected term of the option. Those inputs
are then entered into the Black Scholes model to determine the estimated
fair value. The value of the portion of the award that is ultimately expected
to vest is recognized ratably as expense over the requisite service period in
the Company’s consolidated statements of income.
On May 24, 2012, the Board of Directors approved its fiscal year 2013 equity
incentive program for certain employees to be awarded options to purchase
the Company's common stock. Under the program, executives are eligible
to receive options based on meeting certain target increases in EPS
performance and revenue and operating growth during fiscal year 2013. Non-
executive employees are also eligible to receive options based on satisfying
certain management established criteria and recommendations of senior
management. The options shall be issued pursuant to one of the Company's
shareholder approved option plans, have an exercise price equal to the
closing price of the Company's shares on the date of grant, a term of eight
years and vesting in five equal annual installments commencing one year
following the date of grant.
32
Compensation expense associated with the performance based awards
under the Company’s 2013 incentive plan are initially based on the number
of options expected to vest after assessing the probability that certain
performance criteria will be met. Cumulative adjustments are recorded
quarterly to reflect subsequent changes in the estimated outcome of
performance-related conditions.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood there will be a material
change in the future estimates or assumptions we use to determine stock-
based compensation expense. However, if actual results are not consistent
with our estimates or assumptions, we may be exposed to changes in stock-
based compensation expense that could be material.
Self-Insured Liabilities
Judgments and Uncertainties
Effective January 1, 2010, we became self-
insured with respect to healthcare claims,
subject to stop-loss limits. We accrue for
estimated self-insurance costs and uninsured
exposures based on claims filed and an
estimate of claims incurred but not reported as
of each balance sheet date. However, it is
possible that recorded accruals may not be
adequate to cover the future payment of claims.
Adjustments, if any, to estimated accruals
resulting from ultimate claim payments will be
reflected in earnings during the periods in which
such adjustments are determined.
Overview of Our Results
Our self-insured liabilities contain uncertainties because management is
required to make assumptions and to apply judgment to estimate the ultimate
cost to settle reported claims and claims incurred but not reported at the
balance sheet date.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood that there will be a material
change in the estimates or assumptions we use to calculate our self-insured
liabilities. However, if actual results are not consistent with our estimates or
assumptions, we may be exposed to losses or gains that could be material.
• Consolidated revenue increased 7.1% in the year ended March 31, 2013, as compared to the prior year period. Revenue was
positively impacted by growth in all of our service revenue categories, which in total grew 19.8%. The increase in consolidated
revenue, however, was largely offset by a 16.9% decline in system sales revenue.
• Consolidated gross profit as a percentage of revenue decreased to 58.8% in the year ended March 31, 2013, as compared to
64.8% in the prior year period. The decline in gross profit as a percentage of revenue was primarily attributable to a change
in revenue mix away from higher margin software license revenue toward lower margin service revenue. Software license
revenue represented 19.2% of total revenue compared to 28.5% in the prior year. Accordingly, total gross profit from system
sales declined 35.0% to $70.9 million versus $109.1 million in the prior year. Partially offsetting the decline in system sales
gross profit, however, was an increase in gross profit from service revenue, including maintenance, revenue cycle management
and EDI, which grew 17.8% to $199.6 million compared to $169.5 million in the prior year.
• Consolidated operating income decreased 40.5% in the year ended March 31, 2013, as compared to the prior year period
primarily due to the following factors: (a) a change in the mix of revenue towards lower margin service revenue resulting in a
decline in gross profit, (b) higher selling, general and administrative expenses, which was primarily a result of increased
headcount and selling-related expenses at the NextGen Division and (c) higher corporate-related expenses, primarily due to
the impairment of goodwill relating to the Hospital Solutions Division.
QSI Dental Division
• QSI Dental Division revenue increased 2.0% in the year ended March 31, 2013, and divisional operating income (excluding
unallocated corporate expenses) decreased 9.9%, as compared to the same prior year period. The decline in operating income
is the result of a decrease in system sales and higher selling, general and administrative expenses. It should be noted that the
QSI Dental Division's new software solution (“QSIDental™ Web”) is being sold as a SaaS solution, which typically spreads
revenue over a longer period of time rather than being recognized upfront. Revenue recognized from QSIDental Web was not
significant in the year ended March 31, 2013.
•
The QSI Dental Division is well-positioned to sell to the FQHCs market and intends to continue leveraging the NextGen Division's
sales force to sell its dental electronic medical records software to practices that provide both medical and dental services,
such as FQHCs, which are receiving grants as part of the ARRA.
• Our goal for the QSI Dental Division is to maximize profit performance given the constraints represented by a relatively weak
purchasing environment in the dental group practice market while taking advantage of opportunities with the new QSIDental™
Web product.
33
NextGen Division
• NextGen Division revenue increased 5.8% in the year ended March 31, 2013, as compared to the prior year period. NextGen
revenue was positively impacted by 19.6% growth in service revenue, largely offset by a 16.5% decline in system sales revenue.
Recurring revenue, which consists of maintenance and EDI revenue, increased 17.1% to $188.2 million and accounted for
54.7% of total NextGen Division revenue for the year ended March 31, 2013. In the same period a year ago, recurring revenue
of $160.8 million represented 49.4% of total NextGen Division revenue.
• NextGen Division operating income (excluding unallocated corporate expenses) decreased 4.8% in the year ended March 31,
2013, as compared to the prior year period. The decline in operating income is primarily the result of a decrease in system
sales as mentioned above, as well as a 5.1% increase in selling, general and administrative expenses in the current period.
• Our goals include taking maximum advantage of benefits related to the ARRA and continuing to further enhance our existing
products, including continued efforts to maintain our status as a qualified vendor under the ARRA, expanding our software and
service offerings supporting pay-for-performance initiatives around accountable care organizations, bringing greater ease of
use and intuitiveness to our software products, expanding our interoperability capabilities, integrating our inpatient and
ambulatory software products and further development and enhancements of our portfolio of specialty focused templates within
our EHR software. We intend to remain at the forefront of upcoming new regulatory requirements, including ICD-10 and
meaningful use requirements for stimulus payments. We believe that the expanded requirements for continued eligibility for
incentive payments under meaningful use rules will result in an expanded replacement market for electronic health records
software. We also intend to continue selling additional software and services to existing clients, expanding penetration of
connectivity and other services to new and existing clients, and capitalizing on growth and cross selling opportunities within
the RCM Services Division and the Hospital Solutions Division.
•
The NextGen Division’s growth is attributed to a strong brand name and reputation within a growing marketplace for electronic
health records and investments in sales and marketing activities, including new marketing campaigns, trade show attendance
and other expanded advertising and marketing expenditures. We have also recently expanded our relationship with certain
value added resellers with significant resources both domestically and internationally.
Hospital Solutions Division
• Hospital Solutions Division revenue decreased 8.8% in the year ended March 31, 2013, as compared to the prior year period.
Revenue was negatively impacted by a 21.3% decline in system sales, as well as slightly lower maintenance revenue and
higher reserves for sales returns.
• Divisional operating income/loss (excluding unallocated corporate expenses) was a loss of $4.4 million, as compared to income
of $10.4 million for the prior year period. Operating income was negatively impacted by increases in implementation and support
costs related to expanding infrastructure to support a growing customer base, lower software revenue and an increase in
selling, general and administrative and research and development expenses during the period, which grew $3.5 million and
$2.1 million, respectively.
• Our acquisition of Poseidon in May 2012 did not significantly impact the Hospital Solutions Division results for the period.
•
•
The Hospital Solutions Division has benefited from being able to offer both financial and CCHIT® certified clinical software,
which has been packaged together, and in May 2013, the division's NextGen® Inpatient Clinicals software was certified for
stage two of meaningful use. The Hospital Solutions Division has also benefited from cross sell opportunities with existing
NextGen Division customers, including hospitals that are owned or affiliated with physician offices.
The Hospital Solutions Division has incurred losses in the last several quarters and is expected to continue to incur losses for
the foreseeable future while we continue to invest in implementation and training, support, and development to support our
growing customer base and maximize customer satisfaction. We continue to believe in the long term opportunity in the small
hospital market in spite of the recent losses which we have incurred.
RCM Services Division
• RCM Services Division revenue increased 28.2% in the year ended March 31, 2013. Our acquisition of Matrix in April 2012
added approximately $12.5 million in revenue for the current period. Additionally, the RCM Services Division benefited from
organic growth achieved through cross selling RCM services to existing NextGen Division clients, as well as new clients added
during the year ended March 31, 2013.
• Operating income as a percentage of revenue increased to approximately 12.7% of revenue in the year ended March 31, 2013
versus 11.6% of revenue in the same prior year period primarily as a result of a significant increase in the RCM Services
Division's revenue compared to the prior year period, partially offset by higher selling, general and administrative expenses
during the current period.
34
•
•
•
The Company believes that a significant opportunity exists to cross sell revenue cycle management services to existing NextGen
Division customers. The portion of existing NextGen Division customers who are using the RCM Services Division's RCM
services is less than 15%. We also believe that the increased complexity related to the billing and collections process, which
goes into effect with ICD-10 in October of 2014, will create additional opportunities for our RCM Services Division.
There is also a significant opportunity to expand the RCM Services Division's services into the Hospital Solution and Dental
Division's customers as well. Management is actively pursuing efforts to achieve faster growth from expanded efforts to leverage
the existing NextGen Division's sales force towards selling revenue cycle management services.
Actual and expected customer turnover may result in a near term decline in revenues for the Division. However, we are
encouraged by increased sales activity and a growing sales pipeline of RCM services.
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):
Revenues:
Software and hardware
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 and hardware
Implementation and training services
Total cost of system sales
Maintenance
Electronic data interchange services
Revenue cycle management and related services
Other services
Total cost of maintenance, EDI, RCM and other services
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs
Amortization of acquired intangible assets
Impairment of goodwill
Total operating expenses
Income from operations
Interest income (expense), net
Other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
35
Fiscal Year Ended March 31,
2012
2011
2013
19.2%
28.5%
30.1%
7.6
26.9
34.1
13.0
12.9
13.2
73.1
6.1
34.6
32.3
11.5
10.6
11.0
65.4
5.1
35.2
31.1
11.6
12.8
9.3
64.8
100.0
100.0
100.0
4.7
6.7
11.4
4.4
8.3
9.4
7.6
29.8
41.2
58.8
32.2
6.7
1.1
3.8
43.8
15.0
0.0
0.0
15.0
5.7
9.3%
4.3
5.0
9.2
4.0
7.5
8.0
6.4
25.9
35.2
64.8
30.0
7.3
0.5
0.0
37.8
27.0
0.1
0.0
27.1
9.5
5.6
4.2
9.8
3.7
7.8
9.6
5.2
26.2
36.1
63.9
30.7
6.2
0.5
0.0
37.3
26.6
0.1
0.0
26.7
9.3
17.6%
17.4%
Comparison of the Fiscal Years Ended March 31, 2013 and March 31, 2012
Net Income. Our net income for the year ended March 31, 2013 was $42.7 million, or $0.72 per share on both a basic and fully
diluted basis. In comparison, we earned $75.7 million, or $1.29 per share on a basic and $1.28 per share on a fully diluted basis
for the year ended March 31, 2012. The change in net income for the year ended March 31, 2013 was primarily attributed to the
following:
•
•
•
•
•
a 35.0% decrease in consolidated system sales gross profit as a result of reduced software revenue;
an increase in recurring revenue based gross profit, including maintenance, RCM and EDI which grew 12.1%,
40.9% and 26.9%, respectively, compared to the prior year period;
an increase in selling, general and administrative expenses and amortization of acquired intangibles;
a $17.4 million impairment of goodwill relating to the Hospital Solutions Division; and
a decrease in the provision for income taxes primarily due to the extension of the research and development tax
credit in the current year, as well as lower taxable income in comparison to the prior year period
Revenue. Revenue for the year ended March 31, 2013 increased 7.1% to $460.2 million from $429.8 million for the year ended
March 31, 2012. NextGen Division revenue increased 5.8% to $344.3 million from $325.5 million in the year ended March 31, 2013,
QSI Dental Division revenue increased 2.0% to $20.0 million from $19.6 million, and the RCM Services Division revenue increased
28.2% to $64.5 million from $50.3 million. These increases in revenue were partially offset by a decrease in revenue for the Hospital
Solutions Division, which decreased 8.8% to $31.4 million from $34.5 million in the same prior year period.
System Sales. Revenue earned from Company-wide sales of systems for the year ended March 31, 2013 decreased 16.9% to
$123.6 million from $148.8 million in the prior year period.
Our decrease in revenue from sales of systems was principally the result of a 16.5% decrease in category revenue at our NextGen
Division and a 21.3% decrease at our Hospital Solutions Division. NextGen Division sales in this category decreased $20.5 million
to $103.5 million during the year ended March 31, 2013 from $124.1 million during the same prior year period while the Hospital
Solutions Division delivered a $3.8 million decrease in category revenue to $14.0 million in the year ended March 31, 2013 as
compared to $17.8 million in the same prior year period. The decrease in system sales was driven primarily by lower sales of
software to both new and existing clients, partially offset by increased implementation revenue at both the NextGen and Hospital
Solutions Divisions. Implementation revenue is typically earned and recognized in the quarters following the sale of the software.
Implementation revenue grew for the year ended March 31, 2013 as the Company was implementing system sales from prior
periods. Accordingly, implementation revenue grew in fiscal 2013 despite the decline in system sales.
The following table breaks down our reported system sales into software, hardware and third-party software, and implementation
and training services components on a consolidated and divisional basis for the years ended March 31, 2013 and 2012 (in thousands):
Fiscal Year Ended March 31, 2013
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2012
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Software
Hardware, Third
Party Software
Implementation
and Training
Services
Total System
Sales
$
2,085
$
1,733
$
1,599
$
5,417
$
$
71,862
5,717
431
5,697
1,045
2
26,002
7,207
200
103,561
13,969
633
80,095
$
8,477
$
35,008
$
123,580
2,865
$
1,662
$
1,104
$
5,631
100,517
10,576
961
4,839
987
—
18,708
124,064
6,189
390
17,752
1,351
$
114,919
$
7,488
$
26,391
$
148,798
NextGen Division software license revenue decreased 28.5% in the year ended March 31, 2013 versus the same period last year.
The Division's software revenue accounted for 69.4% of divisional system sales revenue during the year ended March 31, 2013
compared to 81.0% during the same period a year ago. Software license revenue continues to be an area of primary emphasis for
the NextGen Division. Our decline in software revenue was related to a number of factors including higher adoption rates by large
physician groups which resulted in a smaller number of new opportunities, the consolidation of physician offices by hospitals and
other large enterprises thereby reducing the number of potential opportunities, and an extension to the deadline to adopt stage two
meaningful use requirements until calendar 2014.
36
We believe there are other trends which may positively impact future systems sales. Many of our existing large enterprise customers
have plans to grow which will create future revenue opportunities as these customers purchase additional software and services
to support their growth plans. We also expect to benefit from the growth of a replacement market driven by an expected consolidation
of EHR vendors. Finally, we believe many new opportunities will be created by the evolution of healthcare from a pay for services
reimbursement model to a pay for performance model around the management of patient populations. We are developing new
products around these new opportunities which are expected to help drive future growth. It is difficult to assess the relative impact
as well as the timing of positive and negative trends, however, we believe the Company is well positioned to support the ever
increasing need for healthcare information technology.
During the year ended March 31, 2013, 5.5% of the NextGen Division's system sales revenue was represented by hardware and
third-party software compared to 3.9% during the same period a year ago. The number of clients who purchase hardware and third-
party software and the dollar amount of hardware and third-party software revenue fluctuates each period depending on the needs
of clients. The inclusion of hardware and third-party software in the NextGen Division's sales arrangements is typically at the request
of our clients.
Implementation and training revenue related to system sales at the NextGen Division increased 39.0% in the year ended March 31,
2013 compared to the same prior year period. Implementation and training revenue related to system sales at the Hospital Solutions
Division increased 16.4%, in the year ended March 31, 2013 as compared to the same prior year period. The amount of
implementation and training services revenue is dependent on several factors, including timing of client implementations, the
availability of qualified staff and the mix of services being rendered. The number of implementation and training staff increased
during the year ended March 31, 2013 versus the same prior year period in order to accommodate the increased amount of
implementation services sold in conjunction with software sales. It should be noted however that we have experienced a decline
in the level of systems sales in recent quarters which in turn have resulted in a decline in the amount of implementation services
sold, specifically in the NextGen Division. We intend to address the fluctuation in demand for services by managing the use of third
parties for implementation services. We have historically relied on third parties for a portion of our implementations in order to
manage customer requirements. The Hospital Solutions Division required a greater reliance on third parties to handle increased
demands for implementation services, especially in the first half of the fiscal year ended March 31, 2013.
Maintenance, EDI, RCM and Other Services. For the year ended March 31, 2013, our company-wide revenue from maintenance,
EDI, RCM and other services grew 19.8% to $336.6 million from $281.0 million in the same prior year period. The increase is
primarily due to an increase in maintenance, EDI and other services revenue from the NextGen Division and an increase in RCM
revenue from the RCM Services Division.
Total NextGen Division maintenance revenue for the year ended March 31, 2013 grew 14.9% to $133.9 million from $116.5 million
for the same prior year period while NextGen Division EDI revenue grew 22.8% to $54.3 million compared to $44.2 million in the
same prior year period. Other services revenue for the NextGen Division, which consists primarily of third-party annual software
license renewals, consulting services, SaaS fees and hosting services, increased 29.4% to $52.6 million in the year ended March 31,
2013 from $40.6 million in the same prior year period. Other services revenue benefited from a strong increase in consulting revenue
to existing NextGen Division customers.
The Hospital Solutions Division maintenance, EDI and other services revenue for the year ended March 31, 2013 increased 4.4%
as compared to the same prior year period primarily due to an increase in other services revenue. For the year ended March 31,
2013, RCM revenue for the RCM Services Division grew $13.6 million, or 29.9%, to $59.2 million compared to $45.6 million in the
same prior year period. RCM revenue was positively impacted by the acquisition of Matrix which contributed $12.5 million in the
current year.
The following table details maintenance, EDI, RCM and other services revenue by category on a consolidated and divisional basis
for the years ended March 31, 2013 and 2012 (in thousands):
Fiscal Year Ended March 31, 2013
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2012
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Maintenance
EDI
RCM
Other
Total
$
7,902
$
5,152
$
— $
1,519
$
14,573
$
$
133,904
54,281
14,126
839
41
235
—
—
59,219
52,569
240,754
3,277
3,585
17,444
63,878
156,771
$
59,709
$
59,219
$
60,950
$ 336,649
7,639
$
5,045
$
— $
1,281
$
13,965
116,544
44,214
14,553
96
—
—
—
—
45,572
40,645
201,403
2,158
3,290
16,711
48,958
$
138,832
$
49,259
$
45,572
$
47,374
$ 281,037
37
Maintenance revenue for the NextGen Division increased by $17.4 million for the year ended March 31, 2013 as compared to the
same prior year period. The growth in maintenance revenue is primarily a result of increases related to net additional licenses from
new and existing clients.
The NextGen Division’s EDI revenue growth has come from new clients and from further penetration of the division’s existing client
base while the growth in RCM revenue is attributable to both organic growth as well as the addition in revenue from the Matrix
acquisition. We intend to continue to promote maintenance, EDI and RCM services to both new and existing clients. Growth in
other services revenue is primarily due to increases in third-party annual software licenses, consulting services, SaaS fees, patient
portal subscription fees and hosting services revenue.
Cost of Revenue. Cost of revenue for the year ended March 31, 2013 increased 25.4% to $189.7 million from $151.2 million in
the same prior year period and the cost of revenue as a percentage of revenue increased to 41.2% from 35.2% driven primarily by
a higher percentage of lower margin revenue streams such as implementation and RCM services, as well as slight cost increases
across all revenue categories.
The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31, 2013
and 2012 (in thousands):
QSI Dental Division
Revenue
Cost of revenue
Gross profit
NextGen Division
Revenue
Cost of revenue
Gross profit
Hospital Solutions Division
Revenue
Cost of revenue
Gross profit
RCM Services Division
Revenue
Cost of revenue
Gross profit
Unallocated cost of revenue (1)
Consolidated
Revenue
Cost of revenue
Gross profit
Fiscal Year Ended March 31,
2013
%
2012
%
$
19,990
100.0% $
19,596
100.0%
10,453
52.3%
9,097
$
9,537
47.7% $
10,499
46.4%
53.6%
$ 344,315
100.0% $ 325,467
100.0%
114,788
33.3%
93,723
$ 229,527
66.7% $ 231,744
28.8%
71.2%
$
31,413
100.0% $
34,463
100.0%
16,703
53.2%
10,540
$
14,710
46.8% $
23,923
30.6%
69.4%
$
64,511
100.0% $
50,309
100.0%
45,008
19,503
2,700
$
$
69.8%
35,559
30.2% $
14,750
N/A $
2,303
70.7%
29.3%
N/A
$ 460,229
100.0% $ 429,835
100.0%
189,652
41.2%
151,223
$ 270,577
58.8% $ 278,612
35.2%
64.8%
____________________
(1)
Relates to the amortization of acquired software technology intangible assets
38
Gross profit margins for the QSI Dental Division, NextGen Division and the Hospital Solutions Division decreased for the year ended
March 31, 2013 compared to the same prior year period primarily due to a significant decrease in software sales during the current
year. Gross profit margin in the RCM Services Division increased to 30.2% for the year ended March 31, 2013 as compared to
29.3% for the same prior year period primarily due to a significant increase in recurring revenue during the current year.
The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue on a
consolidated and divisional basis for the years ended March 31, 2013 and 2012:
Fiscal Year Ended March 31, 2013
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2012
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Hardware,
Third
Party
Software
Payroll
and
Related
Benefits
EDI
Other
Total Cost
of
Revenue
Gross
Profit
8.7%
1.6%
3.4%
—%
1.8%
7.1%
1.3%
3.2%
—%
1.6%
19.8%
12.1%
28.9%
45.3%
18.3%
23.2%
12.4%
17.0%
46.1%
17.2%
13.6%
9.3%
0.1%
1.0%
7.7%
7.9%
7.8%
—%
2.2%
6.5%
10.2%
10.3%
20.8%
23.5%
13.4%
8.2%
7.3%
10.4%
22.4%
9.9%
52.3%
33.3%
53.2%
69.8%
41.2%
46.4%
28.8%
30.6%
70.7%
35.2%
47.7%
66.7%
46.8%
30.2%
58.8%
53.6%
71.2%
69.4%
29.3%
64.8%
During the year ended March 31, 2013, hardware and third-party software constituted a slightly higher portion of cost of revenue
compared to the same prior year period in the NextGen Division. The number of clients who purchase hardware and third-party
software and the dollar amount of hardware and third-party software purchased fluctuates each quarter depending on the needs
of our clients.
Our payroll and benefits expense associated with delivering our products and services increased to 18.3% of consolidated revenue
in the year ended March 31, 2013 compared to 17.2% during the same period last year. The absolute level of consolidated payroll
and benefit expenses grew from $73.9 million in the year ended March 31, 2011 to $84.1 million in the year ended March 31, 2013,
an increase of 13.8%, or approximately $10.2 million. Of the $10.2 million increase, approximately $6.0 million of the increase is
related to the RCM Services Division as RCM is a service business, which inherently has higher percentage of payroll costs as a
percentage of revenue. Increases of $1.5 million in the NextGen Division and $3.2 million for the Hospital Solutions Division for the
year ended March 31, 2013 are primarily due to headcount additions and increased payroll and benefits expense associated with
delivering products and services. The QSI Dental Division experienced a slight decrease in payroll and benefits expense compared
to the same prior year period. The amount of share-based compensation expense included in cost of revenue was not significant
for both the years ended March 31, 2013 and 2012.
Other cost of revenue, which primarily consists of third-party annual license, hosting costs, third party implementation and consulting
services, and outsourcing costs, increased to 13.4% of total revenue during the year ended March 31, 2013 as compared to 9.9%
for the same period a year ago. The Hospital Solutions Division utilized third parties to perform a larger portion of implementation
services in fiscal 2013, resulting in higher other costs compared to the prior year.
As a result of the foregoing events and activities, our gross profit percentage decreased to 58.8% for the year ended March 31,
2013 versus 64.8% for the same prior year period.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 2013
increased 15.1% to $148.4 million as compared to $128.8 million for the same prior year period. The increase in these expenses
resulted primarily from:
•
•
•
•
•
•
$6.9 million increase in salaries and related benefit expenses primarily as a result of headcount additions;
$1.6 million increase in support services, depreciation and maintenance fees related to the April 1, 2012 go-live of
our ERP system;
$1.8 million of acquisition related expenses, including fair value adjustments;
$1.2 million increase in bad debt expense;
$0.7 million increase in sales commissions;
$1.3 million of proxy contest related expenses; and
39
•
$6.0 million net increase in other selling and administrative expenses.
Share-based compensation expense was approximately $1.9 million and $2.9 million for the year ended March 31, 2013 and 2012,
respectively, and is included in the aforementioned amounts. Selling, general and administrative expenses as a percentage of
revenue increased from 30.0% in the year ended March 31, 2012 to 32.2% in the year ended March 31, 2013.
Research and Development Costs. Research and development costs for the years ended March 31, 2013 and 2012 were $30.9
million and $31.4 million, respectively. Research and development costs as a percentage of revenue decreased to 6.7% in the year
ended March 31, 2013 from 7.3% for the prior year period. The slower growth in research and development expenses was primarily
due to the achievement of technological feasibility for a major project, allowing us to begin to capitalize costs related to this project
in the current year, offset by continued investment in enhancements to our specialty template development, preparation for ICD10
requirements, new products including NextGen Mobile, NextGen NextPen, NextGen Community Connectivity consisting of NextGen
Health Information Exchange (“NextGen HIE,” formerly Community Health Solution), NextGen Patient Portal (“NextMD.com”), and
NextGen Health Quality Measures (“NextGen HQM”), and other enhancements to our existing products. Additions to capitalized
software costs offset increases in research and development costs. For the years ended March 31, 2013 and 2012, our additions
to capitalized software were $29.5 million and $13.1 million, respectively, as we continue to enhance our software to meet the
Meaningful Use definitions under the ARRA as well as further integrate both ambulatory and inpatient products. The increase in
capitalized software added in the year ended March 31, 2013 included $3.0 million paid for the source code of a pharmacy system
which supports customers in the Hospital Solutions Division as well as greater investment in this division. For the years ended
March 31, 2013 and 2012, total research and development expenditures including costs expensed and costs capitalized were $60.4
million and $44.5 million, respectively. We intend to continue to invest heavily in research and development expenses as we develop
a new integrated inpatient and outpatient, web-based software platform as well as continue to bring additional functionality and
features to the medical community. Share-based compensation expense included in research and development costs was not
significant for the years ended March 31, 2013 and 2012.
Amortization of Acquired Intangible Assets. Amortization included in operating expense related to acquired intangible assets
for the years ended March 31, 2013 and 2012 was $4.9 million and $2.2 million, respectively.
Impairment of Goodwill. During the second quarter of fiscal 2013, the operating performance of the Hospital Solutions Division
("Hospital reporting unit" or "Hospital") weakened, relative to the historic performance of this division. Revenues and operating
results further declined during the third quarter of 2013. Accordingly, we assessed the conditions giving rise to the operating
performance and evaluated the carrying amount of Hospital's goodwill balance. At such time, we concluded that the fair value of
the Hospital reporting unit exceeded the carrying amount of the related goodwill, and therefore the value of the goodwill required
no impairment. During the latter part of the quarter ended March 31, 2013, however, we reassessed the short-term and longer-
term business strategies and operating expectations relating to the Hospital Solutions Division. From this assessment, we concluded
that it was necessary to re-evaluate Hospital's goodwill for impairment during the fourth quarter of fiscal 2013.
Based upon the above, the Company performed step one of the goodwill impairment test and determined that the fair value of the
Hospital reporting unit, which was based on a combination of discounted cash flow analysis and market approach, was lower than
the carrying value. The failure of step one triggered step two of the impairment test.
As a result of the step two analysis, the Company determined the implied fair value of the Hospital reporting unit's goodwill and
concluded that the carrying value of goodwill exceeded its implied fair value. Based upon the resulting computations, an impairment
charge of $17.4 million was recognized during the fourth quarter of fiscal 2013.
The Company determined the implied fair value of the Hospital reporting unit's goodwill in the same manner as the amount of
goodwill recognized in a business combination. Therefore, the excess of the fair value of a reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of goodwill.
Key assumptions affecting the results of the goodwill impairment test include: a) the near-term continuation of recent results of
operations for the Division and b) our detailed reassessment of the strategies of the Division and the actions required to achieve
those strategies. Such reassessment resulted in a reprioritization of the objectives for the Division in the next fiscal year and a
determination that additional investment and expenditures would be required to achieve those objectives. Specifically, the Division
will place client satisfaction as its highest priority, de-emphasizing near-term growth.
To achieve high client satisfaction, the Division plans to implement several initiatives designed to enhance the Division's ability to
deliver better value for its customers including implementation, support, and software development. First, the Division will work to
aggressively add employees to its implementation, support, and software development departments to increase the ratio of
employees-to-customers. This will enable the Division to be more hands-on and responsive during the implementation and support
phases. Additionally, during the next fiscal year, the Division plans to bear the cost of providing additional training and implementation
services to certain customers, to enable those customers to make better use of the functionality of the system. We believe that by
completing this work and adding to the support, implementation, and development teams, the Division will greatly improve its
customer experience, and thereby help the Division improve its ability to have more of its client base serve as reference sites.
Additionally, the revenue assumptions relating to the Hospital Division outlook for the next several years reflect planned constraints
on: a) the rate of new implementation engagements, to accommodate the client satisfaction initiative, and b) the timing and extent
of product sales in light of other operational and product development considerations.
Though we have confidence in our assumptions regarding the future performance of the Hospital Solutions Division, if the future
financial results relating to the Division fall short of our assumptions, the fair value of the reporting unit could be negatively impacted,
resulting in an additional impairment of goodwill and/or other intangible assets.
40
The Company will continue to monitor the operating performance of its reporting units in future periods for evidence of any additional
indicators of impairment.
Interest and Other Income (Expense). Total interest and other income (expense) for the year ended March 31, 2013 was $0.2
million of expense as compared to income of $0.1 million for the year ended March 31, 2012. Interest and other income (expense)
consists primarily of dividends and interest earned on our investments along with foreign currency gains or losses for the period.
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, Certificates of Deposit and short term Municipal Bonds with maturities of
365 days or less at the time of purchase. Our Board of Directors continues to review alternate uses for our cash including, but not
limited to, payment of a special dividend, initiation of a stock buyback program, an expansion of our investment policy and other
items. Additionally, it is possible that we will utilize some or all of our cash to fund acquisitions or other similar business activities.
Any or all of these programs could significantly impact our investment income in future periods.
Provision for Income Taxes. The provision for income taxes for the years ended March 31, 2013 and 2012 were $26.2 million
and $40.6 million, respectively. The effective tax rates were 38.0% and 35.0% for the years ended March 31, 2013 and 2012,
respectively. The effective rate for the year ended March 31, 2013 increased as compared to the prior year period primarily due to
the non-deductibility of $5.1 million (tax effected) relating to the impairment of goodwill. Partially offsetting this impact are increased
benefits to the overall effective tax rate from the state effective tax rate, research and development credits and qualified production
activities deductions.
During the years ended March 31, 2013 and 2012, we recognized research and development tax credits of approximately $1.5
million and $1.0 million, respectively. The Company also claimed the qualified production activities deduction under Section 199 of
the Internal Revenue Code (“IRC”) of approximately $9.0 million and $10.0 million (pre-tax) during the years ended March 31, 2013
and 2012, respectively. Research and development credits and the qualified production activities income deduction calculated by
us involve certain assumptions and judgments regarding qualification of expenses under the relevant tax code provision.
Comparison of the Fiscal Years Ended March 31, 2012 and March 31, 2011
Net Income. Our net income for the year ended March 31, 2012 was $75.7 million, or $1.29 per share on a basic and $1.28 per
share on a fully diluted basis. In comparison, we earned $61.6 million, or $1.06 per share on both a basic and fully diluted basis
for the year ended March 31, 2011. The increase in net income for the year ended March 31, 2012 was primarily attributed to the
following:
•
•
•
•
a 21.6% increase in consolidated revenue, including an increase in revenues of $58.9 million from our NextGen
Division and $16.6 million from our Hospital Solutions Division;
21.3% increase in consolidated software license revenue, which accounted for 77.2% of total system sales;
a 19.2% increase in recurring revenue, including RCM, maintenance and EDI revenue; offset by
an increase in selling, general and administrative expenses and research and development costs.
Revenue. Revenue for the year ended March 31, 2012 increased 21.6% to $429.8 million from $353.4 million for the year ended
March 31, 2011. NextGen Division revenue increased 22.1% to $325.5 million from $266.5 million in the year ended March 31,
2012, QSI Dental Division revenue decreased 1.9% to $19.6 million from $20.0 million, RCM Services Division revenue increased
2.8% to $50.3 million from $49.0 million, and Hospital Solutions Division revenue increased 92.5% to $34.5 million from $17.9
million in the same prior year period.
System Sales. Revenue earned from Company-wide sales of systems for the year ended March 31, 2012 increased 19.5% to
$148.8 million from $124.5 million in the prior year period.
Our increase in revenue from sales of systems was principally the result of a 13.9% increase in category revenue at our NextGen
Division and a 114.4% increase at our Hospital Solutions Division. NextGen Division sales in this category grew $15.2 million to
$124.1 million during the year ended March 31, 2012 from $108.9 million during the same prior year period while the Hospital
Solutions Division delivered a $9.5 million increase in category revenue to $17.8 million in the year ended March 31, 2012 as
compared to $8.3 million in the same prior year period. The increases were driven by higher sales of software to both new and
existing clients at the NextGen Division and higher software and implementation revenue at the Hospital Solutions Division.
41
The following table breaks down our reported system sales into software, hardware and third-party software, and implementation
and training services components on a consolidated and divisional basis for the years ended March 31, 2012 and 2011 (in thousands):
Fiscal Year Ended March 31, 2012
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2011
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Software
Hardware, Third
Party Software
Implementation
and Training
Services
Total System
Sales
$
2,865
$
1,662
$
1,104
$
5,631
$
$
100,517
10,576
961
4,839
987
—
18,708
124,064
6,189
390
17,752
1,351
114,919
$
7,488
$
26,391
$
148,798
3,239
$
2,190
$
1,066
$
6,495
84,812
6,187
473
8,979
612
22
15,097
108,888
1,482
370
8,281
865
$
94,711
$
11,803
$
18,015
$
124,529
NextGen Division software license revenue increased 18.5% in the year ended March 31, 2012 versus the same period last year.
The Division’s software revenue accounted for 81.0% of divisional system sales revenue during the year ended March 31, 2012
compared to 77.9% during the same period a year ago. Software license revenue continues to be an area of primary emphasis for
the NextGen Division.
Hospital Solutions Division software license revenue increased 70.9% in the year ended March 31, 2012 versus the same period
last year. The Division’s software revenue accounted for 59.6% of divisional system sales revenue during the year ended March
31, 2012 compared to 74.7% during the same period a year ago.
During the year ended March 31, 2012, 3.9% of the NextGen Division’s system sales revenue was represented by hardware and
third-party software compared to 8.2% during the same period a year ago. The number of clients who purchase hardware and third-
party software and the dollar amount of hardware and third-party software revenue fluctuates each period depending on the needs
of clients. The inclusion of hardware and third-party software in the NextGen Division’s sales arrangements is typically at the request
of our clients.
Implementation and training revenue related to system sales at the NextGen Division increased 23.9% in the year ended March
31, 2012 compared to the same prior year period. Implementation and training revenue related to system sales at the Hospital
Solutions Division increased 317.6%, in the year ended March 31, 2012 as compared to the same prior year period. The amount
of implementation and training services revenue is dependent on several factors, including timing of client implementations, the
availability of qualified staff and the mix of services being rendered. The number of implementation and training staff increased
during the year ended March 31, 2012 versus the same prior year period in order to accommodate the increased amount of
implementation services sold in conjunction with increased software sales. In order to achieve growth in this area, additional staffing
increases and additional training facilities are anticipated, though actual future increases in revenue and staff will depend upon the
availability of qualified staff, business mix and conditions and our ability to retain current staff members.
For the RCM Services Division, total system sales increased $0.5 million, or 56.2%, to $1.4 million in the year ended March 31,
2012 as compared to the same prior year period. Systems sales revenue within the RCM Services Division is composed of sales
to existing RCM clients only and can fluctuate given the size of the current client base of the RCM Services Division.
Maintenance, EDI, RCM and Other Services. For the year ended March 31, 2012, our company-wide revenue from maintenance,
EDI, RCM and other services grew 22.8% to $281.0 million from $228.8 million in the same prior year period. The increase is
primarily due to an increase in maintenance, EDI and other services revenue from the NextGen and Hospital Solutions Divisions.
Total NextGen Division maintenance revenue for the year ended March 31, 2012 grew 24.1% to $116.5 million from $93.9 million
for the same prior year period while NextGen Division EDI revenue grew 22.4% to $44.2 million compared to $36.1 million in the
same prior year period. Other services revenue for the NextGen Division, which consists primarily of third-party annual software
license renewals, follow-on training hours, consulting services and hosting services, increased 47.1% to $40.6 million in the year
ended March 31, 2012 from $27.6 million in the same prior year period. Other services revenue benefited from a strong increase
in consulting revenue and follow-on training services revenue to existing NextGen Division customers.
42
The following table details maintenance, EDI, RCM and other services revenue by category on a consolidated and divisional basis
for the years ended March 31, 2012 and 2011 (in thousands):
Fiscal Year Ended March 31, 2012
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2011
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Maintenance
EDI
RCM
Other
Total
$
7,639
$
5,045
$
— $
1,281
$
13,965
$
$
116,544
44,214
14,553
96
—
—
—
—
45,572
40,645
201,403
2,158
3,290
16,711
48,958
138,832
$
49,259
$
45,572
$
47,374
$ 281,037
7,329
$
4,891
$
— $
1,251
$
13,471
93,890
36,131
8,642
158
—
—
—
—
45,065
27,637
157,658
975
2,865
9,617
48,088
$
110,019
$
41,022
$
45,065
$
32,728
$ 228,834
Maintenance revenue for the NextGen Division increased by $22.7 million for the year ended March 31, 2012 as compared to the
same prior year period. The growth in maintenance revenue is primarily a result of increases related to net additional licenses from
new clients and existing clients as well as a price increase that became effective during the quarter ended September 30, 2011.
The NextGen Division’s EDI revenue growth has come from new clients and from further penetration of the division’s existing client
base while the growth in RCM revenue has come from new clients that have been acquired from cross selling opportunities with
the NextGen Division client base. We intend to continue to promote maintenance, EDI and RCM services to both new and existing
clients. Growth in other services revenue is primarily due to increases in third-party annual software licenses, follow on training
services, consulting services and hosting services revenue.
Cost of Revenue. Cost of revenue for the year ended March 31, 2012 increased 18.6% to $151.2 million from $127.5 million in
the same prior year period and the cost of revenue as a percentage of revenue decreased to 35.2% from 36.1% primarily due to
a lower amount of hardware included in systems sales as compared to the same prior year period as well as strong software sales
achieved in the current year period.
43
The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31, 2012
and 2011 (in thousands):
QSI Dental Division
Revenue
Cost of revenue
Gross profit
NextGen Division
Revenue
Cost of revenue
Gross profit
Hospital Solutions Division
Revenue
Cost of revenue
Gross profit
RCM Services Division
Revenue
Cost of revenue
Gross profit
Unallocated cost of revenue (1)
Consolidated
Revenue
Cost of revenue
Gross profit
Fiscal Year Ended March 31,
2012
%
2011
%
$
19,596
100.0% $
19,966
100.0%
9,097
46.4%
9,034
$
10,499
53.6% $
10,932
45.2%
54.8%
$ 325,467
100.0% $ 266,546
100.0%
93,723
28.8%
78,496
$ 231,744
71.2% $ 188,050
29.4%
70.6%
$
34,463
100.0% $
17,898
100.0%
10,540
30.6%
4,671
$
23,923
69.4% $
13,227
26.1%
73.9%
$
50,309
100.0% $
48,953
100.0%
35,559
14,750
2,303
$
$
70.7%
34,896
29.3% $
14,057
N/A $
385
71.3%
28.7%
N/A
$ 429,835
100.0% $ 353,363
100.0%
151,223
35.2%
127,482
$ 278,612
64.8% $ 225,881
36.1%
63.9%
____________________
(1)
Relates to the amortization of acquired software technology intangible assets
Gross profit margins at the QSI Dental Division for the year ended March 31, 2012 decreased to 53.6% from 54.8% for the same
prior year period primarily as a result of lower software license revenue included in total revenue. Gross profit margins at the NextGen
Division for year ended March 31, 2012 increased to 71.2% compared to 70.6% for the same prior year period due to strong software
sales and an increase in maintenance revenue, which yields higher margins than other services, along with improvements in EDI
margins. Gross margin in the Hospital Solutions Division decreased to 69.4% for the year ended March 31, 2012 as compared to
73.9% for the same prior year period due to growth in implementation and training revenue which carries lower profit margins
compared to software. Gross margin in the RCM Services Division increased to 29.3% for the year ended March 31, 2012 as
compared to 28.7% for the same prior year period due to growth in higher margin software revenue.
44
The following table details the individual components of cost of revenue and gross profit as a percentage of total revenue on a
consolidated and divisional basis for the years ended March 31, 2012 and 2011:
Fiscal Year Ended March 31, 2012
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2011
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Hardware,
Third
Party
Software
Payroll
and
Related
Benefits
EDI
Other
Total Cost
of
Revenue
Gross
Profit
7.1%
1.3%
3.2%
—%
1.6%
8.7%
2.9%
5.4%
—%
3.0%
23.2%
12.4%
17.0%
46.1%
17.2%
17.7%
11.8%
16.7%
43.8%
16.8%
7.9%
7.8%
—%
2.2%
6.5%
11.6%
8.1%
—%
0.5%
6.9%
8.2%
7.3%
10.4%
22.4%
9.9%
7.2%
6.6%
4.0%
27.0%
9.4%
46.4%
28.8%
30.6%
70.7%
35.2%
45.2%
29.4%
26.1%
71.3%
36.1%
53.6%
71.2%
69.4%
29.3%
64.8%
54.8%
70.6%
73.9%
28.7%
63.9%
During the year ended March 31, 2012, hardware and third-party software constituted a lower portion of cost of revenue compared
to the same prior year period in the NextGen Division. The number of clients who purchase hardware and third-party software and
the dollar amount of hardware and third-party software purchased fluctuates each quarter depending on the needs of our clients.
Our payroll and benefits expense associated with delivering our products and services increased to 17.2% of consolidated revenue
in the year ended March 31, 2012 compared to 16.8% during the same period last year. The absolute level of consolidated payroll
and benefit expenses grew from $59.3 million in the year ended March 31, 2011 to $73.9 million in the year ended March 31, 2012,
an increase of 24.5%, or approximately $14.6 million. Of the $14.6 million increase, approximately $1.8 million of the increase is
related to the RCM Services Division as RCM is a service business, which inherently has higher percentage of payroll costs as a
percentage of revenue. Increases of $8.9 million in the NextGen Division, $2.9 million for the Hospital Solutions Division and $1.0
million in the QSI Dental Division for the year ended March 31, 2012 are primarily due to headcount additions and increased payroll
and benefits expense associated with delivering products and services. The amount of share-based compensation expense included
in cost of revenue was $0.3 million for both the years ended March 31, 2012 and 2011.
Other expense, which primarily consists of third-party annual license, hosting costs and outsourcing costs, increased to 9.9% of
total revenue during the year ended March 31, 2012 as compared to 9.4% for the same period a year ago.
As a result of the foregoing events and activities, our gross profit percentage increased to 64.8% for the year ended March 31,
2012 versus 63.9% for the same prior year period.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 2012
increased 19.0% to $128.8 million as compared to $108.3 million for the same prior year period. The increase in these expenses
resulted primarily from:
•
•
•
•
$12.6 million increase in salaries and related benefit expenses primarily as a result of headcount additions and
acquisitions;
$2.9 million increase in sales commissions primarily related to the NextGen Division;
$1.9 million increase in bad debt expense; and
$3.1 million net increase in other selling and administrative expenses.
Share-based compensation expense was approximately $2.9 million and $3.3 million for the year ended March 31, 2012 and 2011,
respectively, and is included in the aforementioned amounts. Selling, general and administrative expenses as a percentage of
revenue decreased from 30.7% in the year ended March 31, 2011 to 30.0% in the year ended March 31, 2012.
Research and Development Costs. Research and development costs for the years ended March 31, 2012 and 2011 were $31.4
million and $21.8 million, respectively. The increases in research and development expenses were due in part to increased investment
in the NextGen and Hospital Solutions Division product lines. We have also invested significantly in enhancements to our specialty
template development, preparation for ICD10 requirements, new products including NextGen Mobile, NextGen NextPen, NextGen
Community Connectivity consisting of NextGen Health Information Exchange (“NextGen HIE,” formerly Community Health Solution),
NextGen Patient Portal (“NextMD.com”), and NextGen Health Quality Measures (“NextGen HQM”), and other enhancements to
our existing products. Additions to capitalized software costs offset increases in research and development costs. For the years
ended March 31, 2012 and 2011, our additions to capitalized software were at $13.1 million and $10.7 million, respectively, as we
45
continue to enhance our software to meet the Meaningful Use definitions under the ARRA as well as further integrate both ambulatory
and inpatient products. Research and development costs as a percentage of revenue increased to 7.3% in the year ended March
31, 2012 from 6.2% for the same prior year period. Research and development expenses are expected to continue at or above
current dollar levels as we develop a new integrated inpatient and outpatient, web-based software platform. Share-based
compensation expense included in research and development costs was $0.2 million for both the years ended March 31, 2012 and
2011.
Amortization of Acquired Intangible Assets. Amortization included in operating expense related to acquired intangible assets
for the years ended March 31, 2012 and 2011 was $2.2 million and $1.7 million, respectively.
Interest and Other Income. Total interest and other income for the year ended March 31, 2012 was $0.1 million as compared to
$0.3 million for the year ended March 31, 2011. Interest and other income consist primarily of dividends and interest earned on our
investments along with foreign currency gains or losses for the period.
Provision for Income Taxes. The provision for income taxes for the years ended March 31, 2012 and 2011 were $40.6 million
and $32.8 million, respectively. The effective tax rates were 35.0% and 34.8% for the years ended March 31, 2012 and 2011,
respectively. The effective rate for the year ended March 31, 2012 increased slightly as compared to the prior year period primarily
due to the qualified production activities deduction and research and development credits and fluctuations in the state effective tax
rate.
During both the year ended March 31, 2012 and 2011, we recognized research and development tax credits of approximately $1.0
million. The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code
(“IRC”) of approximately $10.0 million and $8.1 million during the years ended March 31, 2012 and 2011, respectively. Research
and development credits and the qualified production activities income deduction calculated by us involve certain assumptions and
judgments regarding qualification of expenses under the relevant tax code provision.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for the years ended March 31, 2013, 2012 and 2011 (in
thousands):
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 (1)
Fiscal Year Ended March 31,
2012
2011
2013
$
$
$
$
105,999
$
134,444
(28,445) $
42,724
68,041
$
$
122
17,827
75,657
78,105
122
$
$
$
$
116,617
32,006
61,606
70,317
131
___________________________
(1) Days sales outstanding is equal to accounts receivable divided by average daily revenue
Cash Flows from Operating Activities
Cash provided by operations has historically been our primary source of cash and has primarily been driven by our net income plus
adjustments to add back non-cash expenses, such as depreciation, amortization of intangibles and capitalized software costs,
provisions for bad debts and inventory obsolescence, share-based compensation, changes in fair value of contingent consideration
and deferred taxes.
The following table summarizes our consolidated statements of cash flows for the years ended March 31, 2013, 2012 and 2011 (in
thousands):
Net income
Non-cash expenses
Change in deferred revenue
Change in accounts receivable
Change in other assets and liabilities
Net cash provided by operating activities
Fiscal Year Ended March 31,
2012
2011
2013
$
42,724
$
75,657
$
42,824
(17,993)
(7,988)
8,474
14,932
5,993
(10,389)
(8,088)
$
68,041
$
78,105
$
61,606
17,243
13,211
(36,094)
14,351
70,317
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, 2013, 2012 and 2011.
46
Non-Cash Expenses. Non-cash expenses include depreciation, amortization of intangibles and amortization of capitalized software
costs, provisions for bad debts and inventory obsolescence, share-based compensation, changes in fair value of contingent
consideration, impairment of goodwill and deferred taxes. Total non-cash expenses were $42.8 million, $14.9 million and $17.2
million for the years ended March 31, 2013, 2012 and 2011, respectively.
The $27.9 million increase in non-cash expenses for the year ended March 31, 2013 as compared to the same prior year period
is primarily due to $17.4 million related to the impairment of goodwill, as well as increases of approximately $1.7 million in depreciation,
$1.4 million of amortization of capitalized software costs, $1.2 million of bad debt expense, $3.1 million of amortization of other
intangibles, a $0.1 million increase in the provision for inventory obsolescence, $4.3 million of excess tax benefit from share-based
compensation and $1.3 million in fair value adjustments for contingent consideration, partially offset by a $1.0 million decrease in
share-based compensation and a $1.5 million increase in deferred income tax benefit.
The $2.3 million decrease in non-cash expenses for the year ended March 31, 2012 as compared to the prior year period is primarily
related to increases of approximately $0.9 million in depreciation, $1.2 million of amortization of capitalized software costs,
$1.2 million of amortization of other intangibles, $1.9 million in bad debt expense and a $0.1 million loss on disposal of fixed assets,
offset by a $0.4 million decrease in share-based compensation, a $0.8 million decrease in fair value adjustments for contingent
consideration, a $2.6 million increase in excess tax benefit from share-based compensation and a $3.8 million increase in deferred
income tax benefit.
Deferred Revenue. Cash from operations was negatively impacted by a decrease in deferred revenues of approximately $18.0
million for the year ended March 31, 2013 versus an increase of $6.0 million and $13.2 million in the years ended March 31, 2012
and 2011, respectively. The decline in deferred revenue was primarily due to lower deferred implementation services, which was
related to a decline in system sales during the period. Deferred implementation revenue was also impacted by a change in the
Company's standard payment terms for implementation services. During the quarter ended March 31, 2012, the Company modified
its standard payment terms for implementation services sold in conjunction with software to separate license fee payments from
services and to bill for services as such services are provided. This change results in implementation service fees not being recorded
as both accounts receivable and deferred revenue upon the execution of a contract. In future periods, deferred implementation and
training revenue is not expected to be as significant due to this change in standard payment terms.
Accounts Receivable. Accounts receivable grew by approximately $8.0 million, $10.4 million and $36.1 million for the years ended
March 31, 2013, 2012 and 2011, respectively. The increase in accounts receivable is primarily due to the following factors:
•
•
Consolidated revenue grew 7.1%, 21.6% and 21.1% for the years ended March 31, 2013, 2012 and 2011,
respectively;
Accounts receivable growth was partially offset by a smaller amount of services sold in advance of being rendered.
This is a result of the Company modifying its standard payment terms for implementation services sold in conjunction
with software to separate license fee payments from services and instead billing for services as services are incurred.
This change results in implementation service fees not being recorded as both accounts receivable and deferred
revenue upon the execution of a contract;
Provided turnover of accounts receivable, deferred revenue and profitability remain consistent with the 2013 fiscal year, we anticipate
being able to continue generating cash from operations during fiscal year 2014 primarily from our net income.
Other Assets and Liabilities. Cash from operations in the year ended March 31, 2013 was positively impacted by a net $8.5 million
increase in other assets and liabilities compared to a net decrease of $8.1 million for the year ended March 31, 2012. For the year
ended March 31, 2013, the $8.5 million change in other assets and liabilities is primarily the result of an increase in accounts payable
of $6.2 million, an increase of $4.7 million in other current and non-current liabilities primarily due to contingent consideration and
other acquisition related liabilities in the current period, partially offset by a $2.4 million net decrease in all other assets and liabilities.
Cash from operations in the year ended March 31, 2012 was negatively impacted by a net $8.1 million decrease in other assets
and liabilities compared to a net increase of $14.4 million for the year ended March 31, 2011. For the year ended March 31, 2012,
the $8.1 million change in other assets and liabilities is primarily the result of an decrease in accounts payable of $2.2 million, an
increase in income tax receivable of $2.6 million, a decrease in other current assets of $3.0 million, and a net decrease of $0.3
million for all other assets and liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities for the years ended March 31, 2013, 2012 and 2011 was $53.6 million, $34.9 million and $10.6
million, respectively. During the year ended March 31, 2013 cash flows from investing consists of net cash paid for the acquisitions
of Matrix and Poseidon of $5.1 million and $2.0 million, respectively, in addition to increases of $29.5 million and $10.0 million,
respectively, for capitalized software and equipment and improvements and $7.1 million for the purchase of marketable securities.
During the year ended March 31, 2012, cash flows from investing primarily consists of net cash paid for the acquisitions of IntraNexus,
CQI and ViaTrack of $3.3 million, $2.5 million and $5.7 million, respectively, in addition to increases of $13.1 million and $10.3
million, respectively for capitalized software and equipment and improvements.
During the year ended March 31, 2011, $17.2 million of cash was used for net additions of equipment and improvements and
capitalized software and $1.1 million for the purchase of marketable securities, offset by proceeds of $7.7 million received from the
sale of our ARS investments.
47
Cash Flows from Financing Activities
Net cash used in financing activities for the years ended March 31, 2013, 2012 and 2011 was $42.9 million, $25.4 million and $27.7
million, respectively. During the year ended March 31, 2013, we received proceeds of $0.9 million from the exercise of stock options,
paid $41.5 million in dividends to shareholders, and paid $2.4 million in contingent consideration related to acquisitions compared
to proceeds of $12.8 million from the exercise of stock options, payment of $41.0 million in dividends to shareholders and payment
of $1.3 million in contingent consideration during the year ended March 31, 2012 and proceeds of $5.7 million from the exercise of
stock options, payment of $34.7 million in dividends to shareholders and payment of $0.3 million in contingent consideration during
the year ended March 31, 2011.
We recorded a reduction in our tax benefit from share-based compensation of $4.1 million and $1.5 million during the years ended
March 31, 2012 and 2011, respectively, related to tax deductions received from stock option exercises. The benefit was recorded
as additional paid in capital. The tax benefit from share-based compensation was not significant for the year ended March 31, 2013.
Cash and Cash Equivalents and Marketable Securities
At March 31, 2013, we had cash and cash equivalents of $106.0 million. We may use a portion of these funds towards future
acquisitions although the timing and amount of funds to be used has not been determined. We intend to expend some of these
funds for the development of products complementary to our existing product line as well as new versions of certain products.
These developments are intended to take advantage of more powerful technologies and to increase the integration of our products.
Such expenditures will be funded from our cash on hand and cash flows from operations.
In January 2007, our Board of Directors adopted a policy whereby we intend to pay a regular quarterly dividend on our outstanding
common stock, subject to further review and approval and the establishment of record and distribution dates by our Board of
Directors prior to the declaration of each such quarterly dividend. We anticipate that future quarterly dividends, if and when declared
by our Board of Directors pursuant to this policy, would likely be distributable on or about the fifth day of each of the months of
October, January, April and July.
On May 22, 2013, the Board of Directors approved a quarterly cash dividend of $0.175 per share on our outstanding shares of
common stock, payable to shareholders of record as of June 14, 2013 with an expected distribution date on or about July 5, 2013.
Our Board of Directors declared the following dividends during the periods presented (stock split adjusted):
Declaration Date
May 24, 2012
July 25, 2012
October 25, 2012
January 23, 2013
Fiscal year 2013
May 25, 2011
July 27, 2011
October 26, 2011
January 25, 2012
Fiscal year 2012
May 26, 2010
July 28, 2010
October 25, 2010
January 26, 2011
Fiscal year 2011
Record Date
June 15, 2012
September 14, 2012
December 14, 2012
March 15, 2013
June 17, 2011
September 19, 2011
December 20, 2011
March 20, 2012
June 17, 2010
September 17, 2010
December 17, 2010
March 17, 2011
Payment Date
July 3, 2012
October 5, 2012
December 28, 2012
April 5, 2013
July 5, 2011
October 5, 2011
January 5, 2012
April 5, 2012
July 6, 2010
October 5, 2010
January 5, 2011
April 5, 2011
Per Share
Dividend
$
$
$
$
$
$
0.175
0.175
0.175
0.175
0.700
0.175
0.175
0.175
0.175
0.700
0.150
0.150
0.150
0.175
0.625
Management believes that its cash and cash equivalents on hand at March 31, 2013, together with its marketable securities and
cash flows from operations, if any, will be sufficient to meet its working capital and capital expenditure requirements as well as any
dividends to be paid in the ordinary course of business for fiscal year 2014.
48
Contractual Obligations
The following table summarizes our significant contractual obligations at March 31, 2013 and the effect that such obligations are
expected to have on our liquidity and cash in future periods:
Contractual Obligations
Operating lease obligations
Contingent consideration and other acquisition related
liabilities
Total
New Accounting Pronouncements
For the year ended March 31,
Total
2014
2015
2016
2017
2018 and
beyond
$
32,848 $ 8,152 $ 7,043 $ 6,519 $ 4,595 $
6,539
3,050
1,778
646
313
313
—
$
35,898 $ 9,930 $ 7,689 $ 6,832 $ 4,908 $
6,539
Refer to Note 2, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included elsewhere
in this Report for a discussion of new accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We currently maintain our cash in very liquid short term assets including tax exempt and taxable money market funds and short-
term U.S. Treasury securities with maturities of 90 days or less at the time of purchase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See our consolidated financial statements identified in the Index to Financial Statements appearing under “Item 15. Exhibits and
Financial Statement Schedules” of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively)
have concluded, based on their evaluation as of March 31, 2013, that the design and operation of our “disclosure controls and
procedures” (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended) are effective to provide
reasonable assurance that information required to be disclosed by us in the reports filed or submitted by us under the Security
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the
Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports we file or submit
under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision
and with the participation of our management, including our principal executive officer and principal financial officer, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles.
Our internal control over financial reporting is supported by written policies and procedures, that:
(1)
(2)
(3)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being
made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes
in conditions or that the degree of compliance with the policies or procedures may deteriorate.
49
Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of
March 31, 2013 in making our assessment of internal control over financial reporting, management used the criteria set forth in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of March 31,
2013.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2013 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report contained in Item 15 of
Part IV of this Report, "Exhibits and Financial Statement Schedules."
Changes in Internal Control over Financial Reporting
On April 1, 2012, we implemented a corporate-wide Enterprise Resource Planning ("ERP") system. Our new ERP system will
standardize and automate business processes, improve operational and financial performance, and enhance internal controls. The
implementation of our new ERP system has resulted in changes to our business processes and internal controls over financial
reporting. The key controls surrounding the ERP system are being identified and are subject to our Sarbanes-Oxley testing.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is incorporated herein by reference from our definitive proxy statement for our 2013 Annual
Shareholders’ Meeting to be filed with the SEC.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from our definitive proxy statement for our 2013 Annual
Shareholders’ Meeting to be filed with the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference from our definitive proxy statement for our 2013 Annual
Shareholders’ Meeting to be filed with the SEC.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated herein by reference from our definitive proxy statement for our 2013 Annual
Shareholders’ Meeting to be filed with the SEC.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference from our definitive proxy statement for our 2013 Annual
Shareholders’ Meeting to be filed with the SEC.
50
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1) Index to Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2013 and 2012
Consolidated Statements of Comprehensive Income — Years Ended March 31, 2013, 2012 and 2011
Consolidated Statements of Shareholders’ Equity — Years Ended March 31, 2013, 2012 and 2011
Consolidated Statements of Cash Flows — Years Ended March 31, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
(2) The following supplementary financial statement schedule of Quality Systems, Inc., required to be
included in Item 15(a)(2) on Form 10-K is filed as part of this Report.
Schedule II — Valuation and Qualifying Accounts
Schedules other than that listed above have been omitted since they are either not required, not
applicable, or because the information required is included in the Consolidated Financial Statements or
the notes thereto.
(3) The exhibits listed in the Index to Exhibits hereof are attached hereto or incorporated herein by
reference and filed as a part of this Report.
Page
55
56
57
58
59
61
82
51
Exhibit
Number
Description
INDEX TO EXHIBITS
3.1
3.2
3.3
3.4
3.5
3.6
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
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.
Certificate of Amendment to Articles of Incorporation of Quality Systems, Inc. filed with the Secretary of State of
California effective October 6, 2011 is hereby incorporated by reference to Exhibit 3.1 of the registrant's Current
Report on Form 8-K filed October 6, 2011.
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.
Form of Incentive Stock Option Agreement for Amended and Restated 1998 Stock Option Plan is hereby
incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004.
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.
Second Amended and Restated 2005 Stock Option and Incentive Plan is incorporated by reference to Appendix
to the registrant’s Definitive Proxy Statement on Schedule 14A filed on July 1, 2011.
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.
Employment Agreement with Steven Plochocki is incorporated by reference to Exhibit 10.1 to the registrant's
Current Report on Form 8-K filed August 12, 2008.
10.8**
2009 Quality Systems, Inc. Amended and Restated Deferred Compensation Plan.
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
Form of Outside Directors Amended and Restated Restricted Stock Agreement is incorporated by reference to
Exhibit 10.2 to the registrant's Current Report on Form 8-K filed February 2, 2010.
Form of Outside Director's Restricted Stock Unit Agreement is incorporated by reference to Exhibit 10.1 to the
registrant's Current Report on Form 8-K filed August 15, 2011.
Description of 2013 Director Compensation Program for Fiscal Year Ended March 31, 2013 is incorporated by
reference to Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed May 30, 2012.
Description of 2013 Executive Compensation Program for Fiscal Year Ended March 31, 2013 is incorporated
by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed May 30, 2012.
Employment Arrangement dated September 19, 2012 between Quality Systems, Inc., and Daniel Morefield, is
incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed on September 25,
2012.
Form of Indemnification Agreement is incorporated by reference to Exhibit 10.1 to the registrant's Current Report
on Form 8-K filed on January 28, 2013.
Description of 2014 Executive Compensation Program for Fiscal Year Ended March 31, 2014 is incorporated
by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K filed May 28, 2013.
52
10.16*
10.17*
Form of Executive Officer Restricted Stock Agreement is incorporated by reference to Exhibit 10.2 to the
registrant's Current Report on Form 8-K filed May 28, 2013.
Description of 2014 Director Compensation Program for Fiscal Year Ended March 31, 2014 is incorporated by
reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K filed May 28, 2013.
21**
List of subsidiaries.
23.1**
31.1**
31.2**
32.1**
Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP.
Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934,
as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS***
XBRL Instance
101.SCH***
XBRL Taxonomy Extension Schema
101.CAL***
XBRL Taxonomy Extension Calculation
101.LAB***
XBRL Taxonomy Extension Label
101.PRE***
XBRL Taxonomy Extension Presentation
____________________
*
This exhibit is a management contract or a compensatory plan or arrangement.
**
***
Filed herewith.
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of section 11
or 12 of the Securities and Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the
Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these section.
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
Chief Executive Officer (Principal Executive Officer)
By: /s/ Paul A. Holt
Paul A. Holt
Chief Financial Officer (Principal Accounting Officer)
Date: May 30, 2013
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below hereby constitutes
and appoints Steven T. Plochocki and Paul A. Holt, each of them acting individually, as his attorney-in-fact, each with the full power
of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming our signatures as they may be signed by our said attorney-in-fact and any and all amendments to
this Annual Report on Form 10-K.
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed by the following persons on
our behalf in the capacities and on the dates indicated.
Signature
/s/ Sheldon Razin
Sheldon Razin
Title
Chairman of the Board and Director
Date
May 30, 2013
/s/ Steven T. Plochocki
Chief Executive Officer (Principal Executive Officer) and Director
May 30, 2013
Chief Financial Officer (Principal Accounting Officer) and
Executive Vice President
May 30, 2013
Steven T. Plochocki
/s/ Paul A. Holt
Paul A. Holt
/s/ Craig Barbarosh
Craig Barbarosh
/s/ Mark Davis
Mark Davis
/s/ George Bristol
George Bristol
Michael Aghajanian
/s/ Russell Pflueger
Russell Pflueger
Director
Director
Director
Director
Director
/s/ Lance Rosenzweig
Director
Lance Rosenzweig
54
May 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
May 30, 2013
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Quality Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income,
statements of shareholders' equity and statements of cash flow present fairly, in all material respects, the financial position of Quality
Systems, Inc. and its subsidiaries at March 31, 2013 and March 31, 2012, and the results of their operations and their cash flows
for each of the three years in the period ended March 31, 2013 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15
(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2013, based on criteria established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these financial statements, the financial statement schedule, and on the
Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Orange County, California
May 30, 2013
55
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash (Note 1)
Marketable securities
Accounts receivable, net (Note 9)
Inventories
Income taxes receivable
Deferred income taxes, net
Other current assets
Total current assets
Equipment and improvements, net
Capitalized software costs, net
Intangibles, net
Goodwill
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Deferred revenue
Accrued compensation and related benefits
Income taxes payable
Dividends payable
Other current liabilities
Total current liabilities
Deferred revenue, net of current
Deferred income taxes, net
Deferred compensation
Other noncurrent liabilities
Total liabilities
Commitments and contingencies (Note 13)
Shareholders’ equity:
Common stock
$0.01 par value; authorized 100,000 shares; issued and outstanding 59,543 and 59,180
shares at March 31, 2013 and 2012, respectively
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity
March 31,
2013
March 31,
2012
$
105,999
$
134,444
5,488
12,012
148,257
710
—
12,140
12,720
297,326
21,887
39,781
27,550
45,761
10,750
1,962
4,987
145,756
1,242
2,628
10,127
11,563
312,709
17,841
19,994
23,259
60,776
5,773
$
$
443,055
$
440,352
11,501
$
65,207
11,915
1,480
10,418
26,508
127,029
1,219
—
3,809
3,949
4,532
83,108
11,870
—
10,354
19,568
129,432
1,293
5,351
3,497
5,602
136,006
145,175
595
592
179,743
169,033
(11)
126,722
307,049
(45)
125,597
295,177
Total liabilities and shareholders’ equity
$
443,055
$
440,352
The accompanying notes are an integral part of these consolidated financial statements.
56
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
Revenues:
Software and hardware
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 and hardware
Implementation and training services
Total cost of system sales
Maintenance
Electronic data interchange services
Revenue cycle management and related services
Other services
Total cost of maintenance, EDI, RCM and other services
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development costs
Amortization of acquired intangible assets
Impairment of goodwill
Total operating expenses
Income from operations
Interest income (expense), net
Other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Other comprehensive income (loss):
Foreign currency translation (net of $0 tax)
Unrealized loss on AFS securities (net of $0 tax)
Comprehensive income
Net income per share:
Basic
Diluted
Weighted-average shares outstanding:
Basic
Diluted
Dividends declared per common share
Fiscal Year Ended March 31,
2012
2011
2013
$
88,572
$
122,407
$
106,514
35,008
123,580
156,771
59,709
59,219
60,950
336,649
460,229
21,750
30,896
52,646
20,316
38,350
43,324
35,016
137,006
189,652
270,577
148,353
30,865
4,859
17,400
201,477
69,100
(107)
(79)
68,914
26,190
26,391
148,798
138,832
49,259
45,572
47,374
281,037
429,835
18,399
21,298
39,697
17,104
32,422
34,295
27,705
111,526
151,223
278,612
128,846
31,369
2,198
—
162,413
116,199
247
(139)
116,307
40,650
42,724
$
75,657
$
34
—
(3)
(42)
18,015
124,529
110,019
41,022
45,065
32,728
228,834
353,363
19,779
15,010
34,789
12,948
27,711
33,815
18,219
92,693
127,482
225,881
108,310
21,797
1,682
—
131,789
94,092
263
61
94,416
32,810
61,606
—
—
42,758
$
75,612
$
61,606
0.72
0.72
$
$
1.29
1.28
$
$
59,392
59,462
58,729
59,049
0.700
$
0.700
$
1.06
1.06
57,894
58,236
0.625
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
57
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
57,758
$ 578
$ 121,982
$ 65,729
$
— $
188,289
Balance, March 31, 2011
58,068
581
132,968
Balance, March 31, 2010
Exercise of stock options
Tax benefit resulting from exercise of stock options
Stock-based compensation
Dividends declared
Net income
310
—
—
—
—
3
—
—
—
—
Exercise of stock options and issuance of restricted
stock
Common stock issuance for earnout settlement
Common stock issuance for acquisitions
Tax benefit resulting from exercise of stock options
Stock-based compensation
Dividends declared
Components of other comprehensive income (loss):
Unrealized loss on AFS securities
Translation adjustments
Net income
735
286
91
—
—
—
—
—
—
7
3
1
—
—
—
—
—
—
5,714
1,524
3,748
—
—
—
— (36,214)
—
12,783
11,885
3,931
4,145
3,321
61,606
91,121
—
—
—
—
—
— (41,181)
—
—
—
—
—
75,657
Balance, March 31, 2012
59,180
592
169,033
125,597
Exercise of stock options and issuance of restricted
stock
Common stock issuance for earnout settlement
Common stock issuance for acquisitions
Tax benefit resulting from exercise of stock options
Stock-based compensation
Dividends declared
Components of other comprehensive income (loss):
Translation adjustments
Net income
83
165
115
—
—
—
—
—
1
1
1
—
—
—
—
—
947
2,999
4,594
(157)
2,327
—
—
—
—
—
— (41,599)
—
—
—
42,724
—
—
—
—
—
—
—
—
—
—
—
—
(42)
(3)
—
(45)
—
—
—
—
—
—
34
—
5,717
1,524
3,748
(36,214)
61,606
224,670
12,790
11,888
3,932
4,145
3,321
(41,181)
(42)
(3)
75,657
295,177
948
3,000
4,595
(157)
2,327
(41,599)
34
42,724
Balance, March 31, 2013
59,543
$ 595
$ 179,743
$126,722
$
(11) $
307,049
The accompanying notes are an integral part of these consolidated financial statements.
58
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended March 31,
2012
2011
2013
$
42,724
$
75,657
$
61,606
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation
Amortization of capitalized software costs
Amortization of other intangibles
Provision for bad debts
Provision for inventory obsolescence
Share-based compensation
Deferred income tax benefit
Excess tax benefit from share-based compensation
Change in fair value of contingent consideration
Impairment of goodwill
Loss (gain) 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 benefits
Income taxes payable
Other current liabilities
Deferred compensation
Other noncurrent liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Additions to capitalized software costs
Additions to equipment and improvements
Proceeds from disposal of equipment and improvements
Proceeds from sale of marketable securities
Purchases of marketable securities
Cash acquired from purchase of ViaTrack
Purchase of ViaTrack
Cash acquired from purchase of CQI
Purchase of CQI
Purchase of IntraNexus
Purchase of Poseidon
Purchase of Matrix
Net cash used in investing activities
Cash flows from financing activities:
Excess tax benefit from share-based compensation
Proceeds from exercise of stock options
Dividends paid
Payment of contingent consideration related to acquisitions
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
6,928
9,668
7,559
6,885
193
2,327
(9,565)
157
1,272
17,400
—
(7,988)
339
2,628
(4,073)
(2,777)
6,223
(17,993)
45
1,082
9,079
312
(4,384)
68,041
(29,455)
(9,969)
—
—
(7,100)
—
—
—
—
—
(2,033)
(5,073)
(53,630)
5,195
8,254
4,501
5,715
43
3,321
(8,025)
(4,145)
—
—
73
(10,389)
(1,024)
(2,628)
(2,955)
(841)
(2,184)
5,993
1,623
615
(1,910)
1,009
207
78,105
(13,098)
(10,323)
11
—
—
10
(5,710)
222
(2,737)
(3,279)
—
—
(34,904)
4,304
7,091
3,255
3,780
27
3,748
(4,194)
(1,524)
789
—
(33)
(36,094)
1,052
2,953
(3,746)
(1,817)
3,344
13,211
1,296
5,054
12,560
605
(6,950)
70,317
(10,695)
(6,804)
336
7,700
(1,120)
—
—
—
—
—
—
—
(10,583)
1,524
5,717
(34,716)
(253)
(27,728)
32,006
84,611
116,617
84
948
(41,535)
(2,353)
(42,856)
(28,445)
134,444
105,999
$
4,145
12,789
(40,989)
(1,319)
(25,374)
17,827
116,617
134,444
$
$
59
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(In thousands)
Fiscal Year Ended March 31,
2012
2011
2013
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes, net of refunds
Non-cash investing activities:
Tenant improvement allowance received from landlord
Common stock issued at fair value for Opus earnout settlement
Common stock issued at fair value for ViaTrack earnout settlement
Effective May 1, 2012, the Company acquired Poseidon in a transaction
summarized as follows:
Fair value of assets acquired
Cash paid
Purchase price holdback
Liabilities assumed
Effective April 16, 2012, the Company acquired Matrix in a transaction
summarized as follows:
Fair value of assets acquired
Cash paid
Common stock issued at fair value
Purchase price holdback
Fair value of contingent consideration
Fair value of non-compete agreement (liability)
Liabilities assumed
Effective November 14, 2011, the Company acquired ViaTrack in a
transaction summarized as follows:
Fair value of assets acquired
Cash paid
Common stock issued at fair value
Purchase price holdback
Fair value of contingent consideration
Liabilities assumed
Effective July 26, 2011, the Company acquired CQI in a transaction
summarized as follows:
Fair value of assets acquired
Cash paid
Common stock issued at fair value
Purchase price holdback
Fair value of contingent consideration
Liabilities assumed
Effective April 29 2011, the Company acquired IntraNexus in a transaction
summarized as follows:
Fair value of assets acquired
Cash paid
Purchase price holdback
Fair value of contingent consideration
Liabilities assumed
$
$
$
$
$
$
$
$
$
$
$
$
$
$
31,656
$
50,605
$
29,044
965
$
— $
1,970
— $
11,888
$
3,000
$
— $
2,551
$
— $
(2,033)
(500)
—
—
18
$
— $
14,587
$
— $
(5,073)
(3,953)
(853)
(2,862)
(1,100)
—
—
—
—
—
746
$
— $
— $
11,048
$
—
—
—
—
(5,710)
(1,068)
(1,187)
(2,958)
— $
125
$
— $
11,417
$
—
—
—
—
(2,737)
(2,864)
(600)
(2,346)
— $
2,870
$
— $
4,524
$
—
—
—
(3,279)
(125)
(800)
— $
320
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
The accompanying notes are an integral part of these consolidated financial statements.
60
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 and 2012
(In thousands, except shares and per share data)
1. Organization of Business
Description of Business
Quality Systems, Inc. and its wholly-owned subsidiaries operate as four divisions (each, a "Division") which are comprised of: (i)
the QSI Dental Division, (ii) the NextGen Division, (iii) the Hospital Solutions Division (formerly Inpatient Solutions) and (iv) the RCM
Services Division (formerly Practice Solutions). In fiscal year 2011, we opened a captive entity in India called Quality Systems India
Healthcare Private Limited (“QSIH”). We primarily derive revenue by developing and marketing healthcare information systems
that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations
(“PHOs”) and management service organizations (“MSOs”), ambulatory care centers, community health centers and medical and
dental schools along with comprehensive systems implementation, maintenance and support and add on complementary services
such as revenue cycle management (“RCM”) and electronic data interchange (“EDI”). Our systems and services provide our clients
with the ability to redesign patient care and other workflow processes while improving productivity through the facilitation of managed
access to patient information. Utilizing our proprietary software in combination with third-party hardware and software solutions,
our products enable the integration of a variety of administrative and clinical information operations.
The Company was founded with an early focus on providing information systems to dental group practices. This focus area would
later become the QSI Dental Division. In the mid-1980’s, we capitalized on the increasing focus on medical cost containment and
further expanded our information processing systems to serve the ambulatory market. In the mid-1990’s, we made two acquisitions
that accelerated our penetration of the ambulatory market and formed the basis for the NextGen Division. More recently in the last
few years, we acquired several companies, which operate under the Hospital Solutions Division, as part of our strategy to expand
into the small and specialty hospital market. Today, we serve the dental, ambulatory, hospital and RCM services markets through
our QSI Dental Division, NextGen Division, Hospital Solutions Division and RCM Services Division.
The QSI Dental Division, co-located with the Corporate Headquarters in Irvine, California, currently focuses on developing, marketing
and supporting software suites sold to dental organizations located throughout the US.
The NextGen Division, with headquarters in Horsham, Pennsylvania and a significant location in Atlanta, Georgia, provides integrated
clinical, financial and connectivity solutions for ambulatory and dental provider organizations.
The Hospital Solutions Division, with its primary location in Austin, Texas, provides integrated clinical, financial and connectivity
solutions for rural and community hospitals.
The RCM Services 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 medical practices. This Division combines a web-delivered
SaaS model and the NextGen® PM software platform to execute its service offerings.
In January 2011, QSIH was formed in Bangalore, India to function as our India-based captive to offshore technology application
development and business processing services.
The Divisions have historically operated as stand-alone operations, with each Division maintaining its own distinct product lines,
product platforms, development, implementation and support teams and branding. However, there are a growing number of
customers who are simultaneously utilizing software or services from more than one of our Divisions. In an effort to encourage this
cross selling of our products and services between Divisions, we are in the process of further integrating our ambulatory and inpatient
products to provide a more robust and comprehensive platform to offer our customers. The Divisions also share the resources of
our “corporate office,” which includes a variety of accounting and other administrative functions.
Acquisitions
On April 15, 2012, we acquired Matrix Management Solutions, LLC ("Matrix"), a value-added reseller for NextGen Healthcare, that
provides RCM services, healthcare IT solutions and training, implementation and support centered on NextGen® technology, to its
clients nationwide. The acquisition will enable our RCM Services Division to expand its footprint among private and hospital-based
physicians and groups by leveraging Matrix's RCM expertise. On May 1, 2012, we acquired The Poseidon Group ("Poseidon"), a
provider of emergency department software. Poseidon will operate under our Hospital Solutions Division.
Stock Split
On July 27, 2011, the Board of Directors approved a two-for-one split of our common stock and a proportional increase in the
number of our common shares authorized from 50 million to 100 million. Each shareholder of record at the close of business on
October 6, 2011 received one additional share for every outstanding share held on the record date. The additional shares were
distributed October 26, 2011 and trading began on a split-adjusted basis on October 27, 2011. All share and per share amounts in
this Report have been restated for all periods presented to reflect the two-for-one split of our common stock.
61
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, LLC (“NextGen”), NextGen RCM Services, LLC,
Opus Healthcare Solutions, LLC (“Opus”), ViaTrack Systems, LLC (“ViaTrack”), Matrix Management Solutions, LLC ("Matrix"), QSI
Management, LLC and Quality Systems India Healthcare Private Limited (“QSIH”) (collectively, the “Company”). All intercompany
accounts and transactions have been eliminated.
Business Segments. The Company has prepared operating segment information based on the manner in which management
disaggregates the Company’s operations for making internal operating decisions. See Note 14.
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 period amounts have been reclassified to conform with fiscal year 2013 presentation.
References to amounts in the consolidated financial statement sections are in thousands, except shares and per share data, unless
otherwise specified.
Revenue Recognition. The Company generates 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, training, electronic data interchange (“EDI”), post-contract support (maintenance) and other services, including
revenue cycle management (“RCM”), performed for clients who license its products.
A typical system contract contains multiple elements of the above items. Revenue earned on software arrangements involving
multiple elements is allocated to each element based on the relative fair values of those elements. The fair value of an element is
based on vendor-specific objective evidence (“VSOE”). The Company limits its assessment of VSOE for each element to either the
price charged when the same element is sold separately or the price established by management having the relevant authority to
do so, for an element not yet sold separately. VSOE calculations are updated and reviewed quarterly or annually depending on the
nature of the product or service. The Company generally establishes VSOE for the related undelivered elements based on the bell-
shaped curve method. Maintenance VSOE for the Company's largest clients is based on stated renewal rates only if the rate is
determined to be substantive and falls within the Company's customary pricing practices.
When evidence of fair value exists for the delivered and undelivered elements of a transaction, then discounts for individual elements
are aggregated and the total discount is allocated to the individual elements in proportion to the elements' fair value relative to the
total contract fair value.
When evidence of fair value exists for the undelivered elements only, the residual method is used. Under the residual method, the
Company defers revenue related to the undelivered elements in a system sale based on VSOE of fair value of each of the undelivered
elements and allocates the remainder of the contract price net of all discounts to revenue recognized from the delivered elements.
If VSOE of fair value of any undelivered element does not exist, all revenue is deferred until VSOE of fair value of the undelivered
element is established or the element has been delivered.
Provided the fees are fixed or determinable and collection is considered probable, revenue from licensing rights and sales of
hardware and third-party software is generally recognized upon physical or electronic shipment and transfer of title. In certain
transactions where collection risk is high, the revenue is deferred until collection occurs or becomes probable. If the fee is not fixed
or determinable, then the revenue recognized in each period (subject to application of other revenue recognition criteria) will be
the lesser of the aggregate of amounts due and payable or the amount of the arrangement fee that would have been recognized
if the fees were being recognized using the residual method. Fees which are considered fixed or determinable at the inception of
the Company's arrangements must include the following characteristic:
The fee must be negotiated at the outset of an arrangement and generally be based on the specific volume of products
to be delivered without being subject to change based on variable pricing mechanisms such as the number of units copied
or distributed or the expected number of users.
Revenue from implementation and training services is recognized as the corresponding services are performed. Maintenance
revenue is recognized ratably over the contractual maintenance period.
Contract accounting is applied where services include significant modification, development or customization.
The Company ensures that the following criteria have been met prior to recognition of revenue:
the price is fixed or determinable;
the customer is obligated to pay and there are no contingencies surrounding the obligation or the payment;
the customer's obligation would not change in the event of theft or damage to the product;
the customer has economic substance;
the amount of returns can be reasonably estimated; and
the Company does not have significant obligations for future performance in order to bring about resale of the product by
the customer.
62
The Company has historically offered short-term rights of return in certain sales arrangements. If the Company is able to estimate
returns for these types of arrangements, revenue is recognized, net of an allowance for returns, 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
for revenue recognition have been met.
Revenue related to sales arrangements that include hosting or the right to use software stored on the Company's hardware is
recognized in accordance to the same revenue recognition criteria discussed above only if the customer has the contractual right
to take possession of the software without incurring a significant penalty and it is feasible for the customer to either host the software
themselves or through another third-party. Otherwise, the arrangement is accounted for as a service contract in which the entire
arrangement is deferred and recognized over the period that the hosting services are being performed.
From time to time, the Company offers future purchase discounts on its products and services as part of its sales arrangements.
Such discounts that are incremental to the range of discounts reflected 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 significant, are treated as an
additional element of the contract to be deferred. Amounts deferred related to future purchase options are not recognized until either
the customer exercises the discount offer or the offer expires.
RCM service revenue is derived from services fees, which include amounts charged for ongoing billing and other related services,
and are generally billed to the customer as a percentage of total collections. The Company does not recognize revenue for services
fees until these collections are made, as the services fees are not fixed 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 training 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, consulting services, annual third-party license fees, hosting services, Software as a Service
("SaaS") fees and other services revenue.
Cash and Cash Equivalents. Cash and cash equivalents generally consist of cash, money market funds and short-term U.S.
Treasury securities with maturities of 90 days or less at the time of purchase. The Company had cash deposits at U.S. banks and
financial institutions at March 31, 2013 of which $105.0 million was in excess of the Federal Deposit Insurance Corporation insurance
limit of $250,000 per owner. The Company is exposed to credit loss for amounts in excess of insured limits in the event of
nonperformance by the institutions; however, the Company does not anticipate nonperformance by these institutions.
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.
Restricted Cash. Restricted cash consists of cash which is being held by the Company 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 service programs and relieves both restricted cash and the Care Services liability
when amounts are disbursed. The Company earns an administrative fee which is based on a percentage of funds disbursed on
behalf of certain government social service programs.
Marketable Securities. Marketable securities are classified as available-for-sale and are recorded at fair value, based on quoted
market rates when observable or valuation analysis when appropriate. Unrealized gains and losses, are included in shareholders’
equity. Realized gains and losses on investments are included as interest income.
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 clients and maintains reserves for estimated credit losses. Reserves for potential credit losses are determined by
establishing both specific and general reserves. Specific reserves are based on management’s estimate of the probability of collection
for certain troubled accounts. General reserves are established based on the Company’s historical experience of bad debt expense
and the aging of the Company’s accounts receivable balances, net of deferred revenue and specifically reserved accounts. Accounts
are written off as uncollectible only after the Company has expended extensive collection efforts.
Inventories. Inventories consist of hardware for specific client orders and spare parts and are valued at lower of cost (first-in, first-
out) or market. Management provides a reserve to reduce inventory to its net realizable value.
Equipment and Improvements. Equipment and improvements are stated at cost less accumulated depreciation and amortization.
Repair and maintenance costs that do not improve service potential or extend economic life are expensed as incurred. Depreciation
and amortization of equipment and improvements are recorded over the estimated useful lives of the assets, or the related lease
terms if shorter, by the straight-line method. Useful lives generally have the following ranges:
Computer equipment
Furniture and fixtures
Leasehold improvements
3-5 years
5-7 years
lesser of lease term or estimated useful life of asset
Costs incurred to develop internal-use software during the application development stage are capitalized, stated at cost, and
amortized using the straight-line method over the estimated useful lives of the assets, which is typically seven years. Application
63
development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing.
Costs of significant upgrades and enhancements that result in additional functionality are also capitalized, whereas costs incurred
for maintenance and minor upgrades and enhancements are expensed as incurred.
Software Development Costs. Development costs incurred in the research and development of new software products and
enhancements to existing software products for external use are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional external software development costs are capitalized and
amortized on a straight-line basis over the estimated economic life of the related product, which is typically three years. 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 capitalized software costs. If a determination is made that capitalized amounts
are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized
amounts are written off.
Business Combinations. In accordance with the accounting for business combinations, the Company allocates the purchase price
of acquired businesses to the tangible and intangible assets acquired and liabilities assumed based on estimated fair values. The
purchase price allocation methodology contains uncertainties because it requires management to make assumptions and to apply
judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities
based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including
discounted cash flows and market multiple analyses. Unanticipated events or circumstances may occur which could affect the
accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies.
Goodwill. The Company tests goodwill for impairment annually during its first fiscal quarter, referred to as the annual test date.
The Company will also test for impairment between annual test dates if an event occurs or circumstances change that would indicate
the carrying amount may be impaired. Impairment testing for goodwill is performed at a reporting-unit level, which is defined as an
operating segment or one level below an operating segment (referred to as a component). A component of an operating segment
is a reporting unit if the component constitutes a business for which discrete financial information is available and segment
management regularly reviews the operating results of that component. 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.
During the quarter ended December 31, 2012 and subsequently at March 31, 2013, certain events and circumstances indicated
the possibility that the carrying amount of goodwill could potentially be impaired. See Note 6 for information regarding the impairment
of goodwill at March 31, 2013.
Intangible Assets. Intangible assets consist of customer relationships, trade names and contracts and certain software technology.
These intangible assets are recorded at fair value and are stated net of accumulated amortization. The Company currently amortizes
the intangible assets over periods ranging from six months to nine years using a method that reflects the pattern in which the
economic benefits of the intangible asset are consumed. Also, see discussion below regarding the recoverability of long-lived assets,
which includes definite-lived intangible assets.
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. If the future undiscounted cash flows expected to result
from the use of the related assets are less than the carrying value of such assets, 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 flows.
Management periodically reviews the carrying value of long-lived assets to determine whether or not impairment to such value has
occurred and has determined that there was no impairment to its long-lived assets as of March 31, 2013. In addition to the
recoverability assessment, the Company routinely reviews the remaining estimated lives of its long-lived assets.
Income Taxes. Income taxes are provided based on current taxable income and the future tax consequences of temporary
differences between the basis of assets and liabilities for 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 deductible 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, estimates of future taxable income and adjusts
the related valuation allowance as necessary. Management makes a number of assumptions and estimates in determining the
appropriate amount of expense to record for income taxes. These assumptions 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
transactions and future projected profitability of the Company’s businesses based on management’s interpretation of existing facts
and circumstances.
Self-Insurance Liabilities. 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 possible that recorded accruals
may not be adequate to cover the future payment of claims. Adjustments, if any, to estimated accruals resulting from ultimate claim
payments will be reflected in earnings during the periods in which such adjustments are determined. Periodically, the Company
reevaluates the adequacy of the accruals by comparing amounts accrued on the balance sheets for anticipated losses to an updated
actuarial loss forecasts and third-party claim administrator loss estimates and makes adjustments to the accruals as needed. The
self-insurance accrual is included in other current liabilities. 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. As of March 31, 2013 and
64
2012, the self-insurance accrual was approximately $1,336 and $934, respectively, and is included in other current liabilities on the
accompanying consolidated balance sheets. 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 include trade shows and conventions, were approximately $6,499, $6,254 and $7,122 for the
years ended March 31, 2013, 2012 and 2011, respectively, and were included in selling, general and administrative expenses in
the accompanying consolidated statements of comprehensive income.
Marketing Assistance Agreements. The Company has entered 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 specific site visits upon
the Company’s request for prospective clients 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.
Foreign Currency Translation. The Indian Rupee is considered to be the functional currency for QSIH. Assets and liabilities are
re-measured at the exchange rate on the balance sheet dates. Revenues and expenses are re-measured at weighted average
exchange rates in effect during the year. Any translation adjustments resulting from this process are shown as a component of
accumulated other comprehensive income (loss) within shareholders' equity in the consolidated balance sheets. Foreign currency
transaction gains and losses are included in other income (expense) in the consolidated statements of comprehensive income. The
net foreign currency gain (loss) for the year ended March 31, 2013 and 2012 was not significant.
Earnings per Share. The Company provides dual presentation of “basic” and “diluted” earnings per share (“EPS”). Shares discussed
below are in thousands.
Net income
Basic net income per share:
Weighted-average shares outstanding — Basic
Basic net income per common share
Net income
Diluted net income per share:
Weighted-average shares outstanding — Basic
Effect of potentially dilutive securities
Weighted-average shares outstanding — Diluted
$
$
$
Fiscal Year Ended March 31,
2012
2011
2013
42,724
$
75,657
$
61,606
59,392
0.72
42,724
$
$
58,729
1.29
75,657
$
$
59,392
70
59,462
58,729
320
59,049
57,894
1.06
61,606
57,894
342
58,236
1.06
Diluted net income per common share
$
0.72
$
1.28
$
The computation of diluted net income per share does not include 966, 335 and 514 options for the years ended March 31, 2013,
2012 and 2011, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
Share-Based Compensation. The Company estimates the fair value of share-based payment awards on the date of grant using
an option-pricing model. Expected term is estimated using historical exercise experience. Volatility is estimated by using the weighted-
average historical volatility of the Company’s common stock, which approximates expected volatility. The risk free rate is the implied
yield available on the U.S Treasury zero-coupon issues with remaining terms equal to the expected term. The expected dividend
yield is the average dividend rate during a period equal to the expected term of the option. Those inputs are then entered into the
Black Scholes model to determine the estimated fair value. The value of the portion of the award that is ultimately expected to vest
is recognized ratably as expense over the requisite service period in the Company’s consolidated statements of comprehensive
income.
Share-based compensation is adjusted on a monthly basis for changes to estimated forfeitures based on a review of historical
forfeiture activity. To the extent that actual forfeitures differ, or are expected to differ, from the estimate, share-based compensation
expense is adjusted accordingly. The effect of the forfeiture adjustments for years ended March 31, 2013, 2012 and 2011 was not
significant.
65
The following table shows total share-based compensation expense included in the consolidated statements of income for years
ended March 31, 2013, 2012 and 2011:
Costs and expenses:
Cost of revenue
Research and development costs
Selling, general and administrative
Total share-based compensation
Amounts capitalized in software development costs
Amounts charged against earnings, before income tax benefit
Income tax benefit
Decrease in net income
Fiscal Year Ended March 31,
2012
2011
2013
$
$
$
$
201
230
$
261
184
1,896
2,327
—
2,876
3,321
—
2,327
$
3,321
$
(726)
(1,236)
1,601
$
2,085
$
272
152
3,324
3,748
(2)
3,746
(1,343)
2,403
Sales Taxes. The Company records revenue net of sales tax obligation in the consolidated statements of income.
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 specific objective
evidence, self-insurance accruals and income taxes and related credits and deductions. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions.
New Accounting Standards. New accounting pronouncements implemented by the Company during the current year or requiring
implementation in future periods are discussed below or in the notes, where applicable.
In the first quarter of fiscal 2013, the Company adopted new accounting guidance intended to simplify goodwill impairment testing.
Under the revised guidance, entities testing goodwill for impairment have the option to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment
test would be required. Under the revised guidance, an entity has the option to bypass the qualitative assessment for any reporting
unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test. An entity may resume
performing the qualitative assessment in any subsequent period. The revised guidance does not change how goodwill is calculated
or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. In addition, the revised
guidance does not amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant;
however, it does revise the examples of events and circumstances that an entity should consider. The adoption did not have a
material impact on the Company's financial position, results of operations or cash flows and is discussed further within this footnote.
In the first quarter of fiscal 2013, the Company adopted guidance regarding the presentation of comprehensive income. The new
standard requires the presentation of comprehensive income, the components of net income and the components of other
comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive
statements. The adoption of this guidance did not have a material impact on the Company's financial statements.
In the first quarter of fiscal 2013, the Company adopted additional guidance on fair value measurements intended to clarify the
application of the existing guidance and disclosure requirements, as well as change certain fair value measurement principles and
require additional disclosures surrounding these fair value measurements. The adoption of this guidance did not have a material
impact on the Company's financial statements.
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of
Accumulated Other Comprehensive Income (ASU 2013-02). The new standard requires an entity to provide information about the
amounts reclassified out of Accumulated Other Comprehensive Income by component. The adoption of this guidance had no impact
on the Company's consolidated financial statements, but may have an effect on the required disclosures for future reporting periods.
Out-of-Period Accounting Adjustments. During the fourth quarter of fiscal 2013, the Company recorded an adjustment which
decreased pre-tax income by approximately $2.6 million to correct an accounting estimate for commissions, of which $2.1 million
originated in years prior to fiscal 2013. Also recorded in the same period was an adjustment increasing pre-tax income by $1.7
million as a result of capitalizing R&D labor which had been incorrectly expensed during the first three quarters of fiscal 2013. The
Company does not believe these out-of-period adjustments, separately or in aggregate, are material to the consolidated financial
statements for the fiscal year ended March 31, 2013 or to any prior years' consolidated financial statements.
66
3. Cash and Cash Equivalents
At March 31, 2013 and 2012, the Company had cash and cash equivalents of $105,999 and $134,444, 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.
4. Fair Value Measurements
The following tables set forth by level within the fair value hierarchy the Company's financial assets and liabilities that were accounted
for at fair value on a recurring basis at March 31, 2013 and March 31, 2012:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Balance at
March 31,
2013
Unobservable
Inputs
(Level 3)
ASSETS
Cash and cash equivalents (1)
$
105,999
$
105,999
$
— $
Restricted cash
Marketable securities (2)
LIABILITIES
Contingent consideration related to acquisitions
$
$
$
5,488
12,012
5,488
12,012
—
—
123,499
$
123,499
$
— $
5,336
5,336
$
— $
— $
— $
— $
5,336
5,336
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Balance at
March 31,
2012
Unobservable
Inputs
(Level 3)
ASSETS
Cash and cash equivalents (1)
$
134,444
$
134,444
$
— $
Restricted cash
Marketable securities (2)
LIABILITIES
Contingent consideration related to acquisitions
$
$
$
1,962
4,987
1,962
4,987
—
—
141,393
$
141,393
$
— $
6,556
6,556
$
$
— $
— $
— $
— $
6,556
6,556
____________________
(1)
(2)
Cash and cash equivalents consists of money market funds.
Marketable securities consists of fixed-income securities.
The Company's contingent consideration liability is accounted for at fair value on a recurring basis and is adjusted to fair value
when the carrying value differs from fair value. The categorization of the framework used to measure fair value of the contingent
consideration liability is considered Level 3 due to the subjective nature of the unobservable inputs used. The fair values of the
contingent consideration liability were estimated based on the probability of achieving certain business milestones and
management's forecast of expected revenues. See Note 5.
67
—
—
—
—
—
—
—
—
The following table presents activity in the Company's financial assets and liabilities measured at fair value using significant
unobservable inputs (Level 3), as March 31, 2013:
Balance at March 31, 2011
Acquisitions (Note 5)
Earnout payments
Fair value adjustments
Balance at March 31, 2012
Acquisitions (Note 5)
Earnout payments (1)
Fair value adjustments
Balance at March 31, 2013
Total Liabilities
$
$
$
915
6,104
(463)
—
6,556
2,862
(5,354)
1,272
5,336
_____________________
(1) Earnout payments comprised of $2,354 in cash and $3,000 in common stock
Non-Recurring Fair Value Measurements
The Company has certain assets, including goodwill and other intangible assets, which are measured at fair value on a non-recurring
basis and are adjusted to fair value only if an impairment charge is recognized. The categorization of the framework used to measure
fair value of the assets is considered Level 3 due to the subjective nature of the unobservable inputs used. During the year ended
March 31, 2013, there were no adjustments to fair value of such assets, except for the intangible assets acquired from Matrix and
Poseidon as discussed below in Note 5.
5. Business Combinations
On May 1, 2012, the Company acquired Poseidon, a leading provider of hospital emergency department documentation and web-
based electronic medical record solutions. The Poseidon purchase price totaled $2,533. Poseidon operates under the Hospital
Solutions Division.
On April 16, 2012, the Company acquired Matrix, a provider of revenue cycle management services, healthcare IT solutions and
training, implementation and support centered around the NextGen Division's suite of practice management software and electronic
health record solutions. The Matrix purchase price totaled $13,841. The purchase price included contingent consideration payable
over an 18-month period with a fair value of $2,862, which shall not exceed $4,000. The goodwill associated with this acquisition
is deductible for tax purposes. Matrix operates under the RCM Services Division.
The Company accounted for the Matrix and Poseidon acquisitions as purchase business combinations. The purchase price for
each was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as
of the applicable 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 intangible assets and liabilities assumed were determined using
multiple valuation approaches depending on the type of tangible or intangible asset acquired, including but not limited to the income
approach, the excess earnings method and the relief from royalty method approach.
The total purchase price for the Matrix and Poseidon acquisitions during the year ended March 31, 2013 are summarized as follows:
Cash paid
Purchase price holdback
Common stock issued at fair value
Contingent consideration
Non-compete agreement
Total purchase price
Matrix
Poseidon
$
5,073
$
853
3,953
2,862
1,100
2,033
500
—
—
—
$
13,841
$
2,533
68
The following table summarizes the final purchase price allocations for the Matrix and Poseidon acquisitions:
Matrix
Poseidon
Fair value of the net tangible assets acquired and liabilities assumed:
Current assets (including accounts receivable of $1,287 and $111 for Matrix and Poseidon,
respectively)
$
1,755
$
Equipment and improvements and other long-term assets
Accounts payable and accrued liabilities
Deferred revenues
Total net tangible assets acquired and liabilities assumed
Fair value of identifiable intangible assets acquired:
Trade Name
Customer relationships
Software technology
Non-compete agreement
Goodwill
Total identifiable intangible assets acquired
Total purchase price
966
(746)
—
1,975
150
8,650
—
1,100
1,966
11,866
$
13,841
$
143
39
—
(18)
164
—
800
1,150
—
419
2,369
2,533
The pro forma effects of the Matrix and Poseidon acquisitions would not have been material to the Company’s results of operations
and are therefore not presented.
6. Goodwill
The Company does not amortize goodwill as our goodwill has been determined to have an indefinite useful life.
Goodwill by division consists of the following:
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Total goodwill
March 31,
2012
Acquisitions
Impairment
March 31,
2013
$
7,289
$
— $
1,840
21,323
30,324
—
419
1,966
— $
—
(17,400)
7,289
1,840
4,342
—
32,290
$
60,776
$
2,385
$
(17,400) $
45,761
During the second quarter of fiscal 2013, the operating performance of the Hospital Solutions Division ("Hospital reporting unit" or
"Hospital") weakened, relative to the historic performance of this division. Revenues and operating results further declined during
the third quarter of 2013. Accordingly, we assessed the conditions giving rise to the operating performance and evaluated the
carrying amount of Hospital's goodwill balance. At such time, we concluded that the fair value of the Hospital reporting unit exceeded
the carrying amount of the related goodwill, and therefore the value of the goodwill required no impairment. During the latter part
of the quarter ended March 31, 2013, however, we reassessed the short-term and longer-term business strategies and operating
expectations relating to the Hospital Solutions Division. From this assessment, we concluded that it was necessary to re-evaluate
Hospital's goodwill for impairment during the fourth quarter of fiscal 2013.
Based upon the above, the Company performed step one of the goodwill impairment test and determined that the fair value of the
Hospital reporting unit, which was based on a combination of discounted cash flow analysis and market approach, was lower than
the carrying value. The failure of step one triggered step two of the impairment test.
As a result of the step two analysis, the Company determined the implied fair value of the Hospital reporting unit's goodwill and
concluded that the carrying value of goodwill exceeded its implied fair value. Based upon the resulting computations, an impairment
charge of $17.4 million was recognized during the fourth quarter of fiscal 2013.
The Company determined the implied fair value of the Hospital reporting unit's goodwill in the same manner as the amount of
goodwill recognized in a business combination. Therefore, the excess of the fair value of a reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of goodwill.
Key assumptions affecting the results of the goodwill impairment test include: a) the near-term continuation of recent results of
operations for the Division and b) our detailed reassessment of the strategies of the Division and the actions required to achieve
those strategies. Such reassessment resulted in a reprioritization of the objectives for the Division in the next fiscal year and a
69
determination that additional investment and expenditures would be required to achieve those objectives. Specifically, the Division
will place client satisfaction as its highest priority, de-emphasizing near-term growth.
To achieve high client satisfaction, the Division plans to implement several initiatives designed to enhance the Division's ability to
deliver better value for its customers including implementation, support, and software development. First, the Division will work to
aggressively add employees to its implementation, support, and software development departments to increase the ratio of
employees-to-customers. This will enable the Division to be more hands-on and responsive during the implementation and support
phases. Additionally, during the next fiscal year, the Division plans to bear the cost of providing additional training and implementation
services to certain customers, to enable those customers to make better use of the functionality of the system. We believe that by
completing this work and adding to the support, implementation, and development teams, the Division will greatly improve its
customer experience, and thereby help the Division improve its ability to have more of its client base serve as reference sites.
Additionally, the revenue assumptions relating to the Hospital Division outlook for the next several years reflect planned constraints
on: a) the rate of new implementation engagements, to accommodate the client satisfaction initiative, and b) the timing and extent
of product sales in light of other operational and product development considerations.
Though we have confidence in our assumptions regarding the future performance of the Hospital Solutions Division, if the future
financial results relating to the Division fall short of our assumptions, the fair value of the reporting unit could be negatively impacted,
resulting in an additional impairment of goodwill and/or other intangible assets.
The Company will continue to monitor the operating performance of its reporting units in future periods for evidence of any additional
indicators of impairment.
7. Intangible Assets
In connection with the Poseidon acquisition, the Company recorded $1,950 of intangible assets related to customer relationships
and software technology. The Company is amortizing the customer relationships over five years and the software technology over
five years.
In connection with the Matrix acquisition, the Company recorded $9,900 of intangible assets related to a trade name, customer
relationships and non-compete agreements. The Company is amortizing the trade name over six months, the customer relationships
over five years and the non-compete over four years.
The Company’s definite-lived intangible assets, other than capitalized software development costs, are summarized as follows:
Gross carrying amount
Accumulated amortization
Net intangible assets
Gross carrying amount
Accumulated amortization
Net intangible assets
March 31, 2013
Customer
Relationships
Trade Name &
Contracts
Software
Technology
Total
$
$
23,156
$
2,018
$
20,509
$
45,683
(10,028)
(1,112)
(6,993)
(18,133)
13,128
$
906
$
13,516
$
27,550
March 31, 2012
Customer
Relationships
Trade Name &
Contracts
Software
Technology
Total
$
$
13,706
$
768
$
19,359
$
33,833
(5,901)
(606)
(4,067)
(10,574)
7,805
$
162
$
15,292
$
23,259
70
Activity related to the intangible assets for the years ended March 31, 2013 and 2012 is summarized as follows:
Customer
Relationships
Trade Name &
Contracts
Software
Technology
Total
Balance at March 31, 2011
$
6,327
$
Acquisition
Amortization (1)
Balance at March 31, 2012
Acquisition
Amortization (1)
3,500
(2,022)
7,805
9,450
(4,127)
208
130
(176)
162
1,250
(506)
$
10,355
$
7,240
(2,303)
15,292
1,150
(2,926)
Balance at March 31, 2013
$
13,128
$
906
$
13,516
$
16,890
10,870
(4,501)
23,259
11,850
(7,559)
27,550
____________________
(1)
Amortization of the customer relationships and trade name intangible assets is included in operating expenses and
amortization of the software technology intangible assets is included in cost of revenue for software and hardware.
The following table represents the remaining estimated amortization of definite-lived intangible assets as of March 31, 2013:
For the year ended March 31,
2014
2015
2016
2017
2018 and beyond
Total
8. Capitalized Software Costs
The Company’s capitalized software development costs are summarized as follows:
Gross carrying amount
Accumulated amortization
Net capitalized software costs
$
7,391
6,335
5,998
5,228
2,598
$
27,550
March 31,
2013
March 31,
2012
$
$
94,676
$
65,221
(54,895)
(45,227)
39,781
$
19,994
Activity related to net capitalized software costs for the years ended March 31, 2013 and 2012 is summarized as follows:
Beginning of the year
Capitalized
Amortization
End of the year
Fiscal Year Ended March 31,
2013
2012
$
$
19,994
$
29,455
(9,668)
39,781
$
15,150
13,098
(8,254)
19,994
The following table represents the remaining estimated amortization of capitalized software costs as of March 31, 2013:
For the year ended March 31,
2014
2015
2016
2017
2018 and beyond
Total
71
$
10,073
13,294
9,516
6,323
575
$
39,781
9. Composition of Certain Financial Statement Captions
Accounts receivable include amounts related to maintenance and services that were billed but not yet rendered at each period end.
Undelivered maintenance and services are included as a component of the deferred revenue balance on the accompanying
consolidated balance sheets.
March 31,
2013
March 31,
2012
160,080
$
154,237
(11,823)
(8,481)
148,257
$
145,756
March 31,
2013
March 31,
2012
710
$
1,236
—
6
710
$
1,242
$
$
$
$
March 31,
2013
March 31,
2012
$
31,633
$
24,936
8,416
7,125
47,174
(25,287)
6,358
4,906
36,200
(18,359)
$
21,887
$
17,841
March 31,
2013
March 31,
2012
$
12,085
$
36,899
9,906
6,317
65,207
1,219
$
$
12,742
55,235
11,730
3,401
83,108
1,293
March 31,
2013
March 31,
2012
3,842
$
8,073
4,890
6,980
11,915
$
11,870
$
$
$
$
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
Inventories are summarized as follows:
Computer systems and components
Miscellaneous parts
Inventories
Equipment and improvements are summarized as follows:
Computer equipment
Furniture and fixtures
Leasehold improvements
Accumulated depreciation and amortization
Equipment and improvements, net
Current and non-current deferred revenue are summarized as follows:
Maintenance
Implementation services
Annual license services
Undelivered software and other
Deferred revenue
Deferred revenue, net of current
Accrued compensation and related benefits are summarized as follows:
Payroll, bonus and commission
Vacation
Accrued compensation and related benefits
72
Other current and non-current liabilities are summarized as follows:
March 31,
2013
March 31,
2012
Contingent consideration and other liabilities related to acquisitions
$
8,426
$
Care services liabilities
Accrued Consulting
Accrued EDI expense
Self insurance reserve
Accrued royalties
Sales tax payable
Deferred rent
Outside commission payable
Accrued travel
Customer deposits
Other accrued expenses
Other current liabilities
Deferred rent
Contingent consideration and other liabilities related to acquisitions
Other liabilities
Other non-current liabilities
10. Income Tax
5,488
2,602
1,452
1,336
1,331
869
689
461
384
262
3,208
5,482
1,962
880
2,588
934
1,974
527
610
520
509
1,297
2,285
$
$
$
26,508
$
19,568
2,448
$
1,382
119
3,949
$
2,476
2,989
137
5,602
During the years ended March 31, 2013, 2012, and 2011, the Company recognized federal research and development tax credits
of $1,461, $1,055 and $927, respectively, and state research and development tax credits of approximately $145, $165 and $119,
respectively. The Internal Revenue Service (“IRS”) statute related to research and development credits expired on December 31,
2011 and was retroactively reinstated on January 2, 2013 for 2012 and 2013. The Company's research and development credits
claimed for the year ended March 31, 2012 represent credits for the nine-month period from April 1, 2011 through December 31,
2011. The credit for the year ended March 31, 2013 includes the twelve month period from April 1, 2012 through March 31, 2013.
The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code (“IRC”)
for $9,032, $10,025, and $8,134 (pre-tax) during the years ended March 31, 2013, 2012, and 2011, respectively. The research and
development credits and the qualified production activities income deduction calculated by the Company involve certain assumptions
and judgments regarding qualification of expenses under the relevant tax code provisions.
The provision (benefit) for income taxes consists of the following components:
Current:
Federal taxes
State taxes
Foreign taxes
Total current taxes
Deferred:
Federal taxes
State taxes
Foreign taxes
Total deferred taxes
Provision for income taxes
Fiscal Year Ended March 31,
2012
2011
2013
$
30,382
$
36,109
$
5,019
190
35,591
8,614
73
44,796
28,979
6,501
—
35,480
$
(8,469) $
(3,571) $
(2,168)
(742)
(190)
(9,401)
(502)
(73)
(4,146)
$
26,190
$
40,650
$
(502)
—
(2,670)
32,810
73
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 benefit
Research and development tax credits
Qualified production activities income deduction
Impairment of goodwill
Other
Effective income tax rate
Fiscal Year Ended March 31,
2012
2011
2013
35.0%
35.0%
35.0%
4.0
(2.1)
(4.6)
7.5
(1.8)
4.5
(0.9)
(3.0)
—
(0.6)
4.1
(1.0)
(3.0)
—
(0.3)
38.0%
35.0%
34.8%
The net deferred tax assets and liabilities in the accompanying consolidated balance sheets consist of the following:
Deferred tax assets:
Deferred revenue
Inventory valuation
Accrued compensation and benefits
Deferred compensation
State income taxes
Compensatory stock option expense
Allowance for doubtful accounts
Other
Total deferred tax assets
Deferred tax liabilities:
Accelerated depreciation
Capitalized software
Intangibles assets
Prepaid expense
Other
Total deferred tax liabilities
Deferred tax assets (liabilities), net
March 31,
2013
March 31,
2012
$
11,483
$
224
3,898
1,615
17
2,291
7,182
3,207
8,618
113
3,788
1,455
255
1,828
4,235
4,813
29,917
25,105
$
(1,876) $
(7,717)
(4,124)
(1,859)
—
(2,319)
(7,797)
(7,307)
(2,979)
73
(15,576)
(20,329)
$
14,341
$
4,776
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.
Uncertain tax positions
A reconciliation of the beginning and ending amount of unrecognized tax benefits, which is recorded in income taxes payable in
the Company’s consolidated balance sheet, is as follows:
Balance at March 31, 2011
Additions for prior year tax positions
Reductions for prior year tax positions
Balance at March 31, 2012
Additions for current/prior year tax positions
Reductions for prior year tax positions
Balance at March 31, 2013
74
$
$
$
672
26
(285)
413
455
(135)
733
The total amount of unrecognized tax benefit that, if recognized, would decrease the income tax provision is $733.
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 $118 and $75 of accrued interest related to income tax matters at
March 31, 2013 and 2012, respectively. No penalties were accrued.
The Company is no longer subject to U.S. federal income tax examinations for tax years before 2012. With few exceptions, the
Company is no longer subject to state or local income tax examinations for tax years before 2008. The Company does not anticipate
that total unrecognized tax benefits will significantly change due to the settlement of audits or the expiration of statute of limitations
within the next twelve months.
11. Employee Benefit Plans
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 contributions. 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 $889, $630 and
$479 were made by the Company to the 401(k) plan for the years ended March 31, 2013, 2012 and 2011, respectively.
The Company has a deferred compensation plan (the “Deferral Plan”) for the benefit 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 participating employees, and the
amount of the Company match is discretionary and subject to change. Each employee’s deferrals together with earnings thereon
are accrued as part of the long-term liabilities of the Company. Investment decisions are made by each participating employee from
a family of mutual funds. Deferred compensation liability was $3,809 and $3,497 at March 31, 2013 and 2012, respectively. To
offset this liability, the Company has purchased life insurance policies on some of the participants. The Company is the owner and
beneficiary of the policies and the cash values are intended to produce cash needed to help make the benefit payments to employees
when they retire or otherwise leave the Company. The Company intends to hold the life insurance policy until the death of the plan
participant. The net cash surrender value of the life insurance policies for deferred compensation was $3,728 and $2,959 at March 31,
2013 and 2012, respectively. The values of the life insurance policies and the related Company obligation are included on the
accompanying consolidated balance sheets in long-term other assets and long-term deferred compensation, respectively. The
Company made contributions of $49, $66 and $33 to the Deferral Plan for the years ended March 31, 2013, 2012 and 2011,
respectively.
The Company has a voluntary employee stock contribution plan for the benefit of full-time employees. The plan is designed to allow
qualified employees to acquire shares of the Company’s common stock through automatic payroll deduction. 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 broker designated by the Company. In addition, the Company will match 5%of each employee’s contribution and will
pay all brokerage commissions and fees in connection with each purchase. The amount of the Company match is discretionary
and subject to change. The plan is not intended to be an employee benefit plan under the Employee Retirement Income Security
Act of 1974, and is therefore not required to comply with that Act. Contributions of approximately $47, $47 and $39 were made by
the Company for the years ended March 31, 2013, 2012 and 2011, respectively.
12. Share-Based Awards
Employee Stock Option Plans
In September 1998, the Company's shareholders approved a stock option plan (the “1998 Plan”) under which 8,000,000 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 committee, be granted options to
purchase shares of common stock. The exercise price of each option granted was determined by the Board of Directors at the date
of grant, and options under the 1998 Plan expire no later than ten years from the grant date. Options granted will generally become
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 accelerated vesting under certain circumstances. The 1998 Plan terminated on December 31,
2007. As of March 31, 2013, there were 40,000 outstanding options related to the 1998 Plan.
In October 2005, the Company's shareholders approved a stock option and incentive plan (the “2005 Plan”) under which 4,800,000
shares of common stock were reserved for the issuance of awards, including stock options, incentive stock options and non-qualified
stock options, stock appreciation rights, restricted stock, unrestricted stock, restricted stock units, performance shares, performance
units (including performance 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 outstanding option may
be subject to accelerated vesting under certain circumstances. The 2005 Plan terminates on May 25, 2015, unless terminated
75
earlier by the Board of Directors. As of March 31, 2013, there were 1,119,183 outstanding options and 3,012,491 shares available
for future grant related to the 2005 Plan.
A summary of stock option transactions during the years ended March 31, 2013, 2012 and 2011 is as follows:
Outstanding, March 31, 2010
Granted
Exercised
Forfeited/Canceled
Outstanding, March 31, 2011
Granted
Exercised
Forfeited/Canceled
Outstanding, March 31, 2012
Granted
Exercised
Forfeited/Canceled
Outstanding, March 31, 2013
Vested and expected to vest, March 31, 2013
Exercisable, March 31, 2013
Weighted-
Average
Exercise
Price
per Share
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in thousands)
21.58
29.15
18.60
27.50
22.20
43.04
18.34
36.66
32.09
27.78
16.81
31.42
30.54
30.98
27.72
$
7,093
$
17,698
5.4
7.2
0.3
5.8
5.5
5.5
3.3
$
$
$
$
82
31
31
29
Number of
Shares
1,743,926
$
110,000
(307,428)
(148,942)
1,397,556
$
459,400
(697,157)
(171,462)
988,337
$
556,500
(56,366)
(329,288)
1,159,183
1,096,365
354,843
$
$
$
The Company utilizes the Black-Scholes valuation model for estimating the fair value of share-based compensation with the following
assumptions:
Expected life
Expected volatility
Expected dividends
Risk-free rate
Year Ended
Year Ended
Year Ended
March 31, 2013 March 31, 2012 March 31, 2011
5.0 years
4.3 years
4.2 years
41.3% - 45.1%
2.4% - 4.0%
0.7% - 0.8%
41.2%
1.6%
1.8%
42.6% - 44.7%
1.9% - 2.2%
1.5% - 2.1%
The weighted-average grant date fair value of stock options granted during the years ended March 31, 2013, 2012 and 2011 was
$8.22, $13.32 and $9.24 per share, respectively.
The Company issues new shares to satisfy option exercises. Based on historical experience of option cancellations, the Company
has estimated an annualized forfeiture rate of 8.0%, 4.1% and 3.6% for employee options for the years ended March 31, 2013,
2012 and 2011 and 0.0% for director options for the years ended March 31, 2013, 2012 and 2011. Forfeiture rates will be adjusted
over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate.
76
During the years ended March 31, 2013, 2012 and 2011, a total of 556,500, 459,400 and 110,000 options, respectively, were granted
under the 2005 Plan at an exercise price equal to the market price of the Company’s common stock on the date of grant. A summary
of stock options granted under the 2005 Plan during the years ended March 31, 2013, 2012 and 2011 is as follows:
Option Grant Date
January 23, 2013
November 5, 2012
September 25, 2012
May 24, 2012
May 24, 2012
May 23, 2012
Fiscal year 2013 option grants
May 31, 2011
Fiscal year 2012 option grants
November 29, 2010
August 3, 2010
June 4, 2010
June 2, 2010
Fiscal year 2011 option grants
Number of
Shares
Exercise
Price
Vesting
Terms (1)
Expires
$
$
$
$
$
$
40,000
5,000
20,000
346,000
30,000
115,500
556,500
19.00
17.68
18.42
29.17
29.17
29.45
Five years
January 23, 2021
Five years
November 5, 2020
Five years
September 25, 2020
Five years
May 24, 2020
Four years
May 24, 2020
Five years
May 23, 2020
459,400
$
43.04
Five years
May 31, 2019
459,400
20,000
10,000
50,000
30,000
110,000
$
$
$
$
32.16
27.62
28.15
29.31
Five years
November 29, 2018
Five years
August 3, 2018
Five years
June 4, 2018
Five years
June 2, 2018
____________________
(1)
Options vest in equal annual installments on each grant anniversary date beginning one year after the grant date.
Performance-Based Awards
On May 24, 2012, the Board of Directors approved its fiscal year 2013 equity incentive program for certain employees to be awarded
options to purchase the Company’s common stock. The maximum number of options available under the equity incentive program
plan is 600,000, of which 220,000 are reserved for the Company’s named executive officers and 380,000 for non-executive employees
of the Company. Under the program, executives are eligible to receive cash bonuses and options based on meeting certain target
increases in EPS performance and revenue and operating income growth during fiscal year 2013. Under the program, the non-
executive employees are eligible to receive options based on satisfying certain management established criteria and
recommendations of senior management. The options shall be issued pursuant to one of the Company’s shareholder approved
option plans, have an exercise price equal to the closing price of the Company’s shares on the date of grant, a term of eight years
and vesting in five equal annual installments commencing one year following the date of grant.
Compensation expense associated with the performance based awards under the Company’s equity incentive plans are initially
based on the number of options expected to vest after assessing the probability that certain performance criteria will be met.
Cumulative adjustments are recorded quarterly to reflect subsequent changes in the estimated outcome of performance-related
conditions. The Company utilized the Black-Scholes option valuation model with the assumptions below and recorded stock
compensation expense related to the performance based awards of $616 and $788 for the years ended March 31, 2012 and 2011,
respectively. Stock compensation expense related to the performance based awards was not significant for the year ended March 31,
2013.
Expected life
Expected volatility
Expected dividends
Risk-free rate
Year Ended
March 31, 2013
Year Ended
March 31, 2012
Year Ended
March 31, 2011
5.0 years
4.3 years
4.3 years
41.7% - 45.0% 41.2% - 42.2%
2.5% - 4.0%
1.4% - 1.9%
0.6% - 0.7%
0.8 % - 1.8%
41.6%
1.5%
2.2%
77
Non-vested stock option award activity, including employee stock options and performance-based awards, during the years ended
March 31, 2013, 2012 and 2011 is summarized as follows:
Outstanding, March 31, 2010
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2011
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2012
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2013
Non-Vested
Number of
Shares
1,221,672
$
110,000
(379,694)
(148,942)
803,036
$
459,400
(312,655)
(171,462)
778,319
$
556,500
(201,191)
(329,288)
804,340
$
Weighted-
Average
Grant-Date
Fair Value
per Share
7.63
9.24
6.43
9.41
8.08
13.32
7.22
11.55
10.76
8.22
8.43
9.92
9.89
As of March 31, 2013, $5,575 of total unrecognized compensation costs related to stock options is expected to be recognized over
a weighted-average period of 3.6 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 the years ended March 31,
2013, 2012 and 2011 was $1,696, $2,256 and $2,442, respectively.
Restricted Stock
On May 24, 2012, the Board of Directors approved its 2013 Director Compensation Program, whereby each non-employee director
is to be awarded shares of restricted stock upon election or re-election to the Board of Directors. The shares of restricted stock are
awarded under the 2005 Plan. Such shares of restricted stock vest in two equal, annual installments on the first and second
anniversaries of the grant date and are nontransferable for one year following vesting. The weighted-average grant date fair value
for the restricted stock was estimated using the market price of the common stock on the date of grant. The fair value of the restricted
stock is amortized on a straight-line basis over the vesting period.
The Company recorded compensation expense related to restricted stock of approximately $566, $540 and $427 for the years
ended March 31, 2013, 2012 and 2011, respectively. Restricted stock activity for the years ended March 31, 2013, 2012 and 2011
is summarized as follows:
Outstanding, March 31, 2010
Granted
Vested
Outstanding, March 31, 2011
Granted
Vested
Outstanding, March 31, 2012
Granted
Vested
Outstanding, March 31, 2013
Weighted-
Average
Grant-Date
Fair Value
per Share
Number of
Shares
16,000
$
18,292
(11,396)
22,896
$
22,668
(15,563)
30,001
$
18,939
(18,555)
30,385
$
26.93
27.31
27.22
27.09
39.75
27.51
36.32
19.32
32.14
27.09
As of March 31, 2013, $529 of total unrecognized compensation costs related to restricted stock is expected to be recognized over
a weighted-average period of 1.7 years. This amount does not include the cost of new restricted stock that may be granted in future
periods.
78
13. Commitments, Guarantees and Contingencies
The Company leases facilities and offices under irrevocable operating lease agreements expiring at various dates 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, 2013, 2012 and 2011 was $5,753, $4,330 and $3,964, respectively. The following table summarizes our
significant contractual obligations, including rental commitments, at March 31, 2013:
Contractual Obligations
Operating lease obligations
Contingent consideration and other acquisition related
liabilities
Total
Commitments and Guarantees
For the year ended March 31,
Total
2014
2015
2016
2017
2018 and
beyond
$
32,848 $ 8,152 $ 7,043 $ 6,519 $ 4,595 $
6,539
3,050
1,778
646
313
313
—
$
35,898 $ 9,930 $ 7,689 $ 6,832 $ 4,908 $
6,539
The Company's software license agreements 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 significant costs associated with its performance guarantee or other related warranties and does
not expect to incur significant warranty costs in the future. Therefore, no accrual has been made for potential costs associated with
these warranties. Certain arrangements also include performance guarantees related to response time, availability for operational
use, and other performance-related guarantees. Certain arrangements also include penalties in the form of maintenance credits
should the performance of the software fail to meet the performance guarantees. To date, the Company has not incurred any
significant costs associated with these warranties and does not expect to incur significant warranty costs in the future. Therefore,
no accrual has been made for potential costs associated with these warranties.
The Company has historically offered short-term rights of return in certain sales arrangements. If the Company is able to estimate
returns for these types of arrangements and all other criteria for revenue recognition have been met, revenue is recognized and
these arrangements are recorded in the consolidated financial statements. If the Company is unable to estimate returns for these
types of arrangements, revenue is not recognized in the consolidated financial statements until the rights of return expire, provided
also, that all other criteria of revenue recognition have been met.
Certain standard sales agreements contain a money back guarantee providing for a performance guarantee that is already part of
the software license agreement as well as training and support. The money back guarantee also warrants that the software will
remain robust and flexible to allow participation in the federal health incentive programs. The specific elements of the performance
guarantee pertain to aspects of the software, which the Company has already tested and confirmed to consistently meet using the
Company's existing software without any modifications or enhancements. To date, the Company has not incurred any costs
associated with this guarantee and does not expect to incur significant costs in the future. Therefore, no accrual has been made
for potential costs associated with this guarantee.
The Company's standard sales agreements contain an indemnification provision pursuant to which it shall indemnify, hold harmless,
and reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States
patent, any copyright or other intellectual property infringement claim by any third-party with respect to its software. As the Company
has not incurred any significant costs to defend lawsuits or settle claims related to these indemnification agreements, the Company
believes that its estimated exposure on these agreements is currently minimal. Accordingly, the Company has no liabilities recorded
for these indemnification obligations.
79
14. Operating Segment Information
The Company has four reportable segments that are evaluated regularly by its chief decision making group (Chief Executive Officer,
Chief Financial Officer and Chief Operating Officer) in deciding how to allocate resources and in assessing performance.
Operating segment data is as follows:
Revenue:
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated revenue
Operating income (loss):
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Unallocated corporate expense (1)
Consolidated operating income
Fiscal Year Ended March 31,
2012
2011
2013
$
19,990
$
19,596
$
19,966
$
$
344,315
31,413
64,511
325,467
34,463
50,309
266,546
17,898
48,953
460,229
$
429,835
$
353,363
3,020
$
3,352
$
4,672
120,974
(4,354)
8,180
127,032
10,417
5,835
104,391
5,362
4,235
(58,720)
(30,437)
(24,568)
$
69,100
$
116,199
$
94,092
_______________________
(1)
Unallocated corporate expense includes eliminations relating to QSIH revenues and related expenses included in the results of operating
segments. For the years ended March 31, 2013, 2012 and 2011, eliminations were not significant. For fiscal year 2013, unallocated
corporate expense also includes the impairment of goodwill.
Management evaluates performance based upon stand-alone segment operating income. Because the Company does not evaluate
performance based upon return on assets at the operating segment level, assets are not tracked internally by segment. Therefore,
segment asset information is not presented.
15. Subsequent Events
On May 22, 2013, the Board of Directors approved a quarterly cash dividend of $0.175 per share on the Company’s outstanding
shares of common stock, payable to shareholders of record as of June 14, 2013 with an expected distribution date on or about July
5, 2013.
80
16. Selected Quarterly Operating Results
The following table presents quarterly unaudited consolidated financial information for the eight quarters preceding March 31, 2013.
Such information is presented on the same basis as the annual information presented in the accompanying consolidated financial
statements. In management’s opinion, this information reflects all adjustments that are necessary for a fair presentation of the
results for these periods.
(Unaudited)
Revenues:
6/30/2011
9/30/2011
12/31/2011
3/31/2012
6/30/2012
9/30/2012
12/31/2012
3/31/2013
Quarter Ended
Software and hardware
$ 28,911
$ 31,860
$ 35,074
$ 26,562
$ 25,844
$ 23,720
$ 21,899
$ 17,109
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 and hardware
Implementation and training services
Total cost of system sales
Maintenance
Electronic data interchange services
Revenue cycle management and related
services
Other services
Total cost of maintenance, EDI, RCM
and other services
Total cost of revenue
Gross profit
Operating expenses:
5,472
34,383
31,502
12,092
11,881
10,584
6,094
37,954
35,214
11,985
11,142
11,339
6,555
41,629
36,245
12,101
11,147
11,643
8,270
34,832
35,871
13,081
11,402
13,808
12,046
37,890
38,568
13,823
14,401
13,614
8,535
32,255
38,715
15,024
14,486
15,648
7,266
29,165
39,463
15,209
15,015
15,658
7,161
24,270
40,025
15,653
15,317
16,030
66,059
69,680
71,136
74,162
80,406
83,873
85,345
87,025
100,442
107,634
112,765
108,994
118,296
116,128
114,510
111,295
4,614
4,075
8,689
3,854
7,962
8,826
5,597
4,187
5,050
9,237
3,994
7,964
8,456
6,369
26,239
34,928
65,514
26,783
36,020
71,614
4,622
5,994
4,976
6,179
5,771
9,145
5,624
7,507
4,660
7,221
5,695
7,023
10,616
11,155
14,916
13,131
11,881
12,718
4,412
7,890
8,405
7,011
27,718
38,334
74,431
4,844
8,606
8,608
8,728
30,786
41,941
67,053
4,811
9,248
4,741
9,151
5,259
9,852
5,505
10,099
10,870
10,556
10,918
10,980
8,550
8,785
8,686
8,995
33,479
48,395
69,901
33,233
46,364
69,764
34,715
46,596
67,914
35,579
48,297
62,998
Selling, general and administrative
29,386
32,169
33,096
34,195
36,681
37,832
35,532
38,308
Research and development costs
6,827
7,358
8,277
8,907
Amortization of acquired intangible assets
Impairment of goodwill
Total operating expenses
Income (loss) from operations
Interest income (expense), net
Other income (expense), net
Income (loss) before provision for income
taxes
Provision for income taxes
482
—
36,695
28,819
82
(38)
28,863
9,880
520
—
40,047
31,567
75
(144)
31,498
11,002
543
—
41,916
32,515
55
(218)
32,352
11,247
653
—
43,755
23,298
35
261
8,576
1,137
—
46,394
23,507
35
(213)
6,272
1,316
—
45,420
24,344
(62)
220
23,594
23,329
24,502
8,521
7,832
8,811
7,786
1,212
—
44,530
23,384
13
(122)
23,275
7,649
8,231
1,194
17,400
65,133
(2,135)
(93)
36
(2,192)
1,898
Net income (loss)
$ 18,983
$ 20,496
$ 21,105
$ 15,073
$ 15,497
$ 15,691
$ 15,626
$ (4,090)
Net income (loss) per share:
Basic*
Diluted*
Weighted-average shares outstanding:
$
$
0.33
0.32
$
$
0.35
0.35
$
$
0.36
0.36
$
$
0.26
0.25
$
$
0.26
0.26
$
$
0.26
0.26
$
$
0.26
0.26
$
$
(0.07)
(0.07)
Basic
Diluted
58,362
58,800
58,511
58,902
58,847
59,128
59,048
59,232
59,281
59,388
59,347
59,386
59,400
59,405
59,541
59,541
Dividends declared per common share
$ 0.175
$ 0.175
$
0.175
$ 0.175
$ 0.175
$ 0.175
$
0.175
$ 0.175
____________________
*
Quarterly EPS may not sum to annual EPS due to rounding
81
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Sales Return Reserve
Balance at
Beginning of
Year
Additions
Charged
Against
Revenue
$
$
$
2,229
1,726
961
$
$
$
4,277
503
765
$
$
$
Deductions
Balance at
End of Year
— $
— $
— $
6,506
2,229
1,726
Allowance for Doubtful Accounts
Balance at
Beginning of
Year
Additions
Charged to
Costs and
Expenses
Deductions
Balance at
End of Year
$
$
$
8,481
6,717
4,489
$
$
$
6,885
5,715
3,780
$
$
$
(3,543) $
11,823
(3,951) $
(1,552) $
8,481
6,717
(in thousands)
For the year ended
March 31, 2013
March 31, 2012
March 31, 2011
(in thousands)
For the year ended
March 31, 2013
March 31, 2012
March 31, 2011
82
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C O M P A N Y P R O F I L E
Quality Systems, Inc. (NASDAQ:QSII) develops and markets computer-based
practice management, electronic health records and revenue cycle management
applications along with connectivity products and services. The Company serves
medical and dental group practices as well as rural and community hospitals.
C O M P R E H E N S I V E P R O D U C T A N D S E R V I C E O F F E R I N G S
Quality Systems (QSI) and its NextGen Healthcare subsidiary (QSI/NextGen Healthcare) offer a
wide range of cutting-edge healthcare information technology solutions designed to address the
changing healthcare landscape and evolving models. Some of the Company’s innovative products,
services and solutions include:
NextGen® Ambulatory EHR
NextGen® Inpatient Clinicals
An electronic health record solution that
A comprehensive suite of clinical applications
enables anywhere, anytime access to
for hospitals that includes Computerized
accurate patient data for enhancing care.
Physician Order Entry (CPOE), clinical decision support,
NextGen® Practice Management
An integrated solution that helps accelerate
(cid:86)(cid:62)(cid:195)(cid:133)(cid:3)(cid:121)(cid:156)(cid:220)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:136)(cid:152)(cid:86)(cid:192)(cid:105)(cid:62)(cid:195)(cid:105)(cid:3)(cid:76)(cid:156)(cid:204)(cid:133)(cid:3)(cid:192)(cid:105)(cid:219)(cid:105)(cid:152)(cid:213)(cid:105)(cid:3)(cid:86)(cid:156)(cid:152)(cid:204)(cid:192)(cid:156)(cid:143)(cid:3)
and productivity, enabling providers to make better
order management, advanced reporting and clinical data
tools to improve care and outcomes.
NextGen® Inpatient Financials
(cid:269)(cid:3)(cid:86)(cid:156)(cid:147)(cid:171)(cid:143)(cid:105)(cid:204)(cid:105)(cid:3)(cid:195)(cid:213)(cid:136)(cid:204)(cid:105)(cid:3)(cid:156)(cid:118)(cid:3)(cid:119)(cid:152)(cid:62)(cid:152)(cid:86)(cid:136)(cid:62)(cid:143)(cid:3)(cid:62)(cid:171)(cid:171)(cid:143)(cid:136)(cid:86)(cid:62)(cid:204)(cid:136)(cid:156)(cid:152)(cid:195)(cid:3)(cid:62)(cid:195)(cid:3)
business decisions and improve patient care.
well as reporting and decision support tools
NextGen® Patient Portal
A secure online tool enabling patients to
designed for hospitals, clinics and specialty centers to
enhance business decisions and results.
Patient Portal
access their health records, which engages
NextGen® Population Health
and empowers them while aiding providers in meeting
An automated, integrated outreach
Meaningful Use Stage 2 requirements.
tool that enables providers to engage
NextGen® Revenue Cycle Management
Specialized professional services that
(cid:62)(cid:171)(cid:171)(cid:143)(cid:222)(cid:3)(cid:76)(cid:105)(cid:195)(cid:204)(cid:3)(cid:171)(cid:192)(cid:62)(cid:86)(cid:204)(cid:136)(cid:86)(cid:105)(cid:195)(cid:3)(cid:204)(cid:156)(cid:3)(cid:136)(cid:147)(cid:171)(cid:192)(cid:156)(cid:219)(cid:105)(cid:3)(cid:119)(cid:152)(cid:62)(cid:152)(cid:86)(cid:136)(cid:62)(cid:143)(cid:3)
(cid:171)(cid:105)(cid:192)(cid:118)(cid:156)(cid:192)(cid:147)(cid:62)(cid:152)(cid:86)(cid:105)(cid:93)(cid:3)(cid:195)(cid:204)(cid:192)(cid:105)(cid:62)(cid:147)(cid:143)(cid:136)(cid:152)(cid:105)(cid:3)(cid:220)(cid:156)(cid:192)(cid:142)(cid:121)(cid:156)(cid:220)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:105)(cid:143)(cid:136)(cid:147)(cid:136)(cid:152)(cid:62)(cid:204)(cid:105)(cid:3)
patients, improve outcomes and deliver collaborative,
accountable care across their patient panel.
NextGen® Health Information Exchange
A connectivity tool that enables electronic-
administrative problems, allowing providers to focus on
based, secure sharing of patient data across
HIE
patient care.
NextPen®
multiple vendors and medical communities allowing
providers to deliver collaborative care.
An electronic pen that digitally captures a
NextGen® Electronic Data Interchange
patient or provider’s handwriting on forms
A solution suite that automates data
and interprets it as discrete data. The information
transfer between NextGen Healthcare,
EDI
EDI
Services
Services
becomes part of a chart within the EHR and streamlines
other healthcare organizations and third party
data input while enhancing patient satisfaction.
payer entities helping providers reduce costs,
NextGen® EDR
speed payments, and improve productivity.
An electronic-based dental record that
NextGen® Surgical Management
EDR
integrates with both NextGen Ambulatory
A robust application that helps hospitals
EHR and NextGen Practice Management to provide
manage their operating room so they can
better patient care and safety, using a single patient
(cid:156)(cid:171)(cid:204)(cid:136)(cid:147)(cid:136)(cid:226)(cid:105)(cid:3)(cid:204)(cid:133)(cid:192)(cid:156)(cid:213)(cid:125)(cid:133)(cid:171)(cid:213)(cid:204)(cid:93)(cid:3)(cid:181)(cid:213)(cid:62)(cid:143)(cid:136)(cid:204)(cid:222)(cid:93)(cid:3)(cid:105)(cid:118)(cid:119)(cid:86)(cid:136)(cid:105)(cid:152)(cid:86)(cid:222)(cid:93)(cid:3)(cid:86)(cid:156)(cid:195)(cid:204)(cid:195)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)
record across medical and dental practices.
patient safety.
C O R P O R A T E I N F O R M A T I O N
B O A R D O F D I R E C T O R S
Sheldon Razin
Chairman of the Board and Founder,
Quality Systems, Inc.
Steven T. Plochocki
President and Chief Executive Officer,
Quality Systems, Inc.
Michael Aghajanian
Retired President and CEO,
PRTM Management Consulting
Craig A. Barbarosh
Partner, Katten Muchin Rosenman LLP
George H. Bristol
Managing Director, Janas Associates
Mark H. Davis
Healthcare IT & Technology Advisor
D. Russell Pflueger
(cid:10)(cid:133)(cid:62)(cid:136)(cid:192)(cid:147)(cid:62)(cid:152)(cid:3)(cid:62)(cid:152)(cid:96)(cid:3)(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:3)(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:3)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)(cid:93)(cid:3)
Quiescence Medical, Inc.
Lance E. Rosenzweig
(cid:10)(cid:133)(cid:136)(cid:105)(cid:118)(cid:3)(cid:13)(cid:221)(cid:105)(cid:86)(cid:213)(cid:204)(cid:136)(cid:219)(cid:105)(cid:3)(cid:34)(cid:118)(cid:119)(cid:86)(cid:105)(cid:192)(cid:93)(cid:3)(cid:29)(cid:136)(cid:76)(cid:105)(cid:192)(cid:204)(cid:62)(cid:96)(cid:10)(cid:62)(cid:192)(cid:96)(cid:93)(cid:3)(cid:22)(cid:152)(cid:86)(cid:176)
O F F I C E R S O F T H E C O M P A N Y
Steven T. Plochocki
President and Chief Executive Officer
Paul A. Holt
Executive Vice President, Chief Financial Officer
Jocelyn A. Leavitt
Executive Vice President, General Counsel and Secretary
Daniel J. Morefield
Executive Vice President, Chief Operating Officer
Donn E. Neufeld
Executive Vice President, EDI and Dental
Stephen K. Puckett
Executive Vice President, Chief Technology Officer
Monte L. Sandler
Executive Vice President, NextGen RCM Services
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 LLP
Irvine, California
S T O C K T R A N S F E R A G E N T
& R E G I S T R A R
Computershare
Glendale, California
A N N U A L M E E T I N G
2013 Annual Shareholders’ Meeting is scheduled to be
held on Thursday, August 15, 2013 at 1:00 PM Pacific
Time.
The meeting will be held at:
The Marriott Hotel
18000 Von Karman Avenue
Irvine, California 92612
The meeting may be subject to change or
postponement by Quality Systems’ Board of Directors.
F O R M 1 0 - 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:
Quality Systems, Inc.
Attention: Investor Relations
18111 Von Karman Avenue, Suite 700
Irvine, California 92612
949.255.2600
F O R W A R D - L O O K I N G S TAT 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
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and oral statements made by our representatives that are not
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hopes, beliefs, expectations or predictions of the future, may
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“continue,” “believe,” “may,” “expect,” “hope,” “anticipate,”
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important to note that any such performance and actual results,
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that could cause or contribute to such differences include, but
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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
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