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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
18111 Von Karman Avenue, Suite 700
Irvine, California 92612
949.255.2600
Q S I / N E X T G E N L O C AT I O N S
1701 E. Edinger, Suite E5
Santa Ana, California 92705
1836 Lackland Hill Parkway
St. Louis, Missouri 63146
5619 Scotts Valley Drive
Scotts Valley, California 9506
5200 Stoneham Road, Suite 210
North Canton, Ohio 44720
3340 Peachtree Road NE, Suite 2700
795 Horsham Road
Atlanta, Georgia 30326
Horsham, Pennsylvania 19044
2840 Hillcreek Drive
Augusta, Georgia 30909
12301-B Riata Trace Parkway, Suite 200
Austin, Texas 78727
187 Northside Offi ce Park, Suite 202
1440 Civic Place
Building 5A, Unit 139
Southlake, Texas 76092
16701 N.E. 80th Street, Suite 102
Redmond, Washington 98015
Milledgeville, Georgia 31061
11350 McCormick Road
Executive Plaza IV, Suite 600
Hunt Valley, Maryland 21031
333 Washington Avenue N., Suite 300
Minneapolis, Minnesota 55401
Outer Ring Road, Bellandur Post
Pritech Park SEZ
Block 11, First Floor
Bangalore – 560103
Karnataka India
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
www.qsii.com www.nextgen.com
P O W E R I N G T H E N E X T WAV E O F H E A LT H C A R E
2 0 1 4 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
Quality Systems, Inc. (NASDAQ:QSII) and its NextGen Healthcare
B O A R D O F D I R E C T O R S
A N N U A L M E E T I N G
subsidiary (QSI/NextGen) develop and market a wide range of cutting-
edge healthcare information technology software and services, including
practice management solutions, electronic health records, revenue cycle
management services and patient engagement tools along with
connectivity and interoperability applications. The Company serves
medical and dental group practices as well as rural and community
hospitals. The QSI/NextGen suite of products is designed to address
the changing healthcare landscape and evolving models.
Fiscal Year 2014
Revenue: $444.7 million
Diluted EPS: $0.26
Revenue:
$341.1 million
(77% of Total)
Revenue:
$19.8 million
(4% of Total)
Revenue:
$68.1 million
(15% of Total)
Revenue:
Market
Served:
80,000+
Physicians
Physicians
(cid:127) Practice
Management
(cid:127) Electronic
Health Records
(cid:127) EDI
10,000+
Dentists
Dentists
Market
Served:
Market
Served:
(cid:127) Practice
Management
(cid:127) Electronic
Health Records
(cid:127) EDI
6,500+
Physicians
Physicians
(cid:127) Revenue Cycle
Management
(cid:127) Other Services
$15.6 million
(4% of Total)
300+
Hospitals
Market
Served:
Small Hospitals
(cid:127) Financials
(cid:127) Clinical
(cid:127) Surgery
Scheduling
Sheldon Razin
Chairman of the Board and Founder
Quality Systems, Inc.
Steven T. Plochocki
President and Chief Executive Officer
Quality Systems, Inc.
Craig A. Barbarosh
Partner, Katten Muchin Rosenman LLP
George H. Bristol
Managing Director, Janas Associates
James C. Malone
Chief Financial Officer and
2014 Annual Shareholders’ Meeting is scheduled to be held on
Monday, August 11, 2014 at 1:00 PM Pacifi c 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, fi led
with the Securities and Exchange Commission, is available on
the Company’s website at www.qsii.com or by contacting the
Executive Vice President of American Well, Inc.
Company at:
Jeffrey H. Margolis
Chairman and Chief Executive Officer, Welltok, Inc.
Quality Systems, Inc.
Attention: Investor Relations
18111 Von Karman Avenue, Suite 700
Irvine, California 92612
949.255.2600
Morris Panner
Chief Executive Officer of DICOM Grid
D. Russell Pflueger
Chairman and Chief Executive Officer
Quiescence Medical, Inc.
Lance E. Rosenzweig
Chief Executive Officer, Aegis USA, Inc.
O F F I C E R S O F T H E C O M P A N Y
Steven T. Plochocki
President and Chief Executive Officer
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
Stephen K. Puckett
Executive Vice President, Chief Technology Officer
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
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
statements fi led with the Securities and Exchange Commission
(“Commission”), communications to shareholders, press releases
and oral statements made by our representatives that are not
historical in nature, or that state our or management’s intentions,
hopes, beliefs, expectations or predictions of the future, may
constitute “forward-looking statements” within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as
amended. Forward-looking statements can often be identifi ed
by the use of forward-looking terminology, such as “could,”
“should,” “will,” “will be,” “will lead,” “will assist,” “intended,”
“continue,” “believe,” “may,” “expect,” “hope,” “anticipate,”
“goal,” “forecast,” “plan,” “potentially” or “estimate” or varia-
tions thereof or similar expressions. Forward-looking statements
are not guarantees of future performance. Forward-looking
statements involve risks, uncertainties and assumptions. It is
important to note that any such performance and actual results,
fi nancial condition or business, could differ materially from
those expressed in such forward-looking statements. Factors
that could cause or contribute to such differences include, but
are not limited to, the risk factors discussed in Item 1A of our
Form 10-K as well as factors discussed elsewhere in this and
other reports and documents we fi le with the Commission.
Other unforeseen factors not identifi ed herein could also have
such an effect. We undertake no obligation to update or revise
forward-looking statements to refl ect changed assumptions, the
occurrence of unanticipated events or changes in future oper-
ating results, fi nancial condition or business over time unless
required by law. Interested persons are urged to review the
risks described under Item 1A, “Risk Factors” and in Item 7,
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in our Form 10-K, as well as in our
other public disclosures and fi lings with the Commission.
(cid:127)
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LETTER TO SHAREHOLDERS
SEA CHANGE best describes
the signifi cant transformation the
healthcare information technology
(HCIT) industry has been under-
going, particularly over the past
fi ve years.
Healthcare reform initiatives, such
as Obamacare, are driving much
Steven T. Plochocki
President and
Chief Executive Offi cer
Sheldon Razin
Chairman of the Board
and Founder
of this transformation. As a result, one-fi fth of the economy – healthcare –
is shifting from paper to automation as emerging payment models and
innovative technologies become the catalyst for propelling the healthcare
industry into a new era.
Q u a l i t y S y s t e m s , I n c . | 1
Quality Systems, Inc. (QSI) is helping its clients navigate the reform and a new regulatory environ-ment, all of which are shaping the future of our nation’s healthcare delivery system. Since the enactment of the Health Information Technology for Economic and Clinical Health Act (HITECH Act), part of the 2009 American Recovery and Reinvestment Act (ARRA), stimulus incen-tives have been offered to physicians and medical groups as they transition to an electronic platform, thereby driving the shift toward a new healthcare system. The HITECH Act not only promotes the adoption and use of the Electronic Health Record (EHR) but also supports the electronic exchange of health information for every individual in the U.S. The new levels of HCIT functionality will allow systems to interoperate with one another, which will be required for healthcare reform to succeed.With the advent of the EHR come many rules and requirements. Whether it’s various stages of Meaningful Use (MU) or the transition to the International Classifi cation of Disease 10th revision (ICD-10), there are many elements to operating successfully amid today’s rapidly QSI: Navigating 40 years of Healthcare IT
1973
Dental Market Entry
2008
RMC Market Entry
2011 - 2013
Recent Additions
QSIDental
Formed
1973
Micromed
Acquired
1997
HSI
Acquired
2008
Opus
Healthcare
Solutions
Acquired
2010
NextDDS
Launched
2009
Intranexus
Acquired
2011
ViaTrack
Acquired
2011
Poseidon
Acquired
2012
Clinitec
Acquired
1996
NextGen
Healthcare
Formed
2001
PMP
Acquired
2008
ARRA
Enacted
2009
Sphere
Healthcare
Acquired
2009
Meaningful
Use
Established
2010
CQI
Acquired
2011
Matrix
Acquired
2012
Mirth
Acquired
2013
Ambulatory Market Entry
1996
Inpatient Solutions Market Entry
2009
A willingness to reinvest and reinvent to better compete
changing healthcare environment. MU refers
Today, we are at the forefront of ambulatory
to the standards defi ned by the Centers for
care technology solutions, having spent more than
Medicare and Medicaid Services (CMS) EHR
20 years devoted to this area of healthcare. Our
Incentive Programs for the use of EHR, allowing
NextGen® Ambulatory EHR lies at the core of our
eligible providers and hospitals to earn incentive
integrated ambulatory solution suite and offers
payments by meeting specifi c criteria. ICD-10
customized EHR capabilities across 26 different
requires specifi c codes be used when identifying
medical specialties.
medical diagnoses for proper reimbursement.
By bringing our clients and the industry the
This is where QSI and its NextGen Healthcare
best tools for participating in the changing health-
subsidiary (QSI/NextGen) come in. Since 1974, we
care and regulatory environment, we are preparing
have been automating medical practices, constantly
them for the future. NextGen Ambulatory EHR 5.8
enhancing our offering and strengthening our
is an ONC Certifi ed HIT 2014 Edition Complete
leadership position, making it easy for providers to
EHR. NextGen Healthcare was among the fi rst
succeed as constant change prevails. What started
three vendors to receive this certifi cation as a
40 years ago with our vision to automate healthcare
Complete EHR. And, NextGen® Inpatient Clinicals
has morphed into something bigger than anyone
version 2.6 is an ONC Certifi ed HIT 2014 Edition
could have imagined – then or now.
Complete EHR.
Currently, more than 4,400 medical and dental
Through several wholly owned subsidiaries,
practices spanning 90,000+ providers and 300+
QSI spans four distinct business units, including:
hospitals are using our portfolio of solutions, which
represents one of the largest installed bases in the
HCIT industry.
(cid:127) NextGen Healthcare (Ambulatory), a leading
provider of EHR, population health, fi nancial
and Health Information Exchange (HIE) solu-
tions for health systems, physician practices,
2 | 2 0 1 4 A n n u a l R e p o r t
“While Iasis uses a suite of NextGen
solutions and services, it’s the
NextGen EHR that’s at the core of
our delivery system. Since imple-
mentation four years ago, NextGen
has helped us continue to be a
leader in the delivery of excep-
tional care. Additionally, NextGen’s
measurement tools and capa-
bilities are superior in that they
enable us to demonstrate fi rst-
hand our patient care successes
and share this data with govern-
ment payers, which is critical to
participation in the continually
evolving healthcare industry.”
Jay Simmons, MBA, BS, NCP-EHR, EPM, ICS
Assistant Vice President, Physician Information Systems, Iasis Healthcare
Iasis Healthcare is a Nashville, Tennessee-based integrated
full-service healthcare delivery network with specialty and
primary care providers throughout seven states.
hospitals and other healthcare organizations.
(cid:127) NextGen RCM (Revenue Cycle Management)
Within the umbrella of the ambulatory unit
Services delivers technology-driven, revenue
lies Mirth, a company QSI purchased during
improvement services that create effi cient
fi scal 2014 that is leading the way in healthcare
and effective business operations by enabling
connectivity and interoperability.
timely and accurate reimbursement.
(cid:127) NextGen Hospital Solutions offers electronic
Across the board, we have the solutions
solutions to rural, community and specialty
providers need as healthcare reform, new value-
hospitals.
(cid:127) QSIDental is a pioneer in automated dental
solutions and was the foundation of the busi-
ness when QSI was founded.
based delivery models and regulatory changes
infl uence this new, modern era of healthcare.
Q u a l i t y S y s t e m s , I n c . | 3
Scott D. Hayworth, MD, FACOG
President and Chief Executive Offi cer, Mount Kisco Medical Group PC
Mount Kisco Medical Group (MKMG) is a leading physician-owned
multi-specialty group with 300 physicians serving New York’s Hudson
Valley. MKMG is clinically affi liated with Boston-based Massachusetts
General Hospital.
“The use of an EHR has revolution-
ized healthcare in America from
both quality and safety perspec-
tives. As an early adopter of EHR
15 years ago, I’ve come to realize
that once a physician has used an
EHR, there is no going back. The
instantaneous access to data makes
practicing medicine seamless while
improving care and collaboration.
In the past several years, since
working with NextGen, we have
become among the fi rst healthcare
systems nationwide to achieve
Level 3 Patient Centered Medical
Home designation and have already
met all our current Meaningful Use
parameters.”
DRIVING HEALTHCARE TRANSFORMATION
4 | 2 0 1 4 A n n u a l R e p o r t
While healthcare is changing at an exponential pace, it’s our job – fi rst and foremost – to ensure our clients are able to adapt to the many requirements that have recently arisen.QSI/NextGen continually works fast and furi-ously to properly equip our clients so they may thrive in this dynamic environment that consists of new reimbursement models, more patient-centric care and different regulatory mandates. QSI/NextGen clients are leading the healthcare transformation charge by using our solutions to help set perfor-mance benchmarks that others seek to mirror. Patients are more involved in their care and providers must integrate this involvement into the delivery systems of tomorrow. With the emergence of value-based reimbursement, providers are now Q u a l i t y S y s t e m s , I n c . | 5
paid based on patient outcomes, the value and quality of the care they deliver and the overall health of the populations they serve. The Accountable Care Organization (ACO) is a new core care delivery model that plays a fundamental role in healthcare today. ACOs are comprised of a set of healthcare providers – including primary care physicians, specialists and hospitals – that work together collaboratively and accept collective accountability for the cost and quality of care delivered to a population of patients. More than 200 NextGen Healthcare clients participate in ACOs, representing 34 percent of the growing ACO marketplace. Our population health product directly addresses this model and will become a leading component of the NextGen Healthcare suite of products going forward. The Patient Centered Medical Home (PCMH) is an innovative program for improving primary care. In a set of standards that describe clear and specifi c criteria, the program gives practices information about organizing care around patients, working in teams and coordinating and tracking care over time. PCMHs can result in higher quality of care and lower costs as well as improve the overall patient experi-ence. More than 2,300 providers using NextGen® solutions are recognized PCMHs. As the HITECH Act took effect, software became the key instrument to operating in the new healthcare environment. As a leader in healthcare software development, the QSI/NextGen suite of solutions offers relief to providers from the now ever-increasing burdens associated with running the business of healthcare. An increasing number of QSI/NextGen clients have successfully secured MU EHR attestations, a process by which MU is successfully demonstrated through fulfi llment of the requirements for EHRs. NextGen Healthcare falls in the top fi ve or better for all major medical specialties; ranks fourth in Primary Care specialties, third in Cardiology and fi rst in Ophthalmology (all rankings according to CMS) for helping its clients achieve MU status.By achieving MU certifi cation, our clients are entitled to a range of benefi ts such as incen-tives, enhanced safety, lower healthcare costs and improved overall population health. We have already enabled our clients to secure more than $650 million in MU incentive revenue. Another milestone scheduled to take place within healthcare next year (which has already been delayed by the U.S. Government several times), is the transition to ICD-10. ICD-10 is a coding system of clinical classifi cations created by the World Health Organization used to denote various diseases, symptoms, abnormal fi ndings and external causes of injury in medical records. ICD-10 will move from 13,000 to 68,000 codes when implemented, which is currently slated to occur in 2015. Our solutions are already ICD-10 compliant, positioning our clients for continued success. One example is the devel-opment of our ICD-9/ICD-10 Comparison Utility tool, an educational and testing solution aimed at helping providers familiarize themselves with the mapping of ICD-10 codes to the ICD-9 codes most commonly used on a day-to-day basis. NextGen Healthcare solutions are integrated, revolutionary and built to manage change, which keeps practices a step ahead of regulatory changes and prepared for value-based reimbursement models, coordinated care and population health management. NextGen Healthcare is always ahead of regula-tory changes, and was one of the fi rst vendors to become 2014 ONC HIT certifi ed for MU 2 as well as ICD-10 ready. Through our large installed user base, we have proven time and again that we are the right partner bringing the right people and the right experience together to meet our clients’ needs. Accountable Care Organization
Information
Sharing/
Interoperability
Data Collection
and Integration –
Clinical, Financial
& Operational
Care
Coordination
Cohort and
Knowledge
Management
(manage gaps
in care)
Patient &
Provider
Relationship
Management
Functional Pillars of an Accountable Care Organization
Analytics and
Outcomes
Reporting –
Clinical,
Financial &
Operational
Meaningful Use Stages
NextGen®
Ambulatory
EHR
NextGen®
Practice
Management
NextGen®
Patient
Portal
NextGen®
Population
Health
NextGen®
Dashboard
NextGen®
Health
Quality
Measures
(HQM)
NextGen®
Health
Information
Exchange
Mirth
Solutions
NextGen Healthcare Foundation
Accountable Care Organizations (ACOs) are comprised of a set of healthcare providers – including primary care
physicians, specialists and hospitals – that work together collaboratively and accept collective accountability for
the cost and quality of care delivered to a population of patients. More than 200 NextGen Healthcare clients
participate in ACOs, representing 34 percent of the growing ACO marketplace.
THE WAVE OF THE FUTURE: CONNECTIVITY
AND INTEROPERABILITY
6 | 2 0 1 4 A n n u a l R e p o r t
Connectivity and interoperability are essential to keeping healthcare practices viable, sustainable, successful and profi table in the new landscape. In fact, MU Stage 2 is reliant upon connectivity and interoperability. Connectivity and interoperability require the enablement of systems and organiza-tions to work together as providers, payers and healthcare vendors share and exchange data by connecting systems and records. To further our capabilities in this area, we acquired Mirth during fi scal 2014. Mirth, a global leader in vendor-agnostic health information tech-nology solutions that help achieve interoperability, enhances current QSI enterprise interoperability initiatives and broadens our accountable and collaborative care, population health, disease management and clinical data exchange offerings. With Mirth solutions, clients can accurately inte-grate real-time, longitudinal health information froma wide variety of EHR systems at different hospitals, physicians and ancillary care providers and effi ciently drive actionable workfl ows, standards-based data exchange and analytics. The expected result is a better level of care quality for patients by placing valuable data in the hands of hospitals, physicians, laboratories, pharmaceutical, radiology and other clinical staff to power safer, more effi cient and the delivery of more proactive patient-centric care.Using pioneering Mirth technology, we have developed a new interoperability platform, NextGen® Share, to enable the safe, secure, accu-rate and quick exchange of clinical data and the sending of referrals without leaving the EHR system. NextGen Share, the fi rst joint solution of our legacy technology products and Mirth’s solutions, will be released in the summer of 2014. It offers providers a critical tool for delivering accountable, coordinated care, managing population health and making evidence-based clinical decisions – all Laura Young
Executive Director, Behavioral Health Information Network of Arizona
Behavioral Health Information Network of Arizona
(BHINAZ) is an HIE receiving sponsorship from large and
experienced behavioral health agencies, allowing it to
bring collective expertise to the fi rst statewide behavioral
health HIE in the nation. BHINAZ has the necessary tools
to drive healthcare transformation, a large part of which is
integrating behavioral health and physical health.
“Mirth brings its leading
global healthcare information
technology capabilities to our
HIE. By leveraging Mirth’s
unparalleled connectivity
platform, BHINAZ is changing
the way providers share and use
behavioral health information to
enhance care through practice
improvement. Robust consent
management services are
cornerstone to the success of
our HIE and were developed
in partnership with NextGen
to ensure the protection of
sensitive behavioral health data.”
important initiatives of healthcare reform. NextGen
Mirth provides a central database for all clinical
Share can connect its clients’ systems within one
and fi nancial management while eliminating redun-
large network as well as organizations outside the
dant data entry. Using Mirth solutions provides easy
NextGen Healthcare network, fostering the sharing
conversion from legacy systems and enables prac-
of data and referrals easily and seamlessly.
tices to meet the growing requirement for more
The Mirth HIE solution is a proven interoper-
ability platform and is currently used in more than
10,000 settings worldwide. It shares data easily
across all settings: hospital, ambulatory care, home
data and analysis. As a leading one-stop connec-
tivity solution, Mirth is a central data source with
proven, cross-platform interoperability capable of
connecting with any hospital or practice system.
health – anytime, anywhere.
.
Q u a l i t y S y s t e m s , I n c . | 7
Eric C. Warner, PT, MS
Chief Executive Offi cer, Accelerated Physical Therapy
Accelerated Physical Therapy provides physical and
occupational therapy services, including sports medicine
and outpatient orthopedics, from 300+ locations in eight
states, primarily throughout the Midwest.
“Partnering with NextGen has
provided us with robust tech-
nology platforms for both EHR
and RCM, allowing us to scale and
expand. During the past two years,
Accelerated has gained signifi cant
clinical effi ciencies in day-to-day
operations that have enhanced
overall patient outcomes and
contributed to growth organically
as well as across denovo locations.
NextGen continues to help us
streamline and maximize opportu-
nities as we acquire and integrate
companies into our rapidly growing
network.”
FLOWING REVENUE STREAMS THROUGH
REVENUE CYCLE MANAGEMENT
8 | 2 0 1 4 A n n u a l R e p o r t
Rapid change in the midst of healthcare reform, coding requirements and regulatory demands are adding to the fi nancial complexity of managing a medical practice. Sharing information to leverage patient care can reap tremendous benefi ts, from both a quality of care and quantitative fi nancial perspective. Providers fi nd it extremely diffi cult to manage reimbursement in this medical maze. They also fi nd it challenging to identify appropriate solutions along with the right kind of people to assist in the process. NextGen RCM Services has been growing signifi cantly during the past several years, based on the many catalysts stemming from healthcare Revenue Cycle Management (RCM)
is currently a $50 billion market in the U.S.
7.5 Times Larger
than the EHR Market
Source: Frost & Sullivan 2013
Q u a l i t y S y s t e m s , I n c . | 9
reform. New RCM paradigms can prove over-whelming for providers and accelerates their need to outsource this expertise. As a non–core compe-tency for practices, the outsourcing of RCM is on the rise and helping to fuel our growth. Over the past decade, total operating costs for practices have risen dramatically. Additionally, improper billing has compounded the loss of medical practice income. More time is spent on running the business of any given practice today than on delivering quality patient care. An increasing number of physicians indicate that declining reimbursements are impacting their prac-tice’s profi ts while costs continue to escalate. According to industry statistics from The Medical Group Management Association (MGMA), more than 25-30 percent of lost medical practice income is due to improper billing, which includes incorrect coding, under-pricing, missed or never submitted charges and nonexistent or improper follow-up. Using outsourced services reduces staffi ng costs while improving cash fl ow through better billing practices.All these dynamics have paved the way for NextGen RCM Services to provide these much-needed revenue-enhancing services. With nearly 1,000 experts in billing, collections and claims on staff to help clients manage risk, our RCM team is always working to make sure every dollar on the table is captured and outcomes are the best that they can possibly be. By leveraging NextGen RCM Services, our clients are taking advantage of all the tools NextGen Healthcare has to offer and implementing them in a best practice methodology. Currently, more than 6,500 physicians are using NextGen RCM Services. For the fi scal 2014 year, 15 percent of QSI’s total revenue was derived from our NextGen RCM Services business, demonstrating the increased demand. This growth was achieved, in part, through cross-selling, whereby our sales experts nationwide leverage our RCM capabilities across the marketplace. NextGen RCM Services ensures practices have the right data, benchmarks and analytics to demonstrate success in both quality and outcomes as well as the opportunity to claim every reim-bursement dollar. QSI’s management team celebrates the Company’s 40th business anniversary by ringing the NASDAQ Stock
Market Closing Bell at the NASDAQ MarketSite in New York City.
THE YEAR’S FINANCIAL RESULTS
ENCAPSULATED
1 0 | 2 0 1 4 A n n u a l R e p o r t
We spent the fi scal 2014 year laying the neces-sary groundwork in preparation for this continually evolving healthcare landscape in which we operate. To this end, we invested heavily in research and development to support new products and services. In fact, our total investment in research and devel-opment, including capitalized software, grew to $62.3 million during fi scal 2014 versus $60.4 million in fi scal 2013. We believe this investment will prove benefi cial to our clients and shareholders over the long term. For the fi scal 2014 year ended March 31, 2014, revenue reached $444.7 million versus $460.2 million reported in the 2013 fi scal year. Net income for fi scal 2014 was $15.7 million, compared with $42.7 million for fi scal 2013. On a GAAP basis, fully diluted earnings per share for the 2014 fi scal year was $0.26, versus $0.72 reported in the 2013 fi scal year. On a non-GAAP basis, fully diluted earnings per share for the fi scal 2014 year was $0.70, compared with $1.14 for the same period a year ago.Cash fl ows from operations grew to $104.1 million in fi scal 2014 versus $68 million in fi scal 2013. Our strong operating cash fl ow position allowed us to invest $35 million of cash into the purchase of Mirth, which was a key strategic acquisition for the Company. We returned $42.5 million to “Our partnership with NextGen over
the past 10 years has supported
Centegra’s rapid growth from 25
to 172 providers. Our mission is to
provide quality, collaborative care -
from pediatrics to geriatrics - through
urgent care centers, primary care
as well as specialty providers, fi tness
facilities and nutritional counseling.
This is sustained with the use of
NextGen’s Ambulatory EHR. Based
on our long-standing relationship
with NextGen, we are able to
leverage the benefi ts of their many
technology solutions, allowing us to
deliver exceptional healthcare to
our community and continue to keep
patients well-informed and healthy.”
AnnaMarie Gepperth, MHA
Director, Ambulatory Information Technology, Centegra Health System
Centegra Physician Care is a multi-specialty medical
group owned by Centegra Health System, and offers integrated
healthcare throughout McHenry County, Illinois.
shareholders in the form of dividends with only a
consolidated revenue, bookings and the pipe-
slight decline in our cash position.
line. This improvement was partially fueled by
The Company ended the 2014 fi scal year
debt-free, with $113.8 million in cash and market-
able securities, compared with $118.0 million at
the end of the 2013 fi scal year.
In the fourth quarter of fi scal 2014, QSI
reported sequential growth in systems sales,
the new Mirth product line along with growth
in our RCM business. Both of these areas are
expected to be strong growth drivers for the
Company in fi scal 2015.
Q u a l i t y S y s t e m s , I n c . | 1 1
Gary P. Voydanoff, Executive Vice President of Sales and Marketing; Jonathan P. Isaacs, Senior Vice President, Division Manager,
Hospital Solutions; Sarah T. Corley, MD, Chief Medical Offi cer; Donn E. Neufeld, Executive Vice President, EDI and Dental;
Monte L. Sandler, Executive Vice President, NextGen RCM Services; Daniel J. Morefi eld, Executive Vice President, Chief Operating
Offi cer; Steven T. Plochocki, President and Chief Executive Offi cer; Sheldon Razin, Chairman of the Board and Founder; Mark H. Davis,
Executive Vice President, Corporate Development and Strategy; Paul A. Holt, Executive Vice President, Chief Financial Offi cer;
Jocelyn A. Leavitt, Executive Vice President, General Counsel and Secretary; Kelli R. Castellano, Senior Vice President, Product
Marketing and Communications; David R. Ott, Senior Vice President, Chief Information Offi cer; Stephen K. Puckett, Executive Vice
President, Chief Technology Offi cer; and, Michael A. Lovett, Executive Vice President, Division Manager, Ambulatory.
BUILT TO LAST
Sheldon Razin
Steven T. Plochocki
Chairman of the Board
and Founder
President and
Chief Executive Offi cer
1 2 | 2 0 1 4 A n n u a l R e p o r t
As we continue to grow in the fragmented HCIT industry, we expect to see additional fallout of smaller EHR vendors. They lack the research and development infrastructure necessary to handle the certifi cation and coding requirements mandated by the next generation of healthcare. This will create a healthy replacement market into which we intend to tap.By providing our clients with all the tools necessary to successfully chart their course through the current industry changes and beyond, we are playing a vital role in moving healthcare forward. We are setting industry performance measurement benchmarks that can positively impact the success of healthcare in the years ahead.In light of the paradigm shifts propelling health-care – especially throughout the past decade – our team has expanded worldwide and is now 2,600 professionals strong. It is because of their tireless dedication every day that we are able to create solutions that prepare our clients for success. We thank all our employees for their commitment to developing novel HCIT solutions that are driving healthcare delivery and our clients for their loyalty. We also appreciate the support of our shareholders as they too participate in this sea of change. Looking ahead, we draw strength from our powerful portfolio and the benefi ts that our new interoperability capabilities bring. The sharing of data easily and seamlessly is crucial to the next stage of evolution within healthcare. Our inte-grated suite offers innovative solutions capable of addressing all the critical and substantial challenges that will emerge for many healthcare providers. QSI/NextGen solutions are built to manage change and adapt to the evolving landscape. This, coupled with our large installed base of clients, enables us to power the next wave of healthcare by helping our clients successfully and clearly navigate the ever-changing waters that lay ahead.Respectfully, UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
T
£
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2014
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURI-
TIES 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)
18111 Von Karman Avenue, Suite 700, Irvine, California
(Address of principal executive offices)
95-2888568
(IRS Employer Identification No.)
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 T 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 T
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 Ex-
change 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 T No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Inter-
active 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 T 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 con-
tained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorpo-
rated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
T
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 T
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 T
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2013: $1,083,038,000
(based on the closing sales price of the Registrant’s common stock as reported on the NASDAQ Global Select Market on that date of
$21.73 per share).*
The Registrant has no non-voting common equity.
The number of outstanding shares of the Registrant’s common stock as of May 27, 2014 was 60,224,601 shares.
* For purposes of this Annual Report on Form 10-K, in addition to those shareholders which fall within the definition of “affiliates” un-
der 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 2014 annual meeting of shareholders are incorporated by reference into Part III.
DOCUMENTS INCORPORATED BY REFERENCE
QUALITY SYSTEMS, INC.
TABLE OF CONTENTS
2014 ANNUAL REPORT ON FORM 10-K
Item
Page
3
12
25
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25
25
28
29
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52
52
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57
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.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Signatures
PART IV
2
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 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 and allow healthcare provider organizations the ability to manage patient populations across
various care settings. Our scalable interoperability and population health offerings help to improve care collaboration, quality and
safety. Enabled by our interoperability solutions, data-driven patient population healthcare management decisions assist in
creating more desirable operation, clinical, and financial outcomes that substantiate the value of patient-centered and
accountable care models.
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.
Our 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.
In the last few years, we acquired several companies as part of our strategy to enhance our EDI and RCM services capabilities
as well as expand into the small and specialty hospital market. More recently, we acquired Mirth Corporation ("Mirth"), which
operates under the NextGen Division, and is expected to enhance our current enterprise interoperability initiatives and broaden
our accountable and collaborative care, population health, disease management and clinical data exchange offerings. 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
hospital 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.
3
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, including software implementation
and customer support functions.
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 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 in a
replacement market by leveraging the benefits of our fully integrated electronic health records software. With the addition of
Mirth, our combined solutions enrich the already strong collaborative, connected care support and set the stage for data
synchronization, interoperability growth, and expansion of our current accountable and collaborative care, population health,
disease management and clinical data exchange offering. These Divisions also develop and market software that automates
patient records in physician practices, community health centers 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. The RCM Services Division provides
technology solutions and outsourcing services to cover the full spectrum of healthcare providers' RCM needs, with a primary
focus on outsourced 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. Our employee base in Bangalore has since grown to over 250 employees with
a primary focus on software development 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 product lines and client base of the NextGen Division.
The following table breaks down our reported segment revenue and segment revenue growth by Division for the fiscal years
ended March 31, 2014, 2013 and 2012:
Segment Revenue Breakdown
Fiscal Year Ended March 31,
2012
2013
2014
Segment Revenue Growth (Decline)
Fiscal Year Ended March 31,
2012
2013
2014
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
4.5 %
76.7 %
3.5 %
15.3 %
4.3 %
74.9 %
6.8 %
14.0 %
4.6 %
75.7 %
(0.8 )%
(0.9 )%
2.0 %
5.8 %
8.0 %
(50.3 )%
(8.9 )%
11.7 %
5.6 %
28.2 %
(1.9 )%
22.1 %
92.6 %
2.8 %
100.0 %
100.0 %
100.0 %
(3.4 )%
7.1 %
21.6 %
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
cloud-based Software as a Service ("SaaS") model practice management and clinical software solutions to new and existing
customers. This software solution, QSIDental Web ("QDW"), is marketed primarily to multi-location dental group practices in
which the QSI Dental Division has historically been a dominant player. QDW offers a lower cost of ownership as it is a cloud-
based solution that requires a customer to have Internet access to run the application. Further, QSI Dental sells its Electronic
Dental Chart in conjunction with NextGen® PM ("Practice Management") and EHR ("Electronic Health Record") and is 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® EHR, NextGen® EDR and NextGen® PM provide a unique product in this marketplace—an integrated patient record
accessible by both physicians and dentists. On May 3, 2013, NextGen® EDR version 4.3 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 4.3 relied on to demonstrate compliance was NextGen®
EHR version 5.8.
4
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® PM 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.
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 leverage ViaTrack's technologies to reduce
costs and enhance our EDI offerings to all divisions.
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 major product categories include NextGen® EHR, NextGen® PM, NextGen®
Dashboard, NextGen® Mobile, and NextGen® NextPen. NextGen® Community Connectivity consists of NextGen® Health
Information Exchange (“NextGen® HIE,” formerly Community Health Solution), NextGen® Patient Portal (“NextMD.com”), and
NextGen® Health Quality Measures (“NextGen® HQM”). The NextGen Division also offers hosting services, NextGuard – Data
Protection services, and consulting services, such as strategic governance models and operational transformation, technical
consulting such as data conversions or interface development. 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.
The NextGen Division also provides EDI services, which include electronic submission of claims to insurance providers as well
as automated patient statements.
On September 9, 2013, we acquired Mirth, a global leader in health information technology that helps clients achieve
interoperability. Operating results associated with Mirth products and services are included in the NextGen Division. The
acquisition of Mirth will enhance our current enterprise interoperability initiatives and broaden our accountable and collaborative
care, population health, disease management and clinical data exchange offerings. Mirth offers a wide variety of products and
services utilized by both users of Mirth open code technology as well as a large base of domestic and international paying
customers. Product offerings available from Mirth include Mirth Connect, Mirth Results, Mirth Match, Mirth Mail, Mirth Appliance,
Mirth Care, and Mirth Gateway. As a direct result of the Mirth acquisition, we introduced NextGen® Share to our customer base
in November 2013. As our first offering that integrates technologies from both NextGen Healthcare and Mirth, NextGen® Share
provides the ability to securely and easily share patient charts and other data with other practices using NextGen Internet based
software.
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 acquired companies that were established developers of software and services for the hospital 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 long term 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 hospital markets.
RCM Services Division. The RCM Services Division, with locations in St. Louis, Missouri, North Canton, Ohio, South Jordan,
Utah 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 PM 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 information technology 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.
5
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 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 ("ARRA") and the Patient Protection and Affordable Care Act), the mandate requiring individuals
to obtain insurance, the individual state responses to the government-requested Medicaid expansion, the creation and operation
of insurance exchanges, 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.
In response, healthcare provider organizations have placed increasing demands on their information systems. The initial
healthcare information systems were designed for limited administrative tasks such as billing and scheduling and could neither
accommodate multiple computing environments nor operate effectively across multiple locations and entities. 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, and that the practices that are able to
leverage technology to more efficiently handle such 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
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.
In September 2013, we acquired Mirth, an industry leader within the health information exchange (“HIE") market with
technologies and services delivering vendor agnostic interoperability capability to the healthcare community. This acquisition
also provides expanded capabilities around population health management and data analytics, which we believe will be pivotal
in our continual enhancement of our existing products as well as the development of new product and service offerings for
accountable care organizations.
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 expand our interoperability capabilities enhancing
the competitiveness of our software offerings, continue to integrate our ambulatory and hospital products, make our products
more intuitive and easy to use, and to enhance 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 adding new clients through maintaining
and expanding sales, marketing and product development activities and expanding 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. These investments in our infrastructure will continue while maintaining reasonable
expense discipline. We believe that our growing customer base that is using our software on a daily basis is a strategic asset,
and we intend to leverage this strategic asset by expanding our product and service offerings towards this customer base.
6
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.
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 Software as a Service ("SaaS") arrangements in our software offerings;
although to date, SaaS arrangements do not represent a significant portion of our arrangements.
Dental Solutions
QSI Dental Division Practice Management and Clinical Systems. In fiscal year 2010, we began selling hosted 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 remains a dominant player. This software solution, formerly called
NextDDS and now named QSIDental Web to better identify it as a cloud-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, our 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 our 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, 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 of 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.
Ambulatory Solutions
NextGen® Ambulatory Practice Management Systems. NextGen® 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.
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 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 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
7
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 offers a workflow module, prescription management, automatic document and letter generation,
patient education, referral tracking, interfaces to billing and lab systems, physician alerts and reminders and powerful reporting
and data analysis tools.
NextGen® Ambulatory EHR also offers a foundation to meet Patient Centered Medical Home and Accountable Care
Organization recognition and achieve collaborative care. In 2012, a population health management solution named NextGen®
Population Health ("PH") was introduced to enhance collaborative care capabilities. It features integrated, multi-modal cascading
communication tools including interactive voice response, texting, email, NextGen® Patient Portal, and clinical data from
NextGen® Ambulatory EHR. NextGen® PH 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® PM and clinical
data from NextGen® Ambulatory EHR.
Interoperability and Connectivity
Interoperability connects patients, practices, hospitals, health systems, communities, and payers. Effective interoperability
solutions cross over multiple platforms and other systems, both inside and outside of organizations. It connects disparate
systems so providers can benefit from controlled, secure data flow, decreased costs, and reduced errors. Interoperability makes
all patient encounter data available in the patient record, helping to improve care collaboration, quality, and safety. Combined
with the NextGen Healthcare portfolio, Mirth's available solutions enhance our enterprise interoperability initiatives and will
broaden our accountable and collaborative care, population health, disease management and clinical data exchange offering.
Mirth's primary product base includes the following:
Mirth Connect. Mirth Connect, the best-known product offering of Mirth, is a healthcare data integration engine available in its
base form under a community-supported open-source license.
Mirth Results. Mirth Results is a clinical data repository that collects, organizes, and aggregates clinical data from many
different sources to produce a longitudinal patient record that is easily viewed from a web-based provider portal or access via an
open application program interface.
Mirth Match. Mirth Match is an entity identification service, which handles enterprise master patient index, record locator, and
identity de-duplication services.
Other Mirth products and solutions include Mirth Mail, Mirth Appliance, Mirth Care, and Mirth Gateway.
NextGen® Share, the first joint offering of NextGen Healthcare and Mirth, is an interoperability solution that helps providers
safely and securely send and manage referrals, and accurately exchange clinical content, all without leaving their NextGen®
Ambulatory EHR application.
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.
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Hospital Solutions
NextGen® Hospital Solutions is a single-source, interoperable suite to help rural, critical access, or larger hospitals improve
care, operations, and financial results across both hospital and ambulatory settings. It provides a robust connected suite of
clinical, financial, enterprise scheduling, surgery management, emergency department, and EHR-related applications and
services that work together for improved patient and financial outcomes. 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 hospital solutions are highly scalable, secure and easy to use with a Web 2.0-based clinical
component that leverages full “cloud computing” capabilities. Key NextGen® Hospital Solutions products consist of:
NextGen® Inpatient Clinicals. NextGen® Inpatient Clinicals is 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 EHR Module on May 1, 2013 by the 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. NextGen® Inpatient Financials is 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. NextGen® Emergency Department Solution is 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. NextGen® Enterprise Scheduling is 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. NextGen® Surgical Management is 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. The acquisition of ViaTrack, a developer and provider of information technologies that enhance
EDI offerings, has provided us with in house EDI capabilities at lower costs as compared to third party providers. We believe that
significant opportunities exist to leverage ViaTrack's technologies to reduce costs and enhance our EDI offerings to all divisions.
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.
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, that client is assigned 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, and 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 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.
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At present, our training facilities are located in (i) Horsham, Pennsylvania, (ii) Atlanta, Georgia, (iii) Costa Mesa, California, and
(iv) Irvine, California.
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. In addition, we
include intellectual property protective provisions in our client contracts.
We rely on software that we license from third parties for certain components of our products and services. These components
enhance our products and services and help meet evolving customer needs. The failure to license any necessary technology, or
to maintain our existing licenses, could result in reduced functionality of or reduced demand for our products.
Because the software industry is characterized by rapid technological change, we believe such factors as the technological and
creative skills of our personnel, new product developments, frequent product enhancements, name recognition, and reliable
product maintenance are more important to establishing and maintaining a technology leadership position than the various legal
protections of our technology.
Although we believe our products and services, and other proprietary rights, do not infringe upon the proprietary rights of third
parties, third parties may assert intellectual property infringement claims against us in the future. Any such claims may result in
costly, time-consuming litigation and may require us to enter into royalty or cross-license arrangements.
Sales and Marketing
We sell and market our products 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, 2014, 2013 and 2012.
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, hospital, 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 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, 2014, 2013 or 2012.
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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: Allscripts, athenahealth, Inc., Cerner, Computer Programs and
Systems, Inc., eClinicalWorks, Epic Systems Corporation, GE Healthcare, Greenway, Healthcare Management Systems, Inc.,
Healthland, McKesson, MEDITECH and other competitors.
The electronic patient records and connectivity markets, in particular, are subject to rapid changes in technology, and we expect
that competition in these market segments will 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 Healthcare,
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 2014, 2013 and 2012, we expended approximately $62.3 million, $60.3 million and $44.5 million, respectively, on
research and development activities, including capitalized software amounts of $20.8 million, $29.5 million and $13.1 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, 2014, we employed approximately 2,697 persons, of which 2,672 were full-time employees. We believe that our
future success depends in part upon recruiting and retaining qualified sales, marketing and technical personnel as well as other
employees.
Available Information
Our website address is www.qsii.com. We make our periodic and current reports, together with amendments to these reports,
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available on our
website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the
SEC. You may access such filings under the “Investor Relations” button on our website. Members of the public may also read
and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. To obtain information on the operation of the Public Reference Room, please call the SEC at 1-800-
SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains the reports, proxy statements and other information
that we file electronically with the SEC. Our website and the information contained therein or connected thereto is not intended
to be incorporated into this Report or any other report or information we file with the SEC.
ITEM 1A. RISK FACTORS
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
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.
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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 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.
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 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 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 hospital market. We also acquired ViaTrack Systems, LLC ("ViaTrack")
during fiscal year 2012 which develops information technologies that enhance EDI offerings, Matrix during fiscal year 2013 which
provides revenue cycle management services, and Mirth during fiscal year 2014 which develops health information technology
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that helps clients achieve interoperability.. 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, 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.
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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 recently implemented a new company-wide enterprise resource planning (“ERP”) system. The implementation
process was complex and involved 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 enhanced 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 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 the relevant accounting guidance. During the quarter
ended March 31, 2013, we recorded a $17.4 million goodwill impairment charge relating to our Hospital Solutions Division and
during the quarter ended December 31, 2013, we recorded a $26.0 million impairment charge relating to certain long-lived
15
assets of 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 any of our operating segments to be 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.
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.
We face risks related to litigation advanced by a former director and shareholder of ours, a putative class action and a
shareholder derivative claim. On October 7, 2013, a complaint was filed against us and certain of our officers and directors in
the Superior Court of the State of California for the County of Orange, captionedAhmed D. Hussein v. Sheldon Razin, Steven
Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former
director and significant shareholder of ours. The complaint generally alleges fraud and deceit, constructive fraud, negligent
misrepresentation and breach of fiduciary duty in connection with statements made to our shareholders regarding our financial
condition and projected future performance. On November 19, 2013, a complaint was filed against the Company and certain of
the Company’s officers and directors in the United States District Court for the Central District of California, captioned Deerfield
Beach Police Pension Fund, individually and on behalf of all others similarly situated, v. Quality Systems, Inc., Steven T.
Plochocki, Paul A. Holt and Sheldon Razin, No. SACV13-01818-CJC-JPRx, by the Deerfield Beach Police Pension Fund, a
shareholder of the Company. The complaint is a putative class action filed on behalf of the shareholders of the Company other
than the defendants. The complaint, which is substantially similar to the complaint filed by Mr. Hussein described above,
generally alleges that statements made to the Company’s shareholders regarding the Company’s financial condition and
projected future performance were false and misleading in violation of the Exchange Act, and that the individual defendants are
liable for such statements because they are controlling persons under Section 20(a) of the Exchange Act. On January 24, 2014,
a complaint was filed against the Company and certain of the Company’s officers and current and former directors in the United
States District Court for the Central District of California, captioned Timothy J. Foss, derivatively on behalf of himself and all
others similarly situated, vs. Craig A. Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris Panner, D.
Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and Quality Systems, Inc., No. SACV14-00110-
DOC-JPPx, by Timothy J. Foss, a shareholder of the Company. The complaint arises from the same allegations described above
related to the complaints filed by Mr. Hussein and the Deerfield Beach Police Pension Fund and generally alleges breach of
fiduciary duties, abuse of control and gross mismanagement by the Company’s directors, in addition to unjust enrichment and
insider selling by individual directors. Although we believe the claims to be without merit, our operating results and share price
may be negatively impacted due to the negative publicity, expenses incurred in connection with our defense, management
distraction, and/or other factors related to this litigation. In addition, litigation of this nature may negatively impact our ability to
attract and retain customers and strategic partners, as well as qualified board members and management personnel.
Risks Related to Our Products and Services
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.
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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 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.
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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, 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
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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.
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.
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.
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If we are deemed to infringe on the proprietary rights of third parties, we could incur unanticipated expense and be
prevented from providing our products and services. We have been, and may be in the future, subject to intellectual
property infringement claims as the number of our competitors grows and our applications' functionality is viewed as similar or
overlapping with competitive products. We do not believe that we have infringed or are infringing on any proprietary rights of
third parties. However, claims are occasionally asserted against us, and we cannot assure you that infringement claims will not
be asserted against us in the future. Also, we cannot assure you that any such claims will be unsuccessful. We could incur
substantial costs and diversion of management resources defending any infringement claims - even if we are ultimately
successful in the defense of such matters. Furthermore, a party making a claim against us could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or
services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for
our products or services will be available on commercially reasonable terms, or at all.
We face risks related to the periodic maintenance and upgrades that need to be made to our products. As we continue to
develop and improve upon our technology and offerings, we need to periodically upgrade and maintain the products deployed to
our customers. This process can require a significant amount of our internal time and resources, and be complicated and time
consuming for our customers. Certain upgrades may also pose the risk of system delays or failure. If our periodic upgrades and
maintenance cause disruptions to our customers, we may lose revenue-generating transactions, our customers may elect to use
other solutions and we may also be the subject of negative publicity that may adversely affect our business and reputation.
Risks Related to Regulation
There is significant uncertainty in the healthcare industry in which we operate, and the current governmental laws and
regulations as well as any future modifications to the regulatory environment, 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.
For example, the Health Insurance Portability and Accountability Act of 1996 (as modified by The Health Information Technology
for Economic and Clinical Health Act (“HITECH”) provisions of the American Recovery and Reinvestment Act of 2009 (“ARRA”)
(collectively, “HIPAA”) continues to have a direct impact on the health care industry by requiring national provider identifiers and
standardized transactions/code sets, operating rules and necessary security and privacy measures in order to ensure the
appropriate level of privacy of protected health information. These regulatory factors affect the purchasing practices and
operation of health care organizations.
The Patient Protection and Affordable Care Act (“PPACA”), which was amended by the Health Care and Education
Reconciliation Act of 2010, became law in 2010. This comprehensive health care reform legislation included provisions to control
health care costs, improve health care quality, and expand access to affordable health insurance. Together with ongoing
statutory and budgetary policy developments at a federal level, this health care reform legislation could include changes in
Medicare and Medicaid payment policies and other health care delivery administrative reforms that could potentially negatively
impact our business and the business of our clients. Because not all the administrative rules implementing health care reform
under the legislation have been finalized, and because of ongoing federal fiscal budgetary pressures yet to be resolved for
federal health programs, the full impact of the health care reform legislation and of further statutory actions to reform healthcare
payment on our business is unknown, but there can be no assurances that health care reform legislation will not adversely
impact either our operational results or the manner in which we operate our business. Health care industry participants may
respond by reducing their investments or postponing investment decisions, including investments in our solutions and services.
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.
20
Other specific risks include, but are not limited to, risks relating to:
Privacy and Security of Patient Information. As part of the operation of our business, we may have access to or our clients
may provide to us individually-identifiable health information related to the treatment, payment, and operations of providers’
practices. Government and industry legislation and rulemaking, especially HIPAA, HITECH and standards and requirements
published by industry groups such as the Joint Commission require the use of standard transactions, standard identifiers,
security and other standards and requirements for the transmission of certain electronic health information. These standards and
requirements impose additional obligations and burdens on us, limiting the use and disclosure of individually-identifiable health
information, and require us to enter into business associate agreements with our clients and vendors. Our business associates
may interpret HIPAA requirements differently than we do, and we may not be able to adequately address the risks created by
such interpretations. These new rules, and any future changes to privacy and security rules, may increase the cost of
compliance and could subject us to additional enforcement actions, which could further increase our costs and adversely affect
the way in which we do business.
Implementation of ICD-10 Coding for Medical Coding. The Centers for Medicare & Medicaid Services (“CMS”) had mandated
that all providers, payers, clearinghouses and billing services implement the use of new patient codes for medical coding,
referred to as ICD-10 codes on or before October 1, 2014. In April 2014, Congress passed the Protecting Access to Medicare
Act of 2014, which, among other things, delayed the ICD-10 transition by one-year. The ICD-10 transition mandate substantially
increases the number of medical billing codes by which providers will seek reimbursement, increasing the complexity of
submitting claims for reimbursement. Our efforts to provide services and solutions that enable our clients to comply with the ICD-
10 mandate could be time consuming and expensive. In addition, due to the effort and expense of complying with the ICD-10
mandate, our clients may postpone or cancel decisions to purchase our solutions and services. Either of the foregoing, or any
future delay in the ICD-10 transition, could have a material adverse effect on our business, financial condition and results of
operations.
Interoperability Standards. Our clients are concerned with and often require that our software solutions and health care
devices be interoperable with other third party health care information technology suppliers. Market forces or
governmental/regulatory authorities could create software interoperability standards that would apply to our solutions, health
care devices or solutions, and if our software solutions, health care devices or services are not consistent with those standards,
we could be forced to incur substantial additional development costs to conform. The Certification Commission for Healthcare
Information Technology (“CCHIT”) has developed a comprehensive set of criteria for the functionality, interoperability and
security of various software modules in the health care information technology industry. CCHIT, however, continues to modify
and refine those standards. Achieving CCHIT certification is becoming a competitive requirement, resulting in increased software
development and administrative expense to conform to these requirements.
FDA Regulation. 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.
Health Reform. The health reform laws discussed above and that may be enacted in the future contain and may 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.
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. 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 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.
HITECH established the Medicare and Medicaid EHR Incentive Programs to provide incentive payments for eligible
professionals, hospitals, and critical access hospitals as they adopt, implement, upgrade, or demonstrate meaningful use of
certified EHR technology. HITECH also authorized CMS to apply payment adjustments, or penalties, to Medicare eligible
professionals and eligible hospitals that are not meaningful users under the Medicare EHR Incentive Program.
Although we believe that our service offerings will meet the requirements of HITECH 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. In addition, the financial incentives associated with the meaningful use program are tied to provider participation in
Medicare and Medicaid, and we cannot predict whether providers will continue to participate in these programs. Any delay in the
21
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, amendment or repeal of current healthcare laws and regulations or the delay in regulatory
implementation could require us to undertake additional efforts to meet meaningful use standards, materially impact our ability to
compete in the evolving healthcare IT market, materially impact healthcare providers' decisions to implement electronic health
records systems or have other impacts that would be unfavorable to our business.
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.
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, 2014. 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
22
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;
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.
23
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.
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 16.9% of the outstanding shares of our common stock at March 31, 2014.
Another former director, who owns approximately 9.4% (based on publicly filed information) of the outstanding shares of our
common stock at March 31, 2014, 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 practice 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 practice 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 practice, 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.
24
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters, the QSI Dental Division and the NextGen Division training operations are located in Irvine,
California. We believe that our present facilities are adequate for our current needs. Should we continue to grow, we may be
required to lease or acquire additional space. We believe that suitable additional or substitute space is available, if needed, at
market rates.
As of March 31, 2014, we leased an aggregate of approximately 447,200 square feet of space with lease agreements expiring at
various dates. Significant locations are as follows:
Square Feet
QSI Dental Division and corporate offices
Irvine, California
Augusta, Georgia
Other locations
NextGen Division
Horsham, Pennsylvania
Atlanta, Georgia
Costa Mesa, California
Other locations
Hospital Solutions Division
Austin, Texas
Other locations
RCM Services Division
St. Louis, Missouri
Hunt Valley, Maryland
North Canton, Ohio
India Healthcare Private Limited
Total leased properties
ITEM 3. LEGAL PROCEEDINGS
54,500
7,300
1,800
110,000
34,800
20,000
6,900
45,000
2,400
55,000
34,000
22,100
53,400
447,200
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, by current and former employees regarding certain employment matters and by
certain shareholders. 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.
25
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, 2012
September 30, 2012
December 31, 2012
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
March 31, 2014
High
Low
$44.19
$28.22
$19.14
$20.96
$19.47
$23.58
$24.15
$21.07
$23.93
$15.04
$16.02
$17.16
$17.01
$18.63
$20.29
$16.28
At May 27, 2014, there were approximately 96 holders of record of our common stock.
Dividends
In January 2007, our Board of Directors adopted a practice whereby we intend to pay a regular quarterly dividend on our
outstanding common stock, subject to further review and approval, sufficiency of funds 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 practice, would likely be distributable on or
about the fifth day of each of the months of October, January, April and July.
On May 28, 2014, 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 13, 2014 with an expected distribution date on or about
July 3, 2014.
Our Board of Directors declared the following dividends during the periods presented (stock split adjusted):
Declaration Date
May 22, 2013
July 24, 2013
October 23, 2013
January 22, 2014
Fiscal year 2014
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
Record Date
June 14, 2013
September 13, 2013
December 13, 2013
March 14, 2014
June 15, 2012
September 14, 2012
December 14, 2012
March 15, 2013
June 17, 2011
September 19, 2011
December 20, 2011
March 20, 2012
Payment Date
July 5, 2013
October 4, 2013
January 3, 2014
April 4, 2014
July 3, 2012
October 5, 2012
December 28, 2012
April 5, 2013
July 5, 2011
October 5, 2011
January 5, 2012
April 5, 2012
Per Share
Dividend
0.175
0.175
0.175
0.175
0.700
0.175
0.175
0.175
0.175
0.700
0.175
0.175
0.175
0.175
0.700
$
$
$
$
$
$
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.
26
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, 2014 assuming $100
was invested on March 31, 2009 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 3/31/2009 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, 2010, 2011, 2012, 2013 and 2014 was published by NASDAQ
and, accordingly for the periods ended March 31, 2010, 2011, 2012, 2013 and 2014, 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.
27
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, 2014 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
2014
Fiscal Year Ended March 31,
2012
2011
2013
2010
$ 444,667 $ 460,229 $ 429,835 $ 353,363 $ 291,811
220,163
189,652
151,223
127,482
110,807
224,504
270,577
278,612
225,881
181,004
149,214
148,353
128,846
108,310
41,524
4,805
5,873
23,088
269
(356 )
23,001
7,321
30,865
4,859
17,400
69,100
(107 )
(79 )
68,914
26,190
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
263
61
94,416
32,810
226
268
76,218
27,839
$
$
$
15,680 $
42,724 $
75,657 $
61,606 $
48,379
0.26 $
0.26 $
0.72 $
0.72 $
1.29 $
1.28 $
1.06 $
1.06 $
59,918
60,134
59,392
59,462
58,729
59,049
57,894
58,236
0.84
0.84
57,270
57,592
Dividends declared per common share
$
0.700 $
0.700 $
0.700 $
0.625 $
0.600
Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Total liabilities
March 31,
2014
March 31,
2013
March 31,
2012
March 31,
2011
March 31,
2010
$ 103,145 $ 105,999 $ 134,444 $ 116,617 $
84,611
$ 136,472 $ 170,297 $ 183,277 $ 145,758 $ 118,935
$ 445,058 $ 443,055 $ 440,352 $ 378,686 $ 310,180
$ 149,968 $ 136,006 $ 145,175 $ 154,016 $ 121,891
Total shareholders’ equity
$ 295,090 $ 307,049 $ 295,177 $ 224,670 $ 188,289
28
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, its operating segments,
and the products and services we offer.
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, 2014.
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.
On September 9, 2013, we acquired Mirth, a global leader in health information technology that helps clients achieve
interoperability. Operating results associated with Mirth products and services are included in the NextGen Division. The
acquisition of Mirth will enhance our current enterprise interoperability initiatives and broaden our accountable and collaborative
care, population health, disease management and clinical data exchange offerings. Mirth offers a wide variety of products and
services utilized by both users of Mirth open code technology as well as a large base of domestic and international paying
customers. 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.
29
The acquisition is enabling our RCM Services Division to expand its footprint among private and hospital-based physicians and
groups by leveraging Matrix's RCM expertise.
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 leverage ViaTrack's technologies to reduce
costs and enhance our EDI offerings to all divisions.
In the last few years, we also acquired companies that were established developers of software and services for the hospital
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 acquisitions are part of our long term 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 hospital markets.
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 stimulate demand for robust electronic health record
solutions as well as new healthcare information technology 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 hospitals, 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 hospital 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
leverage this strategic asset by expanding our product and service offerings towards this customer base.
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, capitalizable software development costs, 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.
30
We believe that the significant accounting policies, as described in Note 2 of our consolidated financial statements, “Summary of
Significant Accounting Policies” should be read in conjunction with management’s discussion and analysis of financial condition
and results of operations. We believe the following table depicts the most critical accounting policies that affect our consolidated
financial statements:
Revenue Recognition
Judgments and Uncertainties
We generate revenue from the sale of
licensing rights to use our software products
sold directly to end-users and value-added
resellers, or VARs. We also generate revenue
from sales of hardware and third party
software, implementation and training, EDI,
RCM, post-contract support (maintenance),
and other services, including subscriptions
and hosting services, performed for clients
who license our products.
Revenue from implementation and training
services is recognized as the corresponding
services are performed. Maintenance
revenue is recognized ratably over the
contractual maintenance period. RCM
revenue is derived from service 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”). We limit our assessment of VSOE for each
element to the price charged when the same element is sold separately.
VSOE calculations are updated and reviewed quarterly or annually
depending on the nature of the product or service. We generally establish
VSOE for the related undelivered elements based on the bell-shaped
curve method. Maintenance VSOE for our largest clients is based on
stated renewal rates only if the rate is determined to be substantive and
falls within our customary pricing practices.
When evidence of fair value exists for the 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, we defer revenue
related to the undelivered elements in a system sale based on VSOE of
fair value of each of the undelivered elements and 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 our
arrangements 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.
We have historically offered short-term rights of return in certain sales
arrangements. If we are 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 we are 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.
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.
31
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 for
potential credit losses are determined by
establishing both specific and general
reserves.
Judgments and Uncertainties
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. Specific reserves
are based on management’s estimate of the probability of collection for
certain troubled accounts. If the financial condition of our clients were to
deteriorate resulting in an impairment of their ability to make payments,
additional allowances would be required.
Effect if Actual Results Differ from Assumptions
Although we believe that our approach to estimates and judgments as
described herein is reasonable, actual results could differ and we may be
exposed to increases or decreases in required reserves that could be
material.
Software Development Costs
Judgments and Uncertainties
Development costs, consisting primarily of
employee salaries and benefits, 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.
An assessment of capitalized software costs in FY 2014 determined that
an impairment existed. Refer to the "Overview of Our Results - Impairment
of Goodwill and Other Assets" section for details on the impairment charge
recorded in the current fiscal year.
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
We test goodwill for impairment annually during our first fiscal quarter,
referred to as the annual test date. We will also test for impairment
between annual test dates if an event occurs or circumstances change
that would indicate the carrying amount may be impaired. Impairment
testing for goodwill is performed at a 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.
32
Goodwill (continued)
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. Refer to the "Overview of Our Results - Impairment of
Goodwill and Other Assets" section for information regarding the
impairment of goodwill at March 31, 2014.
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.
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 depending on the nature of the assets being
sold. 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.
Business Combinations — Purchase Price
Allocations
During the last three fiscal years, we
completed six acquisitions: Mirth, Poseidon,
Matrix, ViaTrack, CQI and IntraNexus.
Intangible Assets
Judgments and Uncertainties
Intangible assets consist of trade names and
contracts, customer relationships, and
software technology, all of which arose in
connection with our acquisitions.
These intangible assets are recorded at fair value and are stated net of
accumulated amortization. We currently amortize intangible assets using a
method that reflects the pattern in which the economic benefits of the
intangible asset are consumed.
33
Intangible Assets (continued)
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.
An assessment of intangible assets in FY 2014 determined that an
impairment existed. Refer to the "Overview of Our Results - Impairment of
Goodwill and Other Assets" section for details on the impairment charge
recorded in the current fiscal year.
Share-Based Compensation
Judgments and Uncertainties
Our stock-based compensation plans consist
of stock options and restricted stock. See
Note 12 of our consolidated financial
statements for a complete discussion of our
stock-based compensation programs.
We estimate the fair value of share-based payment awards on the date of
grant using an option-pricing model. Expected term is estimated using
historical exercise experience. Volatility is estimated by using the
weighted-average historical volatility of our 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 our consolidated statements of income.
On May 22, 2013, the Board of Directors approved its fiscal year 2014
equity incentive program for certain employees to be awarded options to
purchase 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 2014.
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 the 2005
Plan, 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 our 2014 incentive plan are initially based on the number of options
expected to vest after assessing the probability that certain performance
criteria will be met. Cumulative adjustments are recorded quarterly to
reflect subsequent changes in the estimated outcome of performance-
related conditions.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood there will be a material
change in the future estimates or assumptions we use to determine stock-
based compensation expense. However, if actual results are not
consistent with our estimates or assumptions, we may be exposed to
changes in stock-based compensation expense that could be material.
Self-Insured Liabilities
Judgments and Uncertainties
Effective January 1, 2010, we became self-
insured with respect to healthcare claims,
subject to stop-loss limits. We accrue for
estimated self-insurance costs and uninsured
exposures based on claims filed and an
estimate of claims incurred but not reported
as of each balance sheet date. However, it is
possible that recorded accruals may not be
adequate to cover the future payment of
claims. Adjustments, if any, to estimated
accruals resulting from ultimate claim
payments will be reflected in earnings during
the periods in which such adjustments are
determined.
Our self-insured liabilities contain uncertainties because management is
required to make assumptions and to apply judgment to estimate the
ultimate cost to settle reported claims and claims incurred but not reported
at the balance sheet date.
Effect if Actual Results Differ from Assumptions
We do not believe there is a reasonable likelihood that there will be a
material change in the estimates or assumptions we use to calculate our
self-insured liabilities. However, if actual results are not consistent with our
estimates or assumptions, we may be exposed to losses or gains that
could be material.
34
Overview of Our Results
• Consolidated revenue decreased 3.4% in the year ended March 31, 2014, as compared to the prior year period. The
decrease reflects a 29.8% decline in system sales revenue, mitigated by a 6.3% growth in recurring services revenue (i.e.
maintenance, EDI, RCM and other services revenues).
•
Consolidated gross profit as a percentage of revenue decreased to 50.5% in the year ended March 31, 2014, as compared
to 58.8% in the prior year period. Gross profit was significantly impacted by a $20.1 million impairment charge recorded to
cost of software sales during the third quarter of the current fiscal year related to the Hospital Solutions Division. See the
"Impairment of Goodwill and Other Assets" section below for further information. In addition, gross profit was negatively
affected by a shift in revenue mix towards recurring services and away from higher margin software license sales. Software
license revenue represented 13.7% of total revenue in the current year compared to 19.2% in the prior year and recurring
service revenue represented 80.5% of total revenue as compared to 73.1% in the prior year. Total gross profit from system
sales declined 81.8% to $12.9 million versus $70.9 million in the prior year. Partially offsetting the decline in system sales
gross profit, was an increase in gross profit from recurring services revenue, including maintenance, RCM and EDI, which
grew 6.0% to $211.6 million compared to $199.6 million in the prior year. Consolidated operating income decreased 66.6%
in the year ended March 31, 2014, as compared to the prior year period primarily due the decline in gross profit as
mentioned above and a 34.5% increase in research and development costs.
Impairment of Goodwill and Other Assets
As reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2013, a goodwill impairment charge of $17.4
million was recorded during the fourth quarter of fiscal 2013 relating to the Hospital Solutions Division (the "Hospital reporting
unit" or "Hospital"), which reduced the book value of goodwill associated with the division to $4.3 million. At that time,
management concluded there was no impairment of intangible or other assets.
During the third quarter of fiscal 2014, management identified certain factors, including a further decline in revenues and
operating results, key management turnover and other qualitative indicators of potential impairment, which warranted a
reassessment of the Hospital reporting unit's multi-year forecast. Based upon such reassessment, we concluded that it was
more likely than not that the fair value of the Hospital reporting unit was less than its carrying amount. Accordingly, management
re-evaluated the Hospital reporting unit's residual goodwill balance for potential impairment. In the course of such assessment,
other long-term assets of the Hospital reporting unit were also evaluated for potential impairment as described below.
We performed step one of the goodwill impairment test to estimate the fair value of the Hospital reporting unit based on a
discounted cash flow analysis considering various scenarios as well as market approach. The step one analysis indicated that
the fair value of the Hospital reporting unit was lower than the carrying value. The failure of step one triggered step two of the
impairment test, which required that we determine the implied fair value of the Hospital reporting unit's assets and liabilities in
the same manner of determining such amounts in a business combination.
Based on our assessment of the fair value of the Hospital reporting unit's assets and liabilities, we concluded that the net
carrying amount of all assets and liabilities approximated their respective fair values, other than capitalized software
development costs, customer relationships intangible assets and acquired software technology intangible assets. The capitalized
software development costs and intangible assets were deemed to have zero fair value based on the following analysis:
•
•
Capitalized software development costs - such costs represent the capitalized portion of research and development
costs applicable to Hospital, net of cumulative amortization of such costs. Management performed an assessment of
the recoverability of such capitalized software costs and determined that the capitalized amounts are not recoverable
based on a negative net realizable value expected to be generated from the Hospital reporting unit's software. As a
result, the remaining net capitalized software costs of $9.1 million were deemed to be impaired and were fully written
off.
Intangible assets - we determined that the acquired software technology intangible asset class represents the primary
long-term asset of the Hospital reporting unit. We then estimated the expected future undiscounted cash flows
associated with this asset class, including the residual value of other long-term assets of this business unit. Based
upon such cash flow estimates, we deemed the customer relationships and acquired software technology to have no
fair value, and an impairment charge of $12.6 million was recognized to reduce the carrying value of this asset class to
zero.
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. As a result of the step two analysis, we concluded that the carrying value of goodwill exceeded the Hospital reporting
unit's implied fair value and that the implied fair value of the goodwill balance was zero as of the measurement date.
Accordingly, a goodwill impairment charge of $4.3 million was recognized to reduce the value of Hospital reporting unit's goodwill
to zero as of December 31, 2013.
Key assumptions underlying the estimation of the fair value of the Hospital reporting unit include: a) the near-term continuation of
recent results of operations for the Division, b) our detailed reassessment of the strategies of this Division and the actions
required to achieve those strategies, and c) the technology roadmap pertinent to this Division. We remain committed to the
35
hospital market and continue to invest in implementation and training, infrastructure and support, customer service and software
development. We intend to maintain the sufficiency of these investments while effectively managing the operating efficiencies of
the Hospital reporting unit.
In aggregate, the Hospital reporting unit's impairment charge relating to goodwill, capitalized software development costs,
customer relationships and acquired software technology intangible assets was $26.0 million for the third quarter of fiscal 2014,
as summarized below (in thousands):
Cost of revenue:
Software and hardware - Hospital Solutions Division
$
— $
— $
9,075 $
Software and hardware - unallocated corporate expenses
Total impairment in cost of revenue
—
—
11,023
11,023
—
9,075
9,075
11,023
20,098
Goodwill
Intangible
Assets
Capitalized
Software Costs
Total
Operating expenses:
Impairment of goodwill and other assets - unallocated corporate
expenses
Total impairment in operating expenses
4,342
4,342
1,531
1,531
—
—
5,873
5,873
Total impairment of goodwill and other assets
$
4,342 $
12,554 $
9,075 $
25,971
Although goodwill and acquired intangible assets are allocated to the Hospital Solutions Division for the purposes of impairment
testing, such assets are deemed corporate assets and the related impairment charges for such assets are recorded as
unallocated corporate expenses. The classification of the impairment charge between cost of revenue and operating expenses
is consistent with the historic accounting for costs associated with each impaired asset class.
QSI Dental Division
• QSI Dental Division revenue decreased 0.8% in the year ended March 31, 2014, and divisional operating income (excluding
unallocated corporate expenses) decreased 6.4%, as compared to the same prior year period. The decline in operating
income is the result of a decrease in system sales and higher research and development costs. It should be noted that the
QSI Dental Division's new software solution, QSIDental Web ("QDW"), is being sold as a SaaS solution, which typically
spreads revenue over a longer period of time rather than being recognized upfront. SaaS revenue recognized from QDW in
the year ended March 31, 2014 grew to approximately $0.7 million from $0.5 million in the prior year period due to a growing
number of customers moving to the QDW solution. The number of QDW users grew to over 2,500 by March 31, 2014 and is
expected to continue to grow in the next year.
• 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.
NextGen Division
• NextGen Division revenue decreased 0.9% in the year ended March 31, 2014, as compared to the prior year period. This
variance reflects a 23.1% decline in system sales revenue, mitigated by 8.6% growth in recurring service revenue, including
increases of 5.3% in maintenance and 13.5% in EDI revenue. System sales at the NextGen Division have declined in recent
quarters partly as a result of greater penetration of EHR software among medium and large size practice groups, which has
reduced the number of sales opportunities to new customers. Consolidation of practice groups by hospitals has also put
increased competitive pressure on the NextGen Division versus hospital based vendors, which possess integrated hospital
and ambulatory offerings. Recurring service revenue, which consists mostly of maintenance and EDI revenue, increased
7.7% to $202.6 million and accounted for 59.4% of total NextGen Division revenue for the year ended March 31, 2014. In
the same period a year ago, recurring service revenue of $188.2 million represented 54.7% of total NextGen Division
revenue.
• NextGen Division operating income (excluding unallocated corporate expenses) decreased 9.6% in the year ended
March 31, 2014, 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 16.4% increase in research and development costs in the current period.
36
• Our acquisition of Mirth on September 9, 2013 added approximately $7.5 million in primarily recurring revenue and $1.0
million in operating income for the NextGen Division from the date of acquisition through March 31, 2014.
• 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 hospital
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. We believe that our acquisition of Mirth will provide improved capabilities
around interoperability and improved competitiveness in our markets, as well as providing new customers and expanded
markets for the NextGen Division.
• The latest significant versions of our ambulatory software products achieved general release during the third quarter of fiscal
2014. We expect that these releases will result in significantly higher rates of amortization relative to previously capitalized
software development costs reflected in our recent historical operating results. Amortization of capitalized software costs are
reflected as cost of revenue on our Consolidated Statements of Comprehensive Income. Refer to Note 8, “Capitalized
Software Costs” of our notes to the consolidated financial statements included elsewhere in this Report for an estimate of
future amortization of capitalized software costs as of March 31, 2014. We have also noted a trend towards shorter
development cycles, which impacts our rate of capitalization of software development costs. Although lower capitalization
rates have no impact on our overall cash flows, it results in a higher portion of our software development costs being
expensed up front, resulting in increased research and development expenses as compared to prior periods.
• The NextGen Division’s growth is attributed to a strong brand name and reputation within the marketplace for healthcare
information technology software and services and investments in sales and marketing activities, including new marketing
campaigns, Internet advertising investments, 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 50.3% in the year ended March 31, 2014, as compared to the prior year
period. Revenue was negatively impacted by a 83.1% decline in system sales, a 29.3% decline in maintenance revenue,
and higher write-offs and reserve accruals for anticipated sales credits.
•
The divisional operating loss (excluding unallocated corporate expenses) for the year ended March 31, 2014 was $26.8
million, as compared to a loss of $4.4 million for the prior year period. Operating results were negatively impacted by the
decrease in system sales and maintenance revenues and $9.1 million in impairment charges recorded to this Division in the
third quarter of the fiscal year related to the write-off of capitalized software development costs, as discussed above in the
"Impairment of Goodwill and Other Assets" section.The Hospital Solutions Division has incurred losses in the last two fiscal
years 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 customer base and maximize customer satisfaction. Our expectations
about the future performance of this Division resulted in the full impairment of significant long-term assets of this Division as
described above. Along with recording an impairment charge, we have also ceased capitalization and amortization of
software development costs at this Division. For the last full quarter preceding the impairment, total capitalized software
costs were approximately $1.2 million and total amortization of previously capitalized amounts was approximately $0.6
million.
RCM Services Division
• RCM Services Division revenue increased 5.6% in the year ended March 31, 2014. 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, 2014, partially offset by the departure of a large customer during the third
and fourth quarters of fiscal 2014.
• Operating income increased 3.5% in the year ended March 31, 2014 as compared to the prior year period primarily due to
growth in RCM revenues and gross profit, partially offset by higher selling, general and administrative expenses.
• The Company believes that a significant opportunity exists to continue cross selling RCM services to existing customers.
The portion of existing NextGen Division customers who are using the RCM Services Division's services is less than 10%.
Management is actively pursuing efforts to achieve faster growth from expanded efforts to leverage the existing NextGen
Division's sales force towards selling RCM services. We also believe that the increased complexity related to the billing and
collections process, expected to go into effect with ICD-10, will create additional opportunities for our RCM Services
Division.
37
• Actual and expected customer turnover may impact short term revenue for the division. However, we are encouraged by
increased sales activity and a growing sales pipeline of RCM services.
Corporate expenses (costs unallocated to the operating segments)
• Historically, amortization expense associated with customer relationships and acquired software technology intangible
assets has been recorded as an unallocated corporate expense. As a result of the impairment of these intangible assets
related to the Hospital Division, recent historical amortization expense of approximately $0.9 million per quarter will no
longer impact Corporate expenses.
• As a result of the Mirth acquisition, we anticipate an increase in expenses related to amortization of acquired intangible
assets and acquisition related expenses (including fair value adjustments) as compared to our recent historical operating
results. Refer to Note 7, “Intangible Assets” of our notes to the consolidated financial statements included elsewhere in this
Report for the remaining estimated amortization of definite-lived intangible assets as of March 31, 2014, which includes the
estimated future impact of amortization related to intangible assets acquired from Mirth. In addition, the purchase
accounting valuation of the Mirth acquisition resulted in a $5.2 million discount related to the share-based purchase
consideration. Such discount is being amortized over a three year period ending September 2016. This amortization is
reflected as a component of our selling, general and administrative operating expenses.
38
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, net
Other income (expense), net
Income before provision for income taxes
Provision for income taxes
Net income
Fiscal Year Ended March 31,
2013
2012
2014
13.7 %
19.2 %
28.5 %
5.8
19.5
36.0
15.1
14.2
15.2
80.5
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
100.0
100.0
100.0
9.9
6.7
16.6
5.1
9.6
10.4
7.8
32.9
49.5
50.5
33.6
9.3
1.1
1.3
45.3
5.2
0.1
(0.1)
5.2
1.6
3.5 %
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
17.6 %
39
Comparison of the Fiscal Years Ended March 31, 2014 and March 31, 2013
Net Income. Our net income for the year ended March 31, 2014 was $15.7 million, or $0.26 per share on both a basic and fully
diluted basis. In comparison, we earned $42.7 million, or $0.72 per share on both a basic and fully diluted basis for the year
ended March 31, 2013. The change in net income for the year ended March 31, 2014 was primarily attributed to the following:
•
•
•
•
an 81.8% decrease in consolidated system sales gross profit as a result of a $20.1 million impairment charge
recorded to cost of software sales related to the Hospital Solutions Division and reduced software license sales
due to a number of factors, including higher adoption rates by large physician groups resulting in a lower 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 of the deadline to adopt stage two meaningful
use requirements until calendar 2014;
a 191.0% decline in implementation and training services gross profit (loss) from $4.1 million for the year ended
March 31, 2013 to $(3.8) million for the year ended March 31, 2014 as a result of reduced utilization rates due to
the lack of expected demand from our customers related to upgrade assistance for ICD-10, for which the
deadline to comply with its requirements was delayed from October 2014 to at least October 2015; offset by
an increase in gross profit from recurring service revenue, including maintenance, RCM and EDI which grew
1.0%, 6.0% and 16.0%, respectively, compared to the prior year period; and
an $18.9 million decrease in the provision for income taxes due to lower taxable income in comparison to the
prior year period.
Revenue. Revenue for the year ended March 31, 2014 decreased 3.4% to $444.7 million from $460.2 million for the year ended
March 31, 2013. NextGen Division revenue decreased 0.9% to $341.1 million from $344.3 million in the year ended March 31,
2014, QSI Dental Division revenue decreased 0.8% to $19.8 million from $20.0 million, and the Hospital Solutions Division
revenue decreased 50.3% to $15.6 million from $31.4 million in the same prior year period. These decreases in revenue were
partially offset by an increase in revenue for the RCM Services Division, which increased 5.6% to $68.1 million from $64.5
million.
System Sales. Revenue earned from company-wide sales of systems for the year ended March 31, 2014 decreased 29.8% to
$86.8 million from $123.6 million in the prior year period.
The decrease in system sales was driven primarily by lower sales of software to both new and existing clients for both the
NextGen and Hospital Solutions Divisions. For the NextGen Division, revenue from system sales decreased 23.1%, or $23.9
million, to $79.6 million during the year ended March 31, 2014 from $103.5 million during the same prior year period while
system sales revenues at the Hospital Solutions Division decreased $11.6 million to $2.4 million in the year ended March 31,
2014 as compared to $14.0 million in the same prior year period.
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, 2014 and 2013 (in
thousands):
Fiscal Year Ended March 31, 2014
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2013
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Software
Hardware and
Third
Party Software
Implementation
and Training
Services
Total System
Sales
$
1,883 $
55,854
(3,492 )
391
1,228 $
4,776
194
—
1,300 $
18,988
5,660
—
4,411
79,618
2,362
391
$
$
54,636 $
6,198 $
25,948 $
86,782
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
NextGen Division software license revenue decreased 22.3% in the year ended March 31, 2014 versus the same period last
year. The Division's software revenue accounted for 70.2% of divisional system sales revenue during the year ended March 31,
2014 compared to 69.4% during the same period a year ago. Software license revenue continues to be an area of primary
emphasis for the NextGen Division.
40
Hospital Solutions Division software license revenue decreased 161.1% in the year ended March 31, 2014 versus the same
period last year due to higher write-offs and accruals for anticipated sales credits, combined with significantly lower software
sales to new and existing customers.
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.
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 electronic health records 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. Additionally, the Mirth acquisition provided us with new products and services around HIE and
interoperability, which we intend to utilize to drive future growth. It is difficult to assess the relative impact as well as the timing of
positive and negative trends, however, we believe we are well positioned to support the ever increasing need for healthcare
information technology.
During the year ended March 31, 2014, 6.0% of the NextGen Division's system sales revenue was represented by hardware and
third-party software compared to 5.5% 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 decreased 27.0% in the year ended
March 31, 2014 compared to the same prior year period. Implementation and training revenue related to system sales at the
Hospital Solutions Division decreased 21.5%, in the year ended March 31, 2014 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. It should be noted that we have
experienced a decline in the level of systems sales in recent quarters which in turn resulted in a decline in the amount of
implementation services sold. We have not reduced our staffing levels in spite of the decline in revenue as we believe that the
demand for services is going to increase especially as our customers implement the newest release of our core ambulatory
software products, which support new ICD-10 billing requirements.
Maintenance, EDI, RCM and Other Services. For the year ended March 31, 2014, our company-wide revenue from
maintenance, EDI, RCM and other services grew 6.3% to $357.9 million from $336.6 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 revenue from the RCM Services Division.
Total NextGen Division maintenance revenue for the year ended March 31, 2014 grew 5.3% to $141.0 million from $133.9
million for the same prior year period while NextGen Division EDI revenue grew 13.5% to $61.6 million compared to $54.3
million in the same prior year period. Maintenance revenue for the NextGen Division increased by $7.1 million for the year
ended March 31, 2014 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
primarily attributable to organic growth. We intend to continue to promote maintenance, EDI and RCM services to both new and
existing clients.
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 11.9% to $58.9 million in the year ended March 31, 2014 from
$52.6 million in the same prior year period. Other services revenue benefited from a strong increase in consulting revenue to
existing NextGen Division customers as well as the addition of Mirth subscription revenue in the current year.
QSI Dental Division maintenance, EDI and other services revenue for the year ended March 31, 2014 was $15.4 million
compared to $14.6 million for the same prior year period. For the year ended March 31, 2014, RCM revenue for the RCM
Services Division grew $3.8 million, or 6.3%, to $63.0 million compared to $59.2 million in the same prior year period. For the
Hospital Solutions Division, maintenance, EDI and other services revenue for the year ended March 31, 2014 decreased 24.0%
as compared to the same prior year period due to a decline in maintenance revenue related to higher accruals for anticipated
sales credits and lower amounts of maintenance services provided to existing customers.
41
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, 2014 and 2013 (in thousands):
Fiscal Year Ended March 31, 2014
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2013
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Maintenance
EDI
RCM
Other
Total
$
8,401 $
5,463 $
— $
1,565 $
15,429
$
$
141,026
61,606
9,981
652
144
82
—
—
62,976
58,870
261,502
3,127
3,992
13,252
67,702
160,060 $
67,295 $
62,976 $
67,554 $ 357,885
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
Cost of Revenue. Cost of revenue for the year ended March 31, 2014 increased 16.1% to $220.2 million from $189.7 million in
the same prior year period and the cost of revenue as a percentage of revenue increased to 49.5% from 41.2% driven primarily
by the following factors: (a) the $20.1 million impairment charge recorded to cost of software sales related to the Hospital
Solutions Division, (b) higher percentage of lower margin revenue streams such as EDI and RCM services and (c) slight cost
increases across all revenue categories, except for implementation and training services.
The following table details revenue and cost of revenue on a consolidated and divisional basis for the years ended March 31,
2014 and 2013 (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 (loss)
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,
2014
%
2013
%
$
$
19,840
10,210
9,630
100.0 % $
19,990
100.0 %
51.5 %
10,453
48.5 % $
9,537
52.3 %
47.7 %
$ 341,120
100.0 % $ 344,315
100.0 %
120,300
35.3 %
114,788
$ 220,820
64.7 % $ 229,527
33.3 %
66.7 %
$
15,614
100.0 % $
31,413
100.0 %
27,170
174.0 %
16,703
$
(11,556 )
(74.0 )% $
14,710
53.2 %
46.8 %
$
$
$
68,093
47,934
20,159
14,549
100.0 % $
64,511
100.0 %
70.4 %
45,008
29.6 % $
19,503
N/A $
2,700
69.8 %
30.2 %
N/A
$ 444,667
100.0 % $ 460,229
100.0 %
220,163
49.5 %
189,652
$ 224,504
50.5 % $ 270,577
41.2 %
58.8 %
____________________
(1)
Relates to the amortization of acquired software technology intangible assets
42
Consolidated gross profit margins decreased for the year ended March 31, 2014 compared to the same prior year period
primarily due to a significant decrease in software sales during the current year. Additionally, the gross profit margin was
negatively impacted by the impairment charge on current year cost of revenue, which totaled $9.1 million and $11.0 million for
the Hospital Solutions Division and the unallocated cost of revenue, respectively.
Gross profit (loss) for the Hospital Solutions Division decreased to (74.0)% for the three months ended March 31, 2014 as
compared to 46.8% for the same prior year period primarily due to the $9.1 million impairment charge recorded to cost of
revenue, as well as significant declines in system sales revenues, implementation and training, and maintenance gross profit.
The change in maintenance gross profit was primarily a result of increased accruals for anticipated sales credits in the current
period.
Gross profit margins in the QSI Dental Division and RCM Services Division remained consistent compared to the same prior
year period with a change of less than 1.0% in each division's respective gross margin percentages.
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, 2014 and 2013:
Fiscal Year Ended March 31, 2014
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Fiscal Year Ended March 31, 2013
QSI Dental Division
NextGen Division
Hospital Solutions Division
RCM Services Division
Consolidated
Hardware
and
Third
Party
Software
Payroll
and
Related
Benefits
Software
Total
Cost
of
Revenue
Gross
Profit
(Loss)
EDI
Other
6.4 %
3.6 %
66.3 %
— %
8.6 %
6.3 %
2.6 %
2.0 %
— %
2.9 %
5.3 %
1.3 %
2.9 %
— %
1.3 %
8.7 %
1.6 %
3.4 %
— %
1.8 %
21.9 %
13.7 %
12.5 %
10.8 %
4.2 %
7.1 %
51.5 % 48.5 %
35.3 % 64.7 %
78.6 %
46.3 %
20.4 %
0.5 %
0.8 %
9.0 %
25.7 %
174.0 % (74.0 )%
23.3 %
70.4 % 29.6 %
10.2 %
49.5 % 50.5 %
19.8 %
13.6 %
12.1 %
28.9 %
45.3 %
18.3 %
9.3 %
0.1 %
1.0 %
7.7 %
3.9 %
7.7 %
52.3 % 47.7 %
33.3 % 66.7 %
18.8 %
53.2 % 46.8 %
23.5 %
69.8 % 30.2 %
10.5 %
41.2 % 58.8 %
The cost of software at the Hospital Solutions Division increased significantly to 66.3% during the year end March 31, 2014 as
compared to 2.0% in the same prior year period due to the $9.1 million impairment charge recorded to cost of software, which
resulted in negative gross margins at the division for the year ended March 31, 2014.
During the year ended March 31, 2014, hardware and third-party software constituted a slightly 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 20.4% of consolidated
revenue in the year ended March 31, 2014 compared to 18.3% during the same period last year. The absolute level of
consolidated payroll and benefit expenses grew from $84.1 million in the year ended March 31, 2013 to $90.8 million in the year
ended March 31, 2014, an increase of 8.0%, or approximately $6.7 million. Of the $6.7 million increase, approximately $2.3
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 $0.8 million in the NextGen Division and $3.2 million for the
Hospital Solutions Division for the year ended March 31, 2014 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 $0.4
million increase 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, 2014 and 2013.
Other cost of revenue, which primarily consists of third-party annual license, hosting costs, third party implementation and
consulting services, and outsourcing costs, decreased slightly to 10.2% of total revenue during the year ended March 31, 2014
as compared to 10.5% for the same period a year ago.
As a result of the foregoing events and activities, our gross profit percentage decreased to 50.5% for the year ended March 31,
2014 versus 58.8% for the same prior year period.
43
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31,
2014 increased 0.6% to $149.2 million as compared to $148.4 million for the same prior year period. The increase in these
expenses resulted primarily from:
•
•
•
•
•
•
•
$2.8 million increase in rent and other facilities costs;
$2.4 million increase in salaries and related benefit expenses primarily as a result of headcount additions;
$1.6 million increase in equipment depreciation expense;
$1.3 million increase in legal expenses;
$0.9 million net increase in other selling and administrative expenses, partially offset by
$5.4 million decrease in bad debt expense as a result of improved collections and fewer customers with specific
reserves for bad debt; and
$2.7 million decrease in sales commissions as a result of lower sales.
Share-based compensation expense was approximately $1.8 million and $1.9 million for the years ended March 31, 2014 and
2013, respectively, and is included in the aforementioned amounts. Selling, general and administrative expenses as a
percentage of revenue increased from 32.2% in the year ended March 31, 2013 to 33.6% in the year ended March 31, 2014.
Research and Development Costs. Research and development costs for the years ended March 31, 2014 and 2013 were
$41.5 million and $30.9 million, respectively. Research and development costs as a percentage of revenue increased to 9.3% in
the year ended March 31, 2014 from 6.7% for the prior year period. The increase in research and development expenses is
primarily due to the reduction in capitalized software costs in the current period resulting from the recent releases of the latest
versions of ambulatory software products, a trend towards shorter development cycles resulting in lower rates of software
development costs capitalization, the inclusion of research and development costs for Mirth, as well as the continued investment
in enhancements to our specialty template development, preparation for ICD-10 requirements, new products including NextGen
Knowledge Base Model ("KBM"), NextGen Mobile, NextGen NextPen, NextGen Community Connectivity consisting of NextGen
HIE, NextGen Patient Portal (“NextMD.com”), and NextGen Health Quality Measures (“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, 2014
and 2013, our additions to capitalized software were $20.8 million and $29.5 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 hospital
products. The decrease in capitalized software added in the year ended March 31, 2014 is primarily the result of the recent
releases of the latest versions of ambulatory software products and a trend towards shorter development cycles, as mentioned
above, as well as the cessation of software development costs capitalization at the Hospital Solutions Division as a result of the
recent impairment charge. For the years ended March 31, 2014 and 2013, total research and development expenditures
including costs expensed and costs capitalized were $62.3 million and $60.4 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, 2014 and 2013.
Amortization of Acquired Intangible Assets. Amortization included in operating expense related to acquired intangible assets
for the years ended March 31, 2014 and 2013 was $4.8 million and $4.9 million, respectively.
Impairment of Goodwill and Other Assets. Refer to "Overview of Our Results - Impairment of Goodwill and Other Assets"
above for details on the $26.0 million impairment charge recorded in the current period of which $5.9 million was recorded to
operating expenses and $20.1 million was recorded to cost of software revenue.
Provision for Income Taxes. The provision for income taxes for the years ended March 31, 2014 and 2013 was $7.3 million
and $26.2 million, respectively. The effective tax rates were 31.8% and 38.0% for the years ended March 31, 2014 and 2013,
respectively. The effective rate for the year ended March 31, 2014 decreased as compared to the prior year period due to a net
benefit from the federal research and development tax credit and a benefit in qualified production activities deduction resulting
from reduced profits in fiscal 2014. The federal research and development tax credit statute expired on December 31, 2011 and
was retroactively enacted through December 31, 2013 in January 2013.
During the years ended March 31, 2014 and 2013, we recognized research and development tax credits of approximately $1.2
million and $1.5 million, respectively. The Company also claimed the qualified production activities deduction under Section 199
of the Internal Revenue Code (“IRC”) of approximately $3.2 million and $9.0 million (pre-tax) during the years ended March 31,
2014 and 2013, 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. We expect to receive the full benefit of the deferred tax assets recorded with the exception of a specific state tax credit
for which we have recorded a valuation allowance.
44
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 $
100,517
10,576
961
1,662 $
4,839
987
—
1,104 $
5,631
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 prior year
period. 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 prior year period. 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.
45
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 prior year period. 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 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 year ended March 31, 2013.
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
14,553
96
44,214
—
—
—
—
45,572
40,645
201,403
2,158
3,290
16,711
48,958
$
138,832 $
49,259 $
45,572 $
47,374 $ 281,037
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. 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.
46
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
10,453
9,537
100.0 % $
19,596
100.0 %
52.3 %
9,097
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
16,703
14,710
64,511
45,008
19,503
2,700
100.0 % $
34,463
100.0 %
53.2 %
10,540
46.8 % $
23,923
30.6 %
69.4 %
100.0 % $
50,309
100.0 %
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
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.
47
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 prior year period. 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 were 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 prior year period. 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
$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 years 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.
48
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 HIE (formerly Community Health Solution), NextGen Patient Portal
(“NextMD.com”), and 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 continued to enhance our software to meet the Meaningful
Use definitions under the ARRA as well as further integrate both ambulatory and hospital 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. 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 reporting unit
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.
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 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.
Liquidity and Capital Resources
The following table presents selected financial statistics and information for the years ended March 31, 2014, 2013 and 2012 (in
thousands):
Cash and cash equivalents and marketable securities
Net increase (decrease) in cash and cash equivalents and marketable
securities
Net income
Net cash provided by operating activities
$
$
$
$
Number of days of sales outstanding (1)
___________________________
(1) Days sales outstanding is equal to accounts receivable, net divided by average daily revenue
87
122
49
Fiscal Year Ended March 31,
2013
2012
2014
113,801 $
118,011 $
139,431
(4,210 ) $
(21,420 ) $
15,680 $
42,724 $
104,140 $
68,041 $
21,694
75,657
78,105
122
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
as adjusted to exclude non-cash expenses, such as impairment charges, 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, 2014, 2013 and 2012
(in thousands):
Fiscal Year Ended March 31,
2013
2012
2014
Net income
Non-cash expenses
Cash from net income (as adjusted)
Change in accounts receivable
Change in other assets and liabilities
$
15,680 $
42,724 $
54,791
70,471
40,548
(6,879 )
42,824
85,548
(7,988 )
(9,519 )
Net cash provided by operating activities
$
104,140 $
68,041 $
75,657
14,932
90,589
(10,389 )
(2,095 )
78,105
Net cash provided by operating activities for the years ended March 31, 2014, 2013 and 2012 was approximately $104.1 million,
$68.0 million and $78.1 million, respectively. Cash from operations increased significantly for the year ended March 31, 2014 as
compared to the prior year primarily resulting from a $40.5 million decrease in accounts receivable and a $11.2 million reduction
in net income taxes paid, partially offset by a decrease in our cash from net income and changes in other assets and liabilities.
The increase in cash flows attributable to accounts receivable activity is primarily due to the enhanced capabilities of our
enterprise resource planning software, which resulted in increased effectiveness of our collections activities, and additional
emphasis on working capital management in the current period as reflected by a reduction of days sales outstanding (“DSO”) in
comparison to the prior year period. Specifically, DSO decreased to 87 days for the year ended March 31, 2014, as compared to
122 days in the prior year.
Cash Flows from Investing Activities
Net cash used in investing activities for the years ended March 31, 2014, 2013 and 2012 was $63.8 million, $53.6 million and
$34.9 million, respectively. The $10.2 million increase in net cash used in investing activities during March 31, 2014 compared to
the prior year is primarily due to the $35.0 million of cash paid for the acquisition of Mirth, partially offset by a decrease in
additions to capitalized software and equipment and improvements in the current year and cash paid for the acquisitions of
Poseidon and Matrix in the prior year.
Cash Flows from Financing Activities
Net cash used in financing activities for the years ended March 31, 2014, 2013 and 2012 was $43.2 million, $42.9 million and
$25.4 million, respectively. During the year ended March 31, 2014, we received proceeds of $2.2 million from the exercise of
stock options, paid $42.2 million in dividends to shareholders, and paid $3.4 million in contingent consideration related to
acquisitions compared to proceeds of $0.9 million from the exercise of stock options, payment of $41.5 million in dividends to
shareholders and payment of $2.4 million in contingent consideration during the year ended March 31, 2013 and 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.
We recorded a reduction in our tax benefit from share-based compensation of $0.2 million, $0.1 million and $4.1 million for the
year ended March 31, 2014, 2013 and 2012, respectively, related to tax deductions received from stock option exercises. The
benefit was recorded as additional paid in capital.
Cash and Cash Equivalents and Marketable Securities
At March 31, 2014, we had combined cash and cash equivalents and marketable securities of $113.8 million, compared to
$118.0 million as of March 31, 2013. This decrease principally reflects the $35.0 million expended for the purchase of Mirth in
September 2013, mitigated by the continued decrease in DSO and emphasis on working capital management in the current
year.
We may use a portion of these funds towards future acquisitions although the timing and amount of funds to be used has not
been determined. We intend to expend some of these funds for the development of products complementary to our existing
product line as well as new versions of certain of our products. These developments are intended to take advantage of more
powerful technologies and to increase the integration of our products. Such expenditures will be funded from cash on hand and
cash flows from operations.
50
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.
In January 2007, our Board of Directors adopted a practice whereby we intend to pay a regular quarterly dividend on our
outstanding common stock, subject to further review and approval, sufficiency of funds 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 practice, would likely be distributable on or
about the fifth day of each of the months of January, April, July and October. The Board of Directors has historically shown a
strong commitment to the payment of a regular dividend and will continue to evaluate the continued payment of dividends based
on our operating cash flows and future capital requirements.
On May 28, 2014, 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 13, 2014 with an expected distribution date on or about July 3,
2014.
Our Board of Directors declared the following dividends during the periods presented (stock split adjusted):
Declaration Date
May 22, 2013
July 24, 2013
October 23, 2013
January 22, 2014
Fiscal year 2014
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
Record Date
June 14, 2013
September 13, 2013
December 13, 2013
March 14, 2014
June 15, 2012
September 14, 2012
December 14, 2012
March 15, 2013
June 17, 2011
September 19, 2011
December 20, 2011
March 20, 2012
Payment Date
July 5, 2013
October 4, 2013
January 3, 2014
April 4, 2014
July 3, 2012
October 5, 2012
December 28, 2012
April 5, 2013
July 5, 2011
October 5, 2011
January 5, 2012
April 5, 2012
Per Share
Dividend
$
$
$
$
$
$
0.175
0.175
0.175
0.175
0.700
0.175
0.175
0.175
0.175
0.700
0.175
0.175
0.175
0.175
0.700
Management believes that its cash, cash equivalents and marketable securities on hand at March 31, 2014, together with its
cash flows from operations 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 the next twelve months. Our Board of Directors will continue to
evaluate the strategic use of our cash towards payment of dividends in light of both working capital and capital expenditure
requirements.
Contractual Obligations
The following table summarizes our significant contractual obligations at March 31, 2014 and the effect that such obligations are
expected to have on our liquidity and cash in future periods:
Contractual Obligations
Total
2015
2016
2017
2018
2019
2020 and
beyond
Operating lease obligations
Contingent consideration and other acquisition related
liabilities (excluding share-based payments)
$ 30,756 $ 8,247 $ 7,776 $ 5,855 $ 5,146 $
1,971 $
1,761
1,243
618
313
312
—
—
—
Total
$ 31,999 $ 8,865 $ 8,089 $ 6,167 $ 5,146 $
1,971 $
1,761
For the year ended March 31,
The deferred compensation liability as of March 31, 2014 was $4,809, which is not included in the table above as the timing of
future benefit payments to employees is not determinable.
51
New Accounting Pronouncements
Refer to Note 2, “Summary of Significant Accounting Policies,” of our notes to consolidated financial statements included
elsewhere in this Report for a discussion of new accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There is little to no market risk as 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.
Although we have international operations, the impact of foreign currency fluctuations have not been material to our financial
position or operating results.
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 evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Security Exchange Act of 1934, as amended, the "Exchange Act") as of March 31, 2014, the end of the period covered by
this Report (the “Evaluation Date”). They have concluded that, as of the Evaluation Date, these disclosure controls and
procedures were effective to ensure that material information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities and would be disclosed on a timely basis. The Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and procedures are designed, and are effective, to give
reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is
recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC. They have
also concluded that the our disclosure controls and procedures are effective to ensure that information required to be disclosed
in the reports that are filed or submitted under the Exchange Act are accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
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.
Management of the Company has assessed the effectiveness of the Company’s internal control over financial reporting as of
March 31, 2014 in making our assessment of internal control over financial reporting, management used the criteria set forth in
Internal Control — Integrated Framework (1992) 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, 2014.
52
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2014 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 September 9, 2013, we completed our acquisition of Mirth Corporation, now a wholly-owned subsidiary whose total assets
and total revenues represent 1.4% and 1.7%, respectively, of the related consolidated financial statement amounts as of and for
the year ended March 31, 2014. In conducting our evaluation of the effectiveness of our internal controls over financial reporting
as of March 31, 2014, we have elected to exclude Mirth Corporation from our evaluation for fiscal year 2014 as permitted under
existing SEC rules. We are currently in the process of integrating Mirth Corporation's historical internal controls over financial
reporting with the rest of the Company. The integration may lead to changes in future periods, but we do not expect these
changes to materially affect our internal controls over financial reporting. We expect to complete this integration in fiscal year
2015.
During the year ended March 31, 2014, there were no other changes in our “internal control over financial reporting” (as defined
in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and
procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their
objectives and are effective at that reasonable assurance level. However, management can provide no assurance that our
disclosure controls and procedures or our internal control over financial reporting can prevent all errors and all fraud under all
circumstances. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been or will be detected. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes
in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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 2014 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 2014 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 2014 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 2014 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 2014 Annual
Shareholders’ Meeting to be filed with the SEC.
53
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(1) Index to Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2014 and 2013
Consolidated Statements of Comprehensive Income — Years Ended March 31, 2014, 2013 and 2012
Consolidated Statements of Shareholders’ Equity — Years Ended March 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows — Years Ended March 31, 2014, 2013 and 2012
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.
Index to Exhibits
Page
58
59
60
61
62
64
87
54
Exhibit
Number
Description
INDEX TO EXHIBITS
2.1
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*
Share Purchase Agreement by and among Quality Systems, Inc., each of the shareholders of Mirth
Corporation identified on Annex A thereto, and Jon Teichrow dated as of September 9, 2013, is hereby
incorporated by reference to Exhibit 2.1 of the registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2013.
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*
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.
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.
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 is incorporated by reference to Exhibit 10.3 to the
registrant's Current Report on Form 8-K filed May 28, 2013.
55
10.15
Agreement by and among Quality Systems, Inc., the Clinton Group, Inc. and certain of its affiliates, dated as
of July 17, 2013, is hereby incorporated by reference to Exhibit 10.1 of the registrant's Current Report on
Form 8-K filed July 17, 2013.
10.16*
Description of 2015 Director Compensation Program is incorporated by reference to Exhibit 10.1 to the
registrant's Current Report on Form 8-K filed May 29, 2014.
10.17**
Form of Performance-Based Restricted Stock Unit Agreement.
21***
List of subsidiaries.
23.1***
Consent of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP.
31.1***
31.2***
32.1***
Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
This exhibit is a compensatory arrangement and is filed herewith.
***
****
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.
56
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 29, 2014
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 29, 2014
/s/ Steven T. Plochocki
Chief Executive Officer (Principal Executive Officer) and Director
May 29, 2014
Steven T. Plochocki
/s/ Paul A. Holt
Paul A. Holt
/s/ Craig Barbarosh
Craig Barbarosh
/s/ George Bristol
George Bristol
/s/ James Malone
James Malone
/s/ Morris Panner
Morris Panner
/s/ Russell Pflueger
Russell Pflueger
Chief Financial Officer (Principal Accounting Officer) and
Executive Vice President
Director
Director
Director
Director
Director
/s/ Lance Rosenzweig
Director
Lance Rosenzweig
Jeffrey H. Margolis
Director
57
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
May 29, 2014
To the Board of Directors and Shareholders of Quality Systems, Inc.
Report of Independent Registered Public Accounting Firm
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive
income, shareholders’ equity, and cash flows present fairly, in all material respects, the financial position of Quality Systems, Inc.
and its subsidiaries at March 31, 2014 and March 31, 2013, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 2014 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, 2014, based on criteria established in Internal Control - Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements and financial statement schedule, 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, on 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.
As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, management has
excluded Mirth Corporation from its assessment of internal control over financial reporting as of March 31, 2014 because it was
acquired by the Company in a purchase business combination during 2014. We have also excluded Mirth Corporation from our
audit of internal control over financial reporting. Mirth Corporation is a wholly-owned subsidiary whose total assets and total
revenues represent 1.4% and 1.7%, respectively, of the related consolidated financial statement amounts as of and for the year
ended March 31, 2014.
/s/ PricewaterhouseCoopers LLP
Orange County, California
May 29, 2014
58
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash (Note 2)
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 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 60,206 and 59,543
shares at March 31, 2014 and 2013, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
March 31,
2014
March 31,
2013
$
103,145 $
105,999
4,351
10,656
5,488
12,012
110,181
148,257
834
8,366
11,690
11,135
710
—
12,140
12,720
260,358
297,326
22,801
39,152
33,016
72,804
16,927
21,887
39,781
27,550
45,761
10,750
$
445,058 $
443,055
$
7,888 $
71,077
15,953
—
10,686
18,282
11,501
65,207
11,915
1,480
10,418
26,508
123,886
127,029
2,187
4,809
19,086
149,968
1,219
3,809
3,949
136,006
602
595
194,739
179,743
(182 )
99,931
295,090
(11 )
126,722
307,049
443,055
Total liabilities and shareholders’ equity
$
445,058 $
The accompanying notes are an integral part of these consolidated financial statements.
59
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 and other assets
Total operating expenses
Income from operations
Interest income (expense), net
Other 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 available-for-sale ("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,
2013
2012
2014
$
60,834 $
88,572 $
122,407
25,948
86,782
160,060
67,295
62,976
67,554
357,885
444,667
44,226
29,681
73,907
22,590
42,567
46,203
34,896
146,256
220,163
224,504
149,214
41,524
4,805
5,873
201,416
23,088
269
(356 )
23,001
7,321
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
15,680 $
42,724 $
(107 )
(64 )
34
—
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
75,657
(3 )
(42 )
15,509 $
42,758 $
75,612
0.26 $
0.26 $
0.72 $
0.72 $
59,918
60,134
59,392
59,462
0.70 $
0.70 $
1.29
1.28
58,729
59,049
0.70
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
60
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Balance, March 31, 2011
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 loss:
Unrealized loss on AFS securities
Translation adjustments
Net income
Balance, March 31, 2012
Exercise of stock options and issuance of restricted
stock
Common stock issuance for earnout settlement
Common stock issuance for acquisitions
Tax deficiency resulting from exercise of stock
options
Stock-based compensation
Dividends declared
Components of other comprehensive income:
Translation adjustments
Net income
Balance, March 31, 2013
Exercise of stock options and issuance of restricted
stock
Common stock issuance for earnout settlement
Common stock issuance for acquisitions
Tax deficiency resulting from exercise of stock
options
Stock-based compensation
Dividends declared
Components of other comprehensive loss:
Unrealized loss on AFS securities
Translation adjustments
Net income
Common Stock
Shares Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
58,068 $
581 $ 132,968 $ 91,121 $
— $
224,670
735
286
91
—
—
—
—
—
—
7
3
1
—
—
—
—
—
—
12,783
11,885
3,931
4,145
3,321
—
—
—
—
—
— (41,181 )
—
—
—
—
—
75,657
59,180
592
169,033
125,597
83
165
115
—
—
—
—
—
1
1
1
—
—
—
—
—
947
2,999
4,594
(157 )
2,327
—
—
—
—
—
— (41,599 )
—
—
—
42,724
—
—
—
—
—
—
(42 )
(3 )
—
(45 )
—
—
—
—
—
—
34
—
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
59,543
595
179,743
126,722
(11 )
307,049
167
62
434
—
—
—
—
—
—
2
1
4
—
—
—
—
—
—
2,199
1,375
9,269
(337 )
2,490
—
—
—
—
—
— (42,471 )
—
—
—
—
—
15,680
—
—
—
—
—
—
(64 )
(107 )
—
2,201
1,376
9,273
(337 )
2,490
(42,471 )
(64 )
(107 )
15,680
Balance, March 31, 2014
60,206 $
602 $ 194,739 $ 99,931 $
(182 ) $
295,090
The accompanying notes are an integral part of these consolidated financial statements.
61
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year Ended March 31,
2013
2012
2014
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
$
15,680 $
42,724 $
75,657
Depreciation
Amortization of capitalized software costs
Amortization of other intangibles
Provision for bad debts
Provision for inventory obsolescence
Share-based compensation
Deferred income taxes
Excess tax benefit from share-based compensation
Change in fair value of contingent consideration
Impairment of goodwill and other assets
Loss on disposal of equipment and improvements
Changes in assets and liabilities, net of amounts acquired:
Accounts receivable
Inventories
Income taxes receivable
Other current assets
Other assets
Accounts payable
Deferred revenue
Accrued compensation and related 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
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
Purchase of Mirth
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
8,069
12,338
8,330
1,467
—
2,490
(3,984 )
(183 )
101
25,971
192
40,548
(81 )
(8,366 )
4,074
(1,662 )
(4,170 )
1,036
4,038
(861 )
(2,876 )
1,000
989
104,140
(20,784 )
(7,934 )
—
—
—
—
—
—
—
—
—
(35,033 )
(63,751 )
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 )
183
2,200
(42,203 )
(3,423 )
(43,243 )
(2,854 )
105,999
103,145 $
84
948
(41,535 )
(2,353 )
(42,856 )
(28,445 )
134,444
105,999 $
$
62
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 )
4,145
12,789
(40,989 )
(1,319 )
(25,374 )
17,827
116,617
134,444
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
(In thousands)
Fiscal Year Ended March 31,
2013
2012
2014
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 September 9, 2013, the Company acquired Mirth in a transaction
summarized as follows:
Fair value of assets acquired
Cash paid
Common stock issued at fair value
Fair value of contingent consideration
Liabilities assumed
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20,443 $
31,656 $
50,605
— $
— $
— $
965
— $
3,000
11,888
62,787 $
(35,033 )
(7,882 )
(13,307 )
6,565 $
—
—
—
—
— $
— $
—
—
— $
— $
—
—
—
—
—
— $
— $
—
—
—
—
— $
— $
—
—
—
—
— $
— $
—
—
—
— $
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.
63
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 and 2013
(In thousands, except shares and per share data)
1. Organization of Business
Description of Business
Quality Systems, Inc. ("QSI") 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, QSI opened a captive entity in
India called Quality Systems India Healthcare Private Limited (“QSIH”) (collectively, with QSI and the four Divisions, the
"Company"). The Company primarily derives 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”). The Company's systems and
services provide its 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 its proprietary software in combination with third-party
hardware and software solutions, the Company's 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, the Company capitalized on the increasing focus on medical cost
containment and further expanded its information processing systems to serve the ambulatory market. In the mid-1990’s, the
Company made two acquisitions that accelerated its penetration of the ambulatory market and formed the basis for the NextGen
Division. In the last few years, the Company acquired several companies as part of its strategy to enhance its EDI and RCM
services capabilities as well as expand into the small and specialty hospital market. More recently, the Company acquired Mirth
Corporation ("Mirth"), which operates under the NextGen Division and is expected to enhance the Company's current enterprise
interoperability initiatives and broaden its accountable and collaborative care, population health, disease management and
clinical data exchange offerings. Today, the Company serves the dental, ambulatory, hospital and RCM services markets through
its 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, North Canton, Ohio, South Jordan, Utah 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 Software as a Service ("SaaS") model and the NextGen® Practice
Management ("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 the Divisions. In an effort to encourage
this cross selling of its products and services between Divisions, the Company is in the process of further integrating its
ambulatory and hospital products to provide a more robust and comprehensive platform to offer its customers. The Divisions
also share the resources of the Company's “corporate office,” which includes a variety of accounting and other administrative
functions.
Acquisitions
On September 9, 2013, the Company acquired Mirth, a global leader in health information technology that helps clients achieve
interoperability. Operating results associated with Mirth products and services are included in the NextGen Division. The
acquisition of Mirth will enhance the Company's current enterprise interoperability initiatives and broaden its accountable and
collaborative care, population health, disease management and clinical data exchange offerings. Mirth offers a wide variety of
products and services utilized by both users of Mirth open code technology as well as a large base of domestic and international
paying customers.
64
Stock Split
On July 27, 2011, the Board of Directors approved a two-for-one split of the Company's 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 Annual Report on Form 10-K have been restated for all periods presented to reflect the two-for-
one split of our common stock.
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”). Mirth is included in the consolidated financial statements from the date of acquisition (September 9, 2013). 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”).
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 ("VARs") The Company also generates revenue from sales of hardware and third-party
software, implementation and training, electronic data interchange (“EDI”), revenue cycle management ("RCM"), post-contract
support (maintenance) and other services, including subscriptions and hosting services, 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 the
price charged when the same element is 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. VSOE is established on maintenance for the Company's largest clients 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 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 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.
65
The Company ensures that the following criteria have been met prior to recognition of revenue:
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
(cid:120)
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.
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 the 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, subscriptions,
hosting services, 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, 2014 of which $102,119 was in excess of the Federal Deposit Insurance Corporation
insurance limit of $250 per owner. The Company is exposed to credit loss for amounts in excess of insured limits in the event of
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 in other income (expense).
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.
66
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:
(cid:120)
(cid:120)
(cid:120)
Computer equipment
Furniture and fixtures
3-5 years
5-7 years
Leasehold improvements
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
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, consisting primarily of employee salaries and benefits, 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 ongoing reviews 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. During the quarter
ended December 31, 2013, the Company recorded a charge of $9,075 related to the write down of capitalized software
development costs at the Hospital Solutions Division, which reduced the net carrying amount of capitalized software costs
associated with the division to zero. See Note 6 for additional information.
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 depending on the nature of the assets being
sold. 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 quarters ended December 31, 2013 and March 31, 2013, the Company recorded charges of $4,342 and $17,400,
respectively, related to impairment of the goodwill at the Hospital Solutions Division, which reduced the amount of goodwill
associated with the division to zero. See Note 6 for additional information.
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. During the quarter ended December 31, 2013,
the Company recorded a charge of $12,554 related to impairment of the customer relationships and software technology
intangible assets at the Hospital Solutions Division, which reduced the net carrying value of such intangible assets associated
with the division to zero. See Note 6 for additional information.
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.
67
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, 2014. 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, 2014 and 2013, the self-insurance accrual was approximately $2,090 and $1,336, 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 $5,600, $6,499 and $6,254 for
the years ended March 31, 2014, 2013 and 2012, 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.
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,
2013
2012
2014
15,680 $
42,724 $
75,657
59,918
59,392
0.26 $
0.72 $
15,680 $
42,724 $
59,918
216
60,134
59,392
70
59,462
58,729
1.29
75,657
58,729
320
59,049
1.28
Diluted net income per common share
$
0.26 $
0.72 $
The computation of diluted net income per share does not include 1,355, 966 and 335 options for the years ended March 31,
2014, 2013 and 2012, respectively, because their inclusion would have an anti-dilutive effect on net income per share.
68
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, 2014, 2013
and 2012 was not significant.
The following table shows total share-based compensation expense included in the consolidated statements of income for years
ended March 31, 2014, 2013 and 2012:
Costs and expenses:
Cost of revenue
Research and development costs
Selling, general and administrative
Total share-based compensation
Income tax benefit
Decrease in net income
Fiscal Year Ended March 31,
2013
2012
2014
$
348 $
201 $
323
1,819
2,490
(794 )
230
1,896
2,327
(726 )
$
1,696 $
1,601 $
261
184
2,876
3,321
(1,236 )
2,085
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 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.
3. Cash and Cash Equivalents
At March 31, 2014 and 2013, the Company had cash and cash equivalents of $103,145 and $105,999, 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.
69
—
—
—
—
—
—
—
—
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, 2014 and March 31, 2013:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Balance at
March 31,
2014
Unobservable
Inputs
(Level 3)
ASSETS
Cash and cash equivalents (1)
$
103,145 $
103,145 $
— $
Restricted cash
Marketable securities (2)
LIABILITIES
Contingent consideration related to acquisitions
$
$
$
4,351
10,656
4,351
10,656
—
—
118,152 $
118,152 $
— $
14,913
14,913 $
— $
— $
— $
— $
14,913
14,913
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
____________________
(1)
(2)
Cash and cash equivalents consists of money market funds.
Marketable securities consists of fixed-income securities, including certificates of deposit and municipal 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. Key assumptions include discount rates and probability-adjusted achievement of
revenue and strategic targets that are not observable in the market. 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 related to the acquisitions of Sphere Health Systems, Inc., IntraNexus,
Inc., and Mirth were estimated based on the probability of achieving certain business milestones and/or management's forecast
of expected revenues.
70
The following table presents activity in the Company's financial assets and liabilities measured at fair value using significant
unobservable inputs (Level 3), as of March 31, 2014:
Balance at March 31, 2012
Acquisitions (Note 5)
Earnout payments (1)
Fair value adjustments
Balance at March 31, 2013
Acquisitions (Note 5)
Earnout payments (2)
Fair value adjustments
Balance at March 31, 2014
_____________________
(1) Comprised of $2,354 in cash and $3,000 in common stock
(2) Comprised of cash payments only
Non-Recurring Fair Value Measurements
Total Liabilities
$
$
6,556
2,862
(5,354 )
1,272
5,336
13,307
(3,831 )
101
$
14,913
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, 2014, there were no adjustments to fair value of such assets, except for the impairment charge
related to the Hospital Solutions Division's goodwill and other assets (see Note 6) and the intangible assets acquired from Mirth
(see Note 5).
5. Business Combinations
On September 9, 2013, the Company acquired 100% of the outstanding capital stock of Mirth, a global leader in health
information technology that helps clients achieve interoperability. The acquisition will enhance the Company’s current enterprise
interoperability initiatives and broaden its accountable and collaborative care, population health, disease management and
clinical data exchange offerings. The Mirth purchase price totaled $56,222, which includes share-based contingent consideration
with an estimated fair value of $13,307 payable over a three year period subject to achievement of certain strategic milestones.
The share-based contingent consideration was adjusted by a $5,239 fair value discount, which is being amortized over the three
year achievement period. The goodwill arising from the acquisition of Mirth represents the opportunity for the Company to sell
Mirth-powered health information technology solutions as a complement to its other products as well as other expected market
participant synergies going forward and is expected to be deductible for income tax purposes over a period of 15 years. Mirth
operates under the NextGen Division.
The Company accounted for the Mirth acquisition as a purchase business combination. The purchase price was allocated to the
tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date.
The fair values of acquired assets and liabilities assumed represent management’s estimate of fair value. As additional
information became available during the measurement period about facts and circumstances that existed as of the acquisition
date, the Company recorded a $215 adjustment to goodwill during the third quarter of fiscal 2014 relating to a change in
estimated working capital and a $712 adjustment to goodwill during the fourth quarter of fiscal 2014 relating a change in
estimates to the fair value of certain current assets.
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 Mirth acquisition during the year ended March 31, 2014 is summarized as follows:
Cash paid
Common stock issued at fair value
Contingent consideration
Total purchase price
71
Mirth
35,033
7,882
13,307
56,222
$
$
The following table summarizes the final purchase price allocation for the Mirth acquisition:
Fair value of the net tangible assets acquired and liabilities assumed:
Current assets (including accounts receivable of $3,939)
Equipment and improvements
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
Goodwill
Total identifiable intangible assets acquired
Total purchase price
Mirth
$
4,231
822
(764 )
(5,802 )
(1,513 )
1,350
2,800
22,200
31,385
57,735
56,222
$
The pro forma effects of the Mirth acquisition 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 it has been determined to have an indefinite useful life.
Goodwill by division consists of the following:
QSI Dental Division (1)
NextGen Division
Hospital Solutions Division
RCM Services Division
Total goodwill
March 31,
2013
Acquisitions
Impairment
March 31,
2014
$
7,289 $
— $
— $
7,289
1,840
4,342
32,290
31,385
—
33,225
—
—
(4,342 )
—
—
32,290
$
45,761 $
31,385 $
(4,342 ) $
72,804
(1) QSI Dental Division goodwill is presented on a basis consistent with that of the management reporting structures within the
Company. For the purposes of testing goodwill for impairment annually and as otherwise may be required; however, the QSI
Dental Division goodwill is allocated to all business units that derive cash flows from the products associated with the acquired
goodwill. For all periods presented in this report, the allocation resulted in substantially all of such goodwill being ascribed to the
NextGen Division.
Approximately 70% of the goodwill balance as of March 31, 2014 is expected to be deductible for income tax purposes over the
periods prescribed by the Internal Revenue Code ("IRC").
As reported in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2013, a goodwill impairment
charge of $17,400 was recognized during the fourth quarter of fiscal 2013 relating to the Hospital Solutions Division (the
"Hospital reporting unit" or "Hospital"), which reduced the book value of goodwill associated with the division to $4,342. At that
time management concluded there was no impairment of intangibles or other assets.
During the third quarter of fiscal 2014, management identified additional factors, including a further decline in revenues and
operating results, key management turnover and other qualitative indicators of potential impairment, which warranted a
reassessment of the Hospital reporting unit's multi-year forecast. Based upon such reassessment, the Company concluded that
it was more likely than not that the fair value of the Hospital reporting unit was less than its carrying amount. Accordingly,
management re-evaluated the Hospital reporting unit's residual goodwill balance for potential impairment. In the course of such
assessment, other long-term assets of the Hospital reporting unit were also evaluated for potential impairment as described
below.
The Company performed step one of the goodwill impairment test to estimate the fair value of the Hospital reporting unit based
on a discounted cash flow analysis considering various scenarios as well as market approach. The step one analysis indicated
that the fair value of the Hospital reporting unit was lower than the carrying value. The failure of step one triggered step two of
the impairment test, which required the Company to determine the implied fair value of the Hospital reporting unit's assets and
liabilities in the same manner of determining such amounts in a business combination.
72
Based on the Company's assessment of the fair value of the Hospital reporting unit's assets and liabilities, the Company
concluded that the net carrying amount of all assets and liabilities approximated their respective fair values, other than
capitalized software development costs, customer relationships intangible assets and acquired software technology intangible
assets. The capitalized software development costs and intangible assets were deemed to have zero fair value based on the
following analysis:
•
•
Capitalized software development costs - such costs represent the capitalized portion of research and development
costs applicable to the Hospital reporting unit, net of cumulative amortization of such costs. Management performed an
assessment of the recoverability of such capitalized software costs and determined that the capitalized amounts are not
recoverable based on a negative net realizable value expected to be generated from the Hospital reporting unit's
software. As a result, the remaining net capitalized software costs of $9,075 were deemed to be impaired and were
fully written off.
Intangible assets - the Company determined that the acquired software technology intangible asset class represents
the primary long-term asset of the Hospital reporting unit. The Company then estimated the expected future
undiscounted cash flows associated with this asset class, including the residual value of other long-term assets of this
business unit. Based upon such cash flow estimates, the Company deemed the customer relationships and acquired
software technology intangible assets to have no fair value, and an impairment charge of $12,554 was recognized to
reduce the carrying value of this asset class to zero.
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. As a result of the step two analysis, the Company concluded that the carrying value of goodwill exceeded the reporting
unit's implied fair value and that the implied fair value of the goodwill balance was zero as of the measurement date.
Accordingly, a goodwill impairment charge of $4,342 was recognized to reduce the value of Hospital goodwill to zero as of
March 31, 2014.
Key assumptions underlying the estimation of the fair value of the Hospital reporting unit include: a) the near-term continuation of
recent results of operations for the Division, b) management's detailed reassessment of the strategies of the Hospital reporting
unit and the actions required to achieve those strategies, and c) the technology roadmap pertinent to the Hospital reporting unit.
The Company remains committed to the hospital market and continues to invest in implementation and training, infrastructure
and support, customer service and software development. The Company intends to maintain the sufficiency of these
investments while effectively managing the operating efficiencies of the Hospital reporting unit.
In aggregate, the Hospital reporting unit's impairment charge relating to goodwill, capitalized software development costs,
customer relationships and acquired software technology intangible assets was $25,971 for fiscal year 2014, as summarized
below:
Cost of revenue:
Software and hardware - Hospital Solutions Division
$
— $
— $
9,075 $
Software and hardware - unallocated corporate expenses
Total impairment in cost of revenue
—
—
11,023
11,023
—
9,075
9,075
11,023
20,098
Goodwill
Intangible
Assets
Capitalized
Software Costs
Total
Operating expenses:
Impairment of goodwill and other assets - unallocated corporate
expenses
Total impairment in operating expenses
4,342
4,342
1,531
1,531
—
—
5,873
5,873
Total impairment of goodwill and other assets
$
4,342 $
12,554 $
9,075 $
25,971
Although goodwill and acquired intangible assets are allocated to the Hospital Solutions Division for the purposes of impairment
testing, such assets are deemed corporate assets and the related impairment charges for such assets are recorded as
unallocated corporate expenses. The classification of the impairment charge between cost of revenue and operating expenses
is consistent with the historic accounting for costs associated with each impaired asset class.
73
7. Intangible Assets
In connection with the Mirth acquisition, the Company recorded $26,350 of intangible assets related to trade name, customer
relationships and software technology. The Company is amortizing the trade name and customer relationships over five years
and the software technology over seven years. The weighted average amortization period for the total amount of intangible
assets acquired is 6.7 years.
Approximately 95% of the acquired intangible assets are expected to be deductible for income tax purposes over the periods
prescribed by the IRC.
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, 2014
Customer
Relationships
Trade Name
and Contracts
Software
Technology
Total
$
$
22,050 $
3,368 $
23,510 $
48,928
(11,837 )
(1,599 )
(2,476 )
(15,912 )
10,213 $
1,769 $
21,034 $
33,016
March 31, 2013
Customer
Relationships
Trade Name
and 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
Activity related to the intangible assets for the years ended March 31, 2014 and 2013 is summarized as follows:
Customer
Relationships
Trade Name
and Contracts
Software
Technology
Total
Balance at March 31, 2012
$
7,805 $
162 $
15,292 $
Acquisition
Amortization (1)
Balance at March 31, 2013
Acquisition
Amortization (1)
Impairment (2)
9,450
(4,127 )
13,128
2,800
(4,184 )
1,250
(506 )
906
1,350
(487 )
1,150
(2,926 )
13,516
22,200
(3,659 )
23,259
11,850
(7,559 )
27,550
26,350
(8,330 )
$
(1,531 ) $
— $
(11,023 ) $
(12,554 )
Balance at March 31, 2014
____________________
(1) Amortization of the customer relationships and trade name and contracts 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.
(2) Refer to Note 6 for details on the impairment charge recorded in the current year
10,213 $
21,034 $
1,769 $
33,016
$
The following table represents the remaining estimated amortization of definite-lived intangible assets as of March 31, 2014:
For the year ended March 31,
2015
2016
2017
2018
2019
2020 and beyond
Total
74
$
$
$
7,171
7,024
6,553
4,301
3,517
4,450
33,016
8. Capitalized Software Costs
The Company’s capitalized software development costs are summarized as follows:
Gross carrying amount
Accumulated amortization
Net capitalized software costs
March 31,
2014
March 31,
2013
$
$
100,455 $
94,676
(61,303 )
(54,895 )
39,152 $
39,781
Activity related to net capitalized software costs for the years ended March 31, 2014 and 2013 is summarized as follows:
Fiscal Year Ended March 31,
2014
2013
Beginning of the year
Capitalized
Amortization
Impairment (1)
End of the year
$
39,781 $
20,784
(12,338 )
(9,075 ) $
$
$
19,994
29,455
(9,668 )
—
39,152 $
39,781
____________________________
(1) Refer to Note 6 for details on the impairment charge recorded in the current year
The following table represents the remaining estimated amortization of capitalized software costs as of March 31, 2014. The
estimated amortization is comprised of (i) amortization of released products and (ii) the expected amortization for products that
are not yet available for sale based on their estimated economic lives and projected general release dates.
For the year ended March 31,
2015
2016
2017
2018
2019
2020 and beyond
Total
$
$
$
9,900
8,200
8,200
7,900
2,200
2,752
39,152
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.
Accounts receivable, gross
Sales return reserve
Allowance for doubtful accounts
Accounts receivable, net
March 31,
2014
March 31,
2013
$
127,006 $
166,586
(10,530 )
(6,295 )
(6,506 )
(11,823 )
$
110,181 $
148,257
75
March 31,
2014
March 31,
2013
$
834 $
710
March 31,
2014
March 31,
2013
$
37,322 $
31,633
9,395
8,874
55,591
(32,790 )
8,416
7,125
47,174
(25,287 )
$
22,801 $
21,887
March 31,
2014
March 31,
2013
$
15,482 $
36,634
11,176
7,785
71,077 $
2,187 $
12,085
36,899
9,906
6,317
65,207
1,219
March 31,
2014
March 31,
2013
6,193 $
9,760
3,842
8,073
15,953 $
11,915
$
$
$
$
Inventories are summarized as follows:
Computer systems and components
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
76
Other current and non-current liabilities are summarized as follows:
Care services liabilities
Self insurance reserve
Accrued consulting
Accrued EDI expense
Accrued royalties
Contingent consideration and other liabilities related to acquisitions
Deferred rent
Sales tax payable
Accrued travel
Outside commission payable
Professional services
Customer deposits
Other accrued expenses
Other current liabilities
Contingent consideration and other liabilities related to acquisitions
Deferred rent
Income tax payable
Other liabilities
Other non-current liabilities
10. Income Tax
The provision (benefit) for income taxes consists of the following components:
March 31,
2014
March 31,
2013
$
4,351 $
2,090
1,707
1,702
1,418
1,052
964
803
369
255
170
76
5,488
1,336
2,602
1,452
1,331
8,426
689
869
384
461
27
262
$
$
3,325
18,282 $
3,181
26,508
14,736 $
3,509
841
—
1,382
2,448
—
119
$
19,086 $
3,949
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,
2013
2012
2014
$
8,673 $
30,382 $
2,380
252
11,305
5,019
190
35,591
36,109
8,614
73
44,796
$
$
(2,894 ) $
(8,469 ) $
(3,571 )
(897 )
(193 )
(742 )
(190 )
(3,984 )
(9,401 )
7,321 $
26,190 $
(502 )
(73 )
(4,146 )
40,650
77
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,
2013
2012
2014
35.0 %
35.0 %
35.0 %
4.2
(5.3 )
(4.9 )
5.7
(2.9 )
4.0
(2.1 )
(4.6 )
7.5
(1.8 )
4.5
(0.9 )
(3.0 )
—
(0.6 )
31.8 %
38.0 %
35.0 %
During the years ended March 31, 2014, 2013, and 2012, the Company recognized federal research and development tax
credits of $1,196, $1,461 and $1,055, respectively, and state research and development tax credits of approximately $251, $145
and $165, respectively. The Internal Revenue Service (“IRS”) statute related to research and development credits expired on
December 31, 2011 and was retroactively reinstated through December 31, 2013 in January 2013. The Company's research
and development credits claimed for the year ended March 31, 2014 represent credits for the nine-month period from April 1,
2013 through December 31, 2013.
The Company also claimed the qualified production activities deduction under Section 199 of the Internal Revenue Code (“IRC”)
for $3,189, $9,032, and $10,025 (pre-tax) during the years ended March 31, 2014, 2013, and 2012, 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 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
Intangible assets
Research and development credit
Other
Total deferred tax assets
Deferred tax liabilities:
Accelerated depreciation
Capitalized software
Intangible assets
Prepaid expense
State income taxes
Total deferred tax liabilities
Valuation allowance
Deferred tax assets, net
78
March 31,
2014
March 31,
2013
$
10,144 $
11,483
46
5,219
1,941
—
2,094
6,791
6,086
2,434
2,992
224
3,898
1,615
17
2,291
7,182
—
2,003
3,207
37,747
31,920
$
(1,582 ) $
(13,919 )
—
(1,199 )
(433 )
(17,133 )
(2,288 )
(1,876 )
(7,717 )
(4,124 )
(1,859 )
—
(15,576 )
(2,003 )
$
18,326 $
14,341
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. The Company expects to receive the full benefit
of the deferred tax assets recorded with the exception of a specific state tax credit for which the Company has recorded a
valuation allowance.
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, 2012
Additions for prior year tax positions
Reductions for prior year tax positions
Balance at March 31, 2013
Additions for current/prior year tax positions
Reductions for prior year tax positions
Balance at March 31, 2014
$
$
$
413
455
(135 )
733
405
(263 )
875
The total amount of unrecognized tax benefit that, if recognized, would decrease the income tax provision is $875.
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 $80 and $118 of accrued interest related to income tax matters
at March 31, 2014 and 2013, respectively. No penalties were accrued.
The Company is no longer subject to U.S. federal income tax examinations for tax years before 2013. With a few exceptions, the
Company is no longer subject to state or local income tax examinations for tax years before 2009. 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 $820,
$889 and $630 were made by the Company to the 401(k) plan for the years ended March 31, 2014, 2013 and 2012,
respectively.
The Company has a deferred compensation plan (the “Deferral Plan”) for the benefit of those employees who qualify.
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 $4,809 and $3,809 at March 31, 2014 and 2013, 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 $4,865
and $3,728 at March 31, 2014 and 2013, 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 $62, $49 and $66 to the Deferral Plan for the years ended
March 31, 2014, 2013 and 2012, respectively.
79
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, 2014, there were 20,000 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 earlier by the Board of Directors. As of March 31, 2014, there were 1,350,101 outstanding
options and 2,632,977 shares available for future grant related to the 2005 Plan.
A summary of stock option transactions during the years ended March 31, 2014, 2013 and 2012 is as follows:
Outstanding, March 31, 2011
Granted
Exercised
Forfeited/Canceled
Outstanding, March 31, 2012
Granted
Exercised
Forfeited/Canceled
Outstanding, March 31, 2013
Granted
Exercised
Forfeited/Canceled
Outstanding, March 31, 2014
Vested and expected to vest, March 31, 2014
Exercisable, March 31, 2014
Weighted-
Average
Exercise
Price
per Share
Weighted-
Average
Remaining
Contractual
Life (years)
Aggregate
Intrinsic
Value
(in thousands)
22.20
43.04
18.34
36.66
32.09
27.78
16.81
31.42
30.54
18.78
19.78
30.28
27.85
27.96
31.97
$
$
5.5
7.2
0.8 $
5.2
5.8 $
5.8 $
4.3 $
17,698
82
264
—
—
—
Number of
Shares
1,397,556 $
459,400
(697,157 )
(171,462 )
988,337 $
556,500
(56,366 )
(329,288 )
1,159,183 $
469,000
(111,272 )
(146,810 )
1,370,101 $
1,285,319 $
378,541 $
80
The Company utilizes the Black-Scholes valuation model for estimating the fair value of share-based compensation with the
following assumptions:
Year Ended
Year Ended
March 31, 2014 March 31, 2013 March 31, 2012
Year Ended
Expected life
Expected volatility
Expected dividends
Risk-free rate
4.9 years
5.0 years
4.3 years
43.4% - 43.7%
41.3% - 45.1%
3.1% - 3.9%
2.4% - 4.0%
1.0% - 1.5%
0.7% - 0.8%
41.2%
1.6%
1.8%
The weighted-average grant date fair value of stock options granted during the years ended March 31, 2014, 2013 and 2012
was $5.20, $8.22 and $13.32 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 8.6%, 8.0% and 4.1% for employee options for the years ended
March 31, 2014, 2013 and 2012 and 0.0% for director options for the years ended March 31, 2014, 2013 and 2012. Forfeiture
rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate.
During the years ended March 31, 2014, 2013 and 2012, a total of 469,000, 556,500 and 459,400 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, 2014, 2013 and 2012 is as
follows:
Option Grant Date
August 15, 2013
July 30, 2013
May 29, 2013
Fiscal year 2014 option grants
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
Number of
Shares
Exercise
Price
Vesting
Terms (1)
Expires
85,000 $
28,000 $
356,000 $
469,000
40,000 $
5,000 $
20,000 $
346,000 $
30,000 $
115,500 $
556,500
459,400 $
459,400
20.85
22.59
17.95
19.00
17.68
18.42
29.17
29.17
29.45
Five years
August 15, 2021
Five years
July 30, 2021
Five years
May 29, 2021
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
43.04
Five years
May 31, 2019
____________________
(1)
Options vest in equal annual installments on each grant anniversary date beginning one year after the grant date.
Performance-Based Awards
On May 22, 2013, the Board of Directors approved its fiscal year 2014 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 210,000 are reserved for the Company’s named executive officers and 390,000 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 revenue, EPS and operating income growth during fiscal year 2014. Under the
program, the non-executive employees are eligible to receive options based on meeting certain target increases in revenue and
EPS growth for fiscal year 2014 and the recommendations of senior management. The options shall be issued pursuant to the
2005 Plan, 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
81
conditions. The Company utilized the Black-Scholes option valuation model with the assumptions below to calculate stock
compensation expense related to the performance based awards. Stock compensation expense recorded for performance
based awards during the year ended March 31, 2012 was $616. Stock compensation expense related to the performance based
awards was not significant for the years ended March 31, 2014 and 2013.
Expected life
Expected volatility
Expected dividends
Risk-free rate
Year Ended
March 31, 2014
Year Ended
March 31, 2013
Year Ended
March 31, 2012
4.9 years
5.0 years
4.3 years
36.9% - 43.5%
41.7% - 45.0%
41.2% - 42.2%
3.2% - 4.1%
2.5% - 4.0%
1.4% - 1.9%
1.4% - 1.8%
0.6% - 0.7%
0.8% - 1.8%
Non-vested stock option award activity, including employee stock options and performance-based awards, during the years
ended March 31, 2014, 2013 and 2012 is summarized as follows:
Outstanding, March 31, 2011
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2012
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2013
Granted
Vested
Forfeited/Canceled
Outstanding, March 31, 2014
Non-Vested
Number of
Shares
Weighted-
Average
Grant-Date
Fair Value
per Share
803,036 $
459,400
(312,655 )
(171,462 )
778,319 $
556,500
(201,191 )
(329,288 )
804,340 $
469,000
(134,970 )
(146,810 )
991,560 $
8.08
13.32
7.22
11.55
10.76
8.22
8.43
9.92
9.89
5.20
9.30
9.33
7.73
As of March 31, 2014, $5,423 of total unrecognized compensation costs related to stock options is expected to be recognized
over a weighted-average period of 3.4 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, 2014, 2013 and 2012 was $1,255, $1,696 and $2,256, respectively.
Restricted Stock
On May 22, 2013, the Board of Directors approved its 2014 Director Compensation Program, pursuant to which each non-
employee director is to be awarded shares of restricted stock upon election or re-election to the Board of Directors. Additionally,
as part of the 2014 equity incentive program, each executive officer received, as a component of his or her base salary, a grant
of restricted stock. 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.
82
The Company recorded compensation expense related to restricted stock of approximately $629, $566 and $540 for the years
ended March 31, 2014, 2013 and 2012, respectively. Restricted stock activity for the years ended March 31, 2014, 2013 and
2012 is summarized as follows:
Outstanding, March 31, 2011
Granted
Vested
Outstanding, March 31, 2012
Granted
Vested
Outstanding, March 31, 2013
Granted
Vested
Canceled
Outstanding, March 31, 2014
Weighted-
Average
Grant-Date
Fair Value
per Share
Number of
Shares
22,896 $
22,668
(15,563 )
30,001 $
18,939
(18,555 )
30,385 $
57,324
(16,302 )
(6,836 )
64,571 $
27.09
39.75
27.51
36.32
19.32
32.14
27.09
20.75
30.64
22.59
20.74
As of March 31, 2014, $873 of total unrecognized compensation costs related to restricted stock is expected to be recognized
over a weighted-average period of 1.3 years. This amount does not include the cost of new restricted stock that may be granted
in future periods.
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, 2014, 2013 and 2012 was $7,604, $5,753 and $4,330, respectively. The following table
summarizes our significant contractual obligations at March 31, 2014 and the effect that such obligations are expected to have
on our liquidity and cash in future periods:
Contractual Obligations
Total
2015
2016
2017
2018
2019
2020 and
beyond
Operating lease obligations
Contingent consideration and other acquisition related
liabilities (excluding share-based payments)
$ 30,756 $ 8,247 $ 7,776 $ 5,855 $ 5,146 $
1,971 $
1,761
1,243
618
313
312
—
—
—
Total
$ 31,999 $ 8,865 $ 8,089 $ 6,167 $ 5,146 $
1,971 $
1,761
For the year ended March 31,
The deferred compensation liability as of March 31, 2014 was $4,809, which is not included in the table above as the timing of
future benefit payments to employees is not determinable.
Commitments and Guarantees
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.
83
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.
Hussein Litigation
On October 7, 2013, a complaint was filed against the Company and certain of the Company’s officers and directors in the
Superior Court of the State of California for the County of Orange, captioned Ahmed D. Hussein v. Sheldon Razin, Steven
Plochocki, Quality Systems, Inc. and Does 1-10, inclusive, No. 30-2013-00679600-CU-NP-CJC, by Ahmed Hussein, a former
director and significant shareholder of the Company. The Company filed a demurrer to the complaint, which the Court granted
on April 10, 2014. An amended complaint was filed on April 25, 2014. The amended complaint generally alleges fraud and
deceit, constructive fraud, negligent misrepresentation and breach of fiduciary duty in connection with statements made to the
Company’s shareholders regarding the Company’s financial condition and projected future performance. The amended
complaint seeks actual damages, exemplary and punitive damages and costs. The Company believes that plaintiff’s claims are
without merit and continues to defend against them vigorously.
Federal Securities Class Action
On November 19, 2013, a putative class action complaint was filed on behalf of the shareholders of the Company other than the
defendants against the Company and certain of the Company’s officers and directors in the United States District Court for the
Central District of California, captioned Deerfield Beach Police Pension Fund, individually and on behalf of all others similarly
situated, v. Quality Systems, Inc., Steven T. Plochocki, Paul A. Holt and Sheldon Razin, No. SACV13-01818-CJC-JPRx, by the
Deerfield Beach Police Pension Fund, a shareholder of the Company. After the court appointed lead plaintiffs and lead counsel
for this action, lead plaintiffs filed an amended complaint on April 7, 2014. The amended complaint, which is substantially similar
to the litigation described above under the caption “Hussein Litigation,” generally alleges that statements made to the
Company’s shareholders regarding the Company’s financial condition and projected future performance were false and
misleading in violation of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the
individual defendants are liable for such statements because they are controlling persons under Section 20(a) of the Exchange
Act. The complaint seeks compensatory damages, court costs and attorneys' fees. The Company believes that plaintiff’s claims
are without merit and intends to defend against them vigorously.
Shareholder Derivative Litigation
On January 24, 2014, a complaint was filed against the Company and certain of the Company’s officers and current and former
directors in the United States District Court for the Central District of California, captioned Timothy J. Foss, derivatively on behalf
of himself and all others similarly situated, vs. Craig A. Barbarosh, George H. Bristol, James C. Malone, Peter M. Neupert, Morris
Panner, D. Russell Pflueger, Steven T. Plochocki, Sheldon Razin, Lance E. Rosenzweig and Quality Systems, Inc., No.
SACV14-00110-DOC-JPPx, by Timothy J. Foss, a shareholder of the Company. The complaint arises from the same allegations
described above under the captions “Hussein Litigation” and “Federal Securities Class Action” and generally alleges breach of
fiduciary duties, abuse of control and gross mismanagement by the Company’s directors, in addition to unjust enrichment and
insider selling by individual directors. The complaint seeks compensatory damages, restitution and disgorgement of all profits,
court costs, attorneys’ fees and implementation of enhanced corporate governance procedures. The parties have agreed to stay
this litigation pending resolution of the Defendants' anticipated motion to dismiss the Federal Securities Class Action. The
Company believes that plaintiff’s claims are without merit and intends to defend against them vigorously.
84
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 (1)
RCM Services Division
Unallocated corporate expense (1)
Fiscal Year Ended March 31,
2013
2012
2014
$
19,840 $
19,990 $
341,120
15,614
68,093
344,315
31,413
64,511
19,596
325,467
34,463
50,309
$
$
444,667 $
460,229 $
429,835
2,828 $
3,020 $
109,313
(26,801 )
8,465
120,974
(4,354 )
8,180
3,352
127,032
10,417
5,835
(70,717 )
(58,720 )
(30,437 )
23,088 $
69,100 $
116,199
Consolidated operating income
_______________________
(1) Refer to Note 6 for details on the impairment charge recorded in the current year
$
Management evaluates performance based upon stand-alone segment operating income. Because assets by segment are not
reported to or used by the Company’s chief decision making group to allocate resources, or to assess performance, total assets
by segment are not disclosed.
Effective April 1, 2013, the Company reorganized certain overhead related departments to unallocated corporate expense from
the operating segments in an effort to centralize shared services functions and to be consistent with disaggregated financial
information used by the Company's chief decision making group. The Company concluded the impact of the reorganization to
prior year operating income was not material to the operating segments or unallocated corporate expense and is therefore not
restated.
15. Subsequent Events
On May 28, 2014, 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 13, 2014 with an expected distribution date on or about
July 3, 2014.
On May 27, 2014, the Company adopted a new form of Performance-Based Restricted Stock Unit Agreement, which form is
attached as Exhibit 10.15 to this Annual Report on Form 10-K. The Performance-Based Restricted Stock Unit Agreement will be
entered into with each of the Company's executive officers pursuant to the 2015 Executive Compensation Program, which was
approved by the Compensation Committee of the Board of Directors on May 27, 2014, and in accordance with the Company's
Second Amended and Restated 2005 Stock Option and Incentive Plan.
85
16. Selected Quarterly Operating Results
The following table presents quarterly unaudited consolidated financial information for the eight quarters preceding March 31,
2014. 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:
6/30/2012
9/30/2012
12/31/2012
3/31/2013
6/30/2013
9/30/2013
12/31/2013
3/31/2014
Quarter Ended
Software and hardware
$ 25,844 $ 23,720 $ 21,899 $ 17,109 $ 15,972 $ 15,562 $ 14,114 $ 15,186
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
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
6,575
22,547
38,608
16,692
16,015
15,667
7,809
23,371
40,313
16,545
15,467
15,385
5,046
19,160
39,763
16,637
16,178
17,116
6,518
21,704
41,376
17,421
15,316
19,386
80,406
83,873
85,345
87,025
86,982
87,710
89,694
93,499
118,296
116,128
114,510
111,295
109,529
111,081
108,854
115,203
5,771
9,145
5,624
7,507
4,660
7,221
5,695
7,023
4,934
7,134
4,779
6,972
27,398
7,466
7,115
8,109
Total cost of system sales
14,916
13,131
11,881
12,718
12,068
11,751
34,864
15,224
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:
4,811
9,248
4,741
9,151
5,259
9,852
5,505
5,302
5,262
5,642
6,384
10,099
10,796
10,650
10,276
10,845
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
11,401
8,505
36,004
48,072
61,457
35,931
47,682
63,399
11,007
11,736
12,059
9,012
8,537
8,842
Selling, general and administrative
36,681
37,832
35,532
38,308
35,096
38,578
Research and development costs
Amortization of acquired intangible assets
Impairment of goodwill and other assets
Total operating expenses
Income (loss) from operations
Interest income (expense), net
Other income (expense), net
Income (loss) before provision for income
taxes
8,576
1,137
—
46,394
23,507
35
(213 )
6,272
1,316
—
45,420
24,344
7,786
1,212
—
44,530
23,384
8,231
1,194
17,400
65,133
5,614
1,194
—
7,615
1,260
—
41,904
47,453
57,131
54,928
(2,135 )
19,553
15,946
(19,332 )
6,921
(62 )
220
13
(122 )
(93 )
36
31
(254 )
(205 )
(155 )
121
18
Provision for (benefit of) income taxes
7,832
8,811
7,649
1,898
6,385
5,465
(6,606 )
Net income (loss)
$ 15,497 $ 15,691 $ 15,626 $ (4,090 ) $ 12,945 $ 10,121 $ (12,587 ) $
5,201
23,329
24,502
23,275
(2,192 )
19,330
15,586
(19,193 )
36,191
71,055
37,799
36,864
13,175
1,219
5,873
38,130
53,354
61,849
38,676
15,120
1,132
—
322
35
7,278
2,077
Net income (loss) per share:
Basic*
Diluted*
Weighted-average shares outstanding:
Basic
Diluted
Dividends declared per common share
____________________
*
Quarterly EPS may not sum to annual EPS due to rounding
86
$
$
0.26 $
0.26 $
0.26 $
(0.07 ) $
0.22 $
0.17 $
(0.21 ) $
0.26 $
0.26 $
0.26 $
(0.07 ) $
0.22 $
0.17 $
(0.21 ) $
0.09
0.09
59,281
59,388
59,347
59,386
59,400
59,405
59,541
59,541
59,559
59,572
59,734
59,751
60,173
60,173
60,208
60,592
$ 0.175 $
0.175 $
0.175 $
0.175 $
0.175 $ 0.175 $ 0.175 $
0.175
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Sales Return Reserve
Balance at
Beginning of
Year
Additions
Charged
Against
Revenue
Deductions
Balance at
End of Year
6,506 $
2,229 $
1,726 $
17,966 $
(13,942 ) $
10,530
10,783 $
2,732 $
(6,506 ) $
(2,229 ) $
6,506
2,229
Allowance for Doubtful Accounts
Balance at
Beginning of
Year
Additions
Charged to
Costs and
Expenses
Deductions
Balance at
End of Year
11,823 $
8,481 $
6,717 $
1,467 $
6,885 $
5,715 $
(6,995 ) $
(3,543 ) $
(3,951 ) $
6,295
11,823
8,481
Valuation Allowance on Deferred Tax Assets
Balance at
Beginning of
Year
Additions
Charged to
Costs and
Expenses
Deductions
Balance at
End of Year
2,003 $
1,446 $
1,102 $
285 $
557 $
344 $
— $
— $
— $
2,288
2,003
1,446
$
$
$
$
$
$
$
$
$
(in thousands)
For the year ended
March 31, 2014
March 31, 2013
March 31, 2012
(in thousands)
For the year ended
March 31, 2014
March 31, 2013
March 31, 2012
(in thousands)
For the year ended
March 31, 2014
March 31, 2013
March 31, 2012
87
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88
C O M P A N Y P R O F I L E
C O R P O R A T E I N F O R M A T I O N
Quality Systems, Inc. (NASDAQ:QSII) and its NextGen Healthcare
B O A R D O F D I R E C T O R S
A N N U A L M E E T I N G
subsidiary (QSI/NextGen) develop and market a wide range of cutting-
edge healthcare information technology software and services, including
practice management solutions, electronic health records, revenue cycle
management services and patient engagement tools along with
connectivity and interoperability applications. The Company serves
medical and dental group practices as well as rural and community
hospitals. The QSI/NextGen suite of products is designed to address
the changing healthcare landscape and evolving models.
Fiscal Year 2014
Revenue: $444.7 million
Diluted EPS: $0.26
Revenue:
$341.1 million
(77% of Total)
Revenue:
$19.8 million
(4% of Total)
Revenue:
$68.1 million
(15% of Total)
Revenue:
Market
Served:
Market
Served:
Market
Served:
Market
Served:
Small Hospitals
80,000+
Physicians
Physicians
(cid:127) Practice
Management
(cid:127) Electronic
Health Records
(cid:127) EDI
10,000+
Dentists
Dentists
(cid:127) Practice
Management
(cid:127) Electronic
Health Records
(cid:127) EDI
6,500+
Physicians
Physicians
(cid:127) Revenue Cycle
Management
(cid:127) Other Services
$15.6 million
(4% of Total)
300+
Hospitals
(cid:127) Financials
(cid:127) Clinical
(cid:127) Surgery
Scheduling
Sheldon Razin
Chairman of the Board and Founder
Quality Systems, Inc.
Steven T. Plochocki
President and Chief Executive Officer
Quality Systems, Inc.
Craig A. Barbarosh
Partner, Katten Muchin Rosenman LLP
George H. Bristol
Managing Director, Janas Associates
James C. Malone
Chief Financial Officer and
Executive Vice President of American Well, Inc.
Jeffrey H. Margolis
Chairman and Chief Executive Officer, Welltok, Inc.
Morris Panner
Chief Executive Officer of DICOM Grid
D. Russell Pflueger
Chairman and Chief Executive Officer
Quiescence Medical, Inc.
Lance E. Rosenzweig
Chief Executive Officer, Aegis USA, Inc.
O F F I C E R S O F T H E C O M P A N Y
Steven T. Plochocki
President and Chief Executive Officer
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
Stephen K. Puckett
Executive Vice President, Chief Technology Officer
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
2014 Annual Shareholders’ Meeting is scheduled to be held on
Monday, August 11, 2014 at 1:00 PM Pacifi c 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, fi led
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
statements fi led with the Securities and Exchange Commission
(“Commission”), communications to shareholders, press releases
and oral statements made by our representatives that are not
historical in nature, or that state our or management’s intentions,
hopes, beliefs, expectations or predictions of the future, may
constitute “forward-looking statements” within the meaning
of Section 21E of the Securities and Exchange Act of 1934, as
amended. Forward-looking statements can often be identifi ed
by the use of forward-looking terminology, such as “could,”
“should,” “will,” “will be,” “will lead,” “will assist,” “intended,”
“continue,” “believe,” “may,” “expect,” “hope,” “anticipate,”
“goal,” “forecast,” “plan,” “potentially” or “estimate” or varia-
tions thereof or similar expressions. Forward-looking statements
are not guarantees of future performance. Forward-looking
statements involve risks, uncertainties and assumptions. It is
important to note that any such performance and actual results,
fi nancial condition or business, could differ materially from
those expressed in such forward-looking statements. Factors
that could cause or contribute to such differences include, but
are not limited to, the risk factors discussed in Item 1A of our
Form 10-K as well as factors discussed elsewhere in this and
other reports and documents we fi le with the Commission.
Other unforeseen factors not identifi ed herein could also have
such an effect. We undertake no obligation to update or revise
forward-looking statements to refl ect changed assumptions, the
occurrence of unanticipated events or changes in future oper-
ating results, fi nancial condition or business over time unless
required by law. Interested persons are urged to review the
risks described under Item 1A, “Risk Factors” and in Item 7,
“Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in our Form 10-K, as well as in our
other public disclosures and fi lings with the Commission.
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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
Q S I / N E X T G E N L O C AT I O N S
1701 E. Edinger, Suite E5
Santa Ana, California 92705
1836 Lackland Hill Parkway
St. Louis, Missouri 63146
5619 Scotts Valley Drive
Scotts Valley, California 9506
5200 Stoneham Road, Suite 210
North Canton, Ohio 44720
3340 Peachtree Road NE, Suite 2700
795 Horsham Road
Atlanta, Georgia 30326
Horsham, Pennsylvania 19044
2840 Hillcreek Drive
Augusta, Georgia 30909
12301-B Riata Trace Parkway, Suite 200
Austin, Texas 78727
187 Northside Offi ce Park, Suite 202
1440 Civic Place
Milledgeville, Georgia 31061
11350 McCormick Road
Executive Plaza IV, Suite 600
Hunt Valley, Maryland 21031
333 Washington Avenue N., Suite 300
Minneapolis, Minnesota 55401
Building 5A, Unit 139
Southlake, Texas 76092
16701 N.E. 80th Street, Suite 102
Redmond, Washington 98015
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
Pritech Park SEZ
Block 11, First Floor
Outer Ring Road, Bellandur Post
Bangalore – 560103
Karnataka India
www.qsii.com www.nextgen.com
P O W E R I N G T H E N E X T WAV E O F H E A LT H C A R E
2 0 1 4 A N N U A L R E P O R T