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QUALITY SYSTEMS, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, 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, including, without limitation, The American Recovery and Reinvestment Act ("ARRA") and The Patient Protection and Affordable Care Act, 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 any risks that may be described in "Item 1A. Risk Factors" as set forth herein and other risk factors appearing in our most recent Annual Report on Form 10-K for the fiscal year ended March 31, 2014 ("Annual Report"), as supplemented by additional risk factors, if any, in our interim filings on our Quarterly Reports on Form 10-Q, 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 Quarterly Report on Form 10-Q. This management's discussion and analysis of financial condition and results of operations ("MD&A") is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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 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 1, "Summary of Significant Accounting Policies," of our notes to consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. • Company Overview. This section provides a more detailed description of our Company, its operating segments, a summary of our acquisition transactions 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. • 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 and (iv) the RCM Services Division. We also have 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. 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 operational, clinical, and financial outcomes that substantiate the value of patient-centered and accountable care models. The turbulence in the worldwide economy has impacted almost all industries. While healthcare is not immune to economic cycles, we believe it is more heavily influenced by US-based regulatory and national health projects than by the economic cycles of our economy. The impact of the current economic conditions on our existing and prospective clients has been mixed. While we continue to see organizations that are doing fairly well operationally, some organizations, especially those with a large dependency on Medicaid populations, have been impacted by the challenging financial conditions faced by many state governments. Various factors have had, and are anticipated to continue to have, a meaningful impact on the U.S. healthcare industry, including the Obama Administration's broad healthcare reform efforts (particularly the HITECH portion of the American Recovery and Reinvestment Act ("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. We have benefited and hope to continue to benefit from the increased demands on healthcare providers for greater efficiency and lower costs, financial incentives from the ARRA to physicians who adopt electronic health records, as well as increased adoption rates for electronic health records and other technology in the healthcare arena. We also believe that healthcare reform and the movement towards pay for performance/quality initiatives will also stimulate demand for robust electronic health record solutions as well as new health 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 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 like us. Our strategy is to focus on addressing the growing 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 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. 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. We describe our significant accounting policies in Note 2, "Summary of Significant Accounting Policies," of our Notes to Consolidated Financial Statements included in our Annual Report. We discuss our critical accounting policies and estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report. There have been no material changes in our significant accounting policies or critical accounting policies and estimates since the end of fiscal year 2014. Company Overview 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. 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 interoperable 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 reflects our reported segment revenue and segment revenue growth by Division for the three months ended June 30, 2014 and 2013: -------------------------------------------------------------------------------- Segment Revenue Breakdown Three Months Ended June 30, 2014 2013 QSI Dental Division 3.6 % 4.7 % NextGen Division 77.8 % 74.4 % Hospital Solutions Division 3.5 % 5.0 % RCM Services Division 15.1 % 15.9 % Consolidated 100.0 % 100.0 % Segment Revenue Growth (Decline) Three Months Ended June 30, 2014 2013 QSI Dental Division (17.6 )% 4.0 % NextGen Division 12.5 % (5.4 )% Hospital Solutions Division (23.6 )% (51.9 )% RCM Services Division 2.2 % 10.1 % Consolidated 7.6 % (7.4 )% 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 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. 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 (formerly Community Health Solution), NextGen® Patient Portal (NextMD.com), and NextGen® Health Quality Measures. 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 have 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, a provider of emergency department software. On July 26, 2011, we acquired CQI Solutions, Inc., a provider of hospital systems for surgery management. On April 29, 2011, we acquired IntraNexus, Inc., a provider of Web-based integrated clinical and hospital information systems. On February 10, 2010, we acquired Opus Healthcare Solutions, LLC, 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., a provider of financial information systems to the small hospital inpatient market. These acquisitions are part of our long term strategy 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. Overview of Our Results • Consolidated revenue increased 7.6% in the three months ended June 30, 2014 as compared to the prior year period. The increase reflects a 11.4% increase in recurring services revenue (i.e. maintenance, EDI, RCM and other services revenues), mitigated by a 6.8% decrease in system sales revenue. The decline in system sales revenue reflects the increasingly saturated markets in which our core software products are sold. • Consolidated gross profit as a percentage of revenue decreased to 52.3% for the three months ended June 30, 2014 compared to 56.1% in the prior year period. The decline is primarily the result of a shift in the mix of revenue towards lower-margin recurring services. For the three months ended June 30, 2014, recurring services revenue comprised 82.2% of consolidated revenue, as compared to 79.4% in the prior year period. • Consolidated operating income decreased 60.3% , or $11.8 million, in the three months ended June 30, 2014 as compared to the prior year period primarily due to a $10.6 million increase in research and development costs as compared to the prior year period resulting from lower capitalization rates of software development costs. QSI Dental Division QSI Dental Division revenue decreased 17.6% in the three months ended June 30, 2014. Divisional operating income (excluding Corporate and unallocated amounts) was $0.9 million in the three months ended June 30, 2014, a decrease of 43.0% as compared to the same prior year period. The decrease in operating income was primarily the result of a $0.6 million decrease in system sales revenue. It should be noted that the division's new software solution, QDW, is being sold as a SaaS solution for which revenue is recognized over a longer period of time rather than upfront. Revenue recognized from QDW was not significant in the three months ended June 30, 2014. • 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 QDW product. NextGen Division • NextGen Division revenue increased 12.5% in the three months ended June 30, 2014, as compared to the same prior year period. This variance reflects a 16.4% growth in recurring service revenue, including an increase of 8.6% in maintenance, 10.3% in EDI revenue and 42.9% in other services revenue. The acquisition of Mirth in September 2013 contributed to the growth in other services revenue for the three months ended June 30, 2014. Recurring service revenue increased to $72.5 million and accounted for 79.1% of total NextGen Division revenue for the three months ended June 30, 2014. In the same period a year ago, recurring service revenue of $62.3 million represented 76.5% of total NextGen Division revenue. • NextGen Division operating income (excluding Corporate and unallocated amounts) increased by 20.0% in the three months ended June 30, 2014, as compared to the same prior year period. The increase in operating income is primarily the result of the increase in total revenue and a decline in operating expenses. • 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. Due to the overall increase in the capitalized software costs balance, 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 5, "Capitalized Software Costs" of our notes to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for an estimate of future amortization of capitalized software costs as of June 30, 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 23.6% in the three months ended June 30, 2014. Revenue was negatively impacted by a 43.6% decline in system sales, as well as lower maintenance revenue and higher accruals for anticipated sales credits. • Divisional operating loss (excluding Corporate and unallocated amounts) was $1.1 million for the three months ended June 30, 2014 as compared to a $0.7 million loss for the same prior year period. The decline in operating results is primarily due to the decline of divisional revenue. • The Hospital Solutions Division has incurred losses in the last several quarters and is expected to continue to incur losses for the foreseeable future while we continue to invest in implementation and training, support, and development to support our 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 during the three months ended December 31, 2013. Along with recording the impairment charge, we have also ceased capitalization and amortization of software development costs at this Division. For the three months ended June 30, 2013, total capitalized software costs were approximately $0.9 million and total amortization of previously capitalized amounts was approximately $0.4 million. RCM Services Division • RCM Services Division revenue increased 2.2% in the three months ended June 30, 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 three months ended June 30, 2014. --------------------------------------------------------------------------------• Operating income decreased 39.2% in the three months ended June 30, 2014 as compared to the same prior year period primarily as a result of a decrease in divisional gross profit compared to the prior year period. • The Company believes that a significant opportunity exists to continue cross selling RCM services to existing customers. The portion of existing NextGen 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. • 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 and unallocated amounts (costs not allocated to the operating segments) • Effective April 1, 2014, we refined the measurement of our segment data to better reflect an organizational structure whereby certain expenses managed by functional area leadership are no longer classified within the operating segments but rather as a component of Corporate and unallocated. Such classification is consistent with the disaggregated financial information used by the chief decision making group. As a result, we no longer classify the amortization of capitalized software costs within the operating segments. The Company has retroactively reclassified the prior year gross margin amounts included in the MD&A to present all segment information on a comparable basis. For additional details, refer to Note 12, "Operating Segment Information," of our notes to consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. 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): -------------------------------------------------------------------------------- Three Months Ended June 30, (Unaudited) 2014 2013 Revenues: Software and hardware 12.5 % 14.6 % Implementation and training services 5.3 6.0 System sales 17.8 20.6 Maintenance 34.6 35.2 Electronic data interchange services 15.5 15.2 Revenue cycle management and related services 14.2 14.6 Other services 17.9 14.3 Maintenance, EDI, RCM and other services 82.2 79.4 Total revenues 100.0 100.0 Cost of revenue: Software and hardware 5.6 4.5 Implementation and training services 6.1 6.5 Total cost of system sales 11.7 11.0 Maintenance 5.9 4.8 Electronic data interchange services 10.2 9.9 Revenue cycle management and related services 10.8 10.4 Other services 9.1 7.8 Total cost of maintenance, EDI, RCM and other services 36.0 32.9 Total cost of revenue 47.7 43.9 Gross profit 52.3 56.1 Operating expenses: Selling, general and administrative 31.2 32.0 Research and development costs 13.8 5.1 Amortization of acquired intangible assets 0.8 1.1 Total operating expenses 45.8 38.2 Income from operations 6.6 17.9 Other income (expense), net 0.0 (0.2) Income before income taxes 6.6 17.6 Provision for income taxes 2.3 5.8 Net income 4.3 % 11.8 % Comparison of the Three Months Ended June 30, 2014 and June 30, 2013 Net Income. Our net income for the three months ended June 30, 2014 was $5.2 million, or $0.09 per share on a basic basis and $0.08 per share on a fully diluted basis. In comparison, we earned net income of $12.9 million, or $0.22 per share, on both a basic and fully diluted basis for the three months ended June 30, 2013. The change in net income for the three months ended June 30, 2014 was primarily attributed to the following: • a 6.8% decline in consolidated system sales revenue related 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 $12.0 million, or 28.7%, increase in total operating expenses compared to the prior year period. This increase is primarily due to a 189.2% increase in research and development expenses in the current period primarily due to the lower capitalization rates of software development costs relating to a trend towards shorter development cycles, which impacts our rate of capitalization. • a reduction of $3.7 million in the provision for income taxes, primarily a result of the decline of net income. -------------------------------------------------------------------------------- Revenue. Revenue for the three months ended June 30, 2014 increased 7.6% to $117.9 million from $109.5 million for the three months ended June 30, 2013. NextGen Division revenue increased 12.5% to $91.7 million compared to $81.5 million in the three months ended June 30, 2013, RCM Services Division revenue increased 2.2% to $17.8 million from $17.4 million, and the Hospital Solutions Division revenue decreased 23.6% during that same period to $4.2 million from $5.5 million. Revenue for the QSI Dental Division decreased 17.6% to $4.2 million from $5.2 million compared to the same prior year period. System Sales. Revenue earned from our company-wide sales of systems for the three months ended June 30, 2014 decreased 6.8% to $21.0 million from $22.5 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 three months ended June 30, 2014 and 2013 (in thousands): Implementation Hardware and Third and Training Total System Software Party Software Services Sales Three Months Ended June 30, 2014 QSI Dental Division $ 159 $ 247 $ 186 $ 592 NextGen Division 12,702 967 5,497 19,166 Hospital Solutions Division 1,137 (567 ) 583 1,153 RCM Services Division 98 - - 98 Consolidated $ 14,096 $ 647 $ 6,266 $ 21,009 Three Months Ended June 30, 2013 QSI Dental Division $ 551 $ 391 $ 277 $ 1,219 NextGen Division 13,496 1,398 4,297 19,191 Hospital Solutions Division (40 ) 83 2,001 2,044 RCM Services Division 93 - - 93 Consolidated $ 14,100 $ 1,872 $ 6,575 $ 22,547 The decrease in system sales was driven primarily by lower sales of software, hardware, and third party software to both new and existing clients for the NextGen Division. NextGen Division software license revenue decreased 5.9% in the three months ended June 30, 2014 versus the same period last year. The NextGen Division's software revenue accounted for 66.3% of divisional system sales revenue during the three months ended June 30, 2014 compared to 70.3% during the same period a year ago. Software license revenue continues to be an area of primary emphasis for the NextGen Division. 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 three months ended June 30, 2014, 5.0% of the NextGen Division's system sales revenue was represented by hardware and third party software compared to 7.3% during same period a year ago. The number of clients who purchase hardware and third party software and the dollar amount of hardware and third party software revenue fluctuates each quarter depending on the needs of clients. The inclusion of hardware and third party software in the 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 27.9% in the three months ended June 30, 2014 compared to the same prior year period. Implementation and training revenue related to system sales at the Hospital Solutions Division decreased 70.9%, in the three months ended June 30, 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 have resulted in a decline in the amount of implementation services sold. We have not had significant reductions in our staffing levels despite 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 three months ended June 30, 2014, our consolidated revenue from maintenance, EDI, RCM and other services grew 11.4% to $96.9 million from $87.0 million in the same prior year period. The increase is due to an increase across all categories of recurring service revenue. The following table details maintenance, EDI, RCM and other services revenue by category on a consolidated and divisional basis for the three months ended June 30, 2014 and 2013 (in thousands): -------------------------------------------------------------------------------- Maintenance EDI RCM Other Total Three Months Ended June 30, 2014 QSI Dental Division $ 1,881 $ 1,290 $ - $ 480 $ 3,651 NextGen Division 36,603 16,800 - 19,145 72,548 Hospital Solutions Division 2,182 40 - 801 3,023 RCM Services Division 139 189 16,693 642 17,663 Consolidated $ 40,805 $ 18,319 $ 16,693 $ 21,068 $ 96,885 Three Months Ended June 30, 2013 QSI Dental Division $ 2,111 $ 1,406 $ - $ 415 $ 3,932 NextGen Division 33,707 15,236 - 13,401 62,344 Hospital Solutions Division 2,582 37 - 804 3,423 RCM Services Division 208 13 16,015 1,047 17,283 Consolidated $ 38,608 $ 16,692 $ 16,015 $ 15,667 $ 86,982 Total NextGen Division maintenance revenue for the three months ended June 30, 2014 grew 8.6% to $36.6 million from $33.7 million for the same prior year period while NextGen Division EDI revenue grew 10.3% to $16.8 million compared to $15.2 million in the same prior year period. Maintenance revenue for the NextGen Division increased by $2.9 million for the three months ended June 30, 2014 as compared to the same prior year period, primarily as a result of net additional licenses from both new and existing clients and the addition of Mirth maintenance revenue. The NextGen Division's EDI revenue growth has come from new clients and from further penetration of the division's existing client base. Other services revenue for the NextGen Division, which consists primarily of third party annual software license renewals, consulting services, SaaS fees, hosting services, and other subscriptions increased 42.9% to $19.1 million in the three months ended June 30, 2014 from $13.4 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. QSI Dental Division maintenance, EDI and other services revenue for the three months ended June 30, 2014 and 2013 was $3.7 million and $3.9 million, respectively. For the three months ended June 30, 2014, RCM revenue for the RCM Services Division increased to $16.7 million compared to $16.0 million in the same prior year period. The growth in RCM revenue is primarily attributable to organic growth achieved through cross selling RCM services to existing NextGen Division clients, as well as new clients. For the Hospital Solutions Division, maintenance and other services revenue for the three months ended June 30, 2014 decreased 11.7% as compared to the same prior year period primarily due to a decrease in maintenance revenue primarily due to decreases in the amount of maintenance services provided to existing customers. We intend to continue to promote maintenance, EDI and RCM services to both new and existing clients. Cost of Revenue. Cost of revenue for the three months ended June 30, 2014 increased to $56.2 million from $48.1 million in the same prior year period and the cost of revenue as a percentage of revenue increased to 47.7% from 43.9%. The increase in the cost of revenue as a percentage of revenue is primarily due to a change in the mix of revenues toward recurring services revenue, which have historically experienced a lower profit margin than system sales. The following table details revenue and cost of revenue on a consolidated and divisional basis for the three months ended June 30, 2014 and 2013 (in thousands): -------------------------------------------------------------------------------- Three Months Ended June 30, 2014 % 2013 % QSI Dental Division Revenue $ 4,243 100.0 % $ 5,151 100.0 % Cost of revenue 2,317 54.6 % 2,392 46.4 % Gross profit $ 1,926 45.4 % $ 2,759 53.6 % NextGen Division Revenue $ 91,714 100.0 % $ 81,535 100.0 % Cost of revenue 31,881 34.8 % 26,856 32.9 % Gross profit $ 59,833 65.2 % $ 54,679 67.1 % Hospital Solutions Division Revenue $ 4,176 100.0 % $ 5,467 100.0 % Cost of revenue 4,306 103.1 % 3,875 70.9 % Gross profit (loss) $ (130 ) (3.1 )% $ 1,592 29.1 % RCM Services Division Revenue $ 17,761 100.0 % $ 17,376 100.0 % Cost of revenue 13,195 74.3 % 11,883 68.4 % Gross profit $ 4,566 25.7 % $ 5,493 31.6 % Unallocated cost of revenue $ 4,491 N/A $ 3,066 N/A Consolidated Revenue $ 117,894 100.0 % $ 109,529 100.0 % Cost of revenue 56,190 47.7 % 48,072 43.9 % Gross profit $ 61,704 52.3 % $ 61,457 56.1 % Gross profit margins for the NextGen Division, QSI Dental Division and the Hospital Solutions Division decreased for the three months ended June 30, 2014 compared to the same prior year period primarily due to a decrease in total system sales (consisting of software and hardware sales and training and implementation services). Gross profit margin for the RCM Services Division declined compared to the same prior year period primarily due to an increase in cost of revenue at a higher rate than the increase in related revenue. The following table details the individual components of cost of revenue and gross profit (loss) as a percentage of total revenue on a consolidated and divisional basis for the three months ended June 30, 2014 and 2013: Hardware and Payroll and Third Party Related Total Cost Gross Profit Software Software Benefits EDI Other of Revenue (Loss) Three Months Ended June 30, 2014 QSI Dental Division 0.0 % 4.0 % 34.1 % 9.0 % 7.5 % 54.6 % 45.4 % NextGen Division 1.4 % 0.8 % 11.9 % 11.5 % 10.6 % 34.8 % 65.2 % Hospital Solutions Division 0.0 % 0.5 % 81.0 % 0.5 % 21.1 % 103.1 % (3.1 )% RCM Services Division 0.0 % 0.0 % 49.6 % 1.0 % 23.7 % 74.3 % 25.7 % Consolidated 4.9 % 0.8 % 20.9 % 9.5 % 16.5 % 47.7 % 52.3 % Three Months Ended June 30, 2013 QSI Dental Division 2.6 % 6.1 % 19.7 % 14.3 % 6.3 % 46.4 % 53.6 % NextGen Division (0.1 )% 1.5 % 12.4 % 11.4 % 7.6 % 32.9 % 67.1 % Hospital Solutions Division 3.5 % 0.7 % 40.9 % 0.4 % 28.9 % 70.9 % 29.1 % RCM Services Division 0.0 % 0.0 % 42.9 % 0.9 % 24.6 % 68.4 % 31.6 % Consolidated 3.0 % 1.5 % 19.0 % 9.3 % 14.1 % 43.9 % 56.1 % During the three months ended June 30, 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. Gross margin for the Hospital Solutions Division decreased to (3.1)% for the three months ended June 30, 2014 as compared to 29.1% for the same prior year period primarily due to the declines in system sales revenues, implementation and training gross margin, and maintenance gross margin. The change in maintenance gross margin was primarily a result of increased accruals for anticipated sales credits, which -------------------------------------------------------------------------------- reduced revenue in the current period. The gross margin for implementation and training was negatively impacted by a decline in implementation revenue without requisite reductions in our implementation staffing levels at the Hospital Solutions Division. Our payroll and benefits expense associated with delivering our products and services increased to 20.9% of consolidated revenue in the three months ended June 30, 2014 compared to 19.0% during the same period last year. The absolute level of consolidated payroll and benefit expenses increased from $20.8 million in the three months ended June 30, 2013 to $24.6 million in the three months ended June 30, 2014. The increase is primarily due to a $1.1 million increase in payroll and benefits expenses within the Hospital Solutions Division, resulting from increased headcount compared to the prior year period and a $1.4 million increase within the RCM Services Division, as RCM is a service business which inherently has higher payroll costs as a percentage of revenue. The amount of share-based compensation expense included in cost of revenue was not significant for the three months ended June 30, 2014 and 2013. Other cost of revenue, which primarily consists of third-party annual licenses, hosting costs and outsourcing costs, increased to 16.5% of total revenue during the three months ended June 30, 2014 as compared to 14.1% for the same period a year ago. Other expenses as a percentage of revenue increased due to the mix of other services revenue sold compared to the prior year period. As a result of the foregoing events and activities, our gross profit percentage decreased to 52.3% for the three months ended June 30, 2014 versus 56.1% for the same prior year period. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2014 increased 4.7% to $36.7 million as compared to $35.1 million for the prior year period. The increase in these expenses is primarily due to the inclusion of Mirth, which was acquired on September 9, 2013. The increase in selling, general and administrative expenses, including the impact of Mirth, consists primarily of: • $2.1 million increase in compensation costs, including salaries, benefits, and commissions • $1.1 million increase in acquisition costs; and • $1.3 million net increase in other selling and administrative expenses; partially offset by • $2.9 million decrease in bad debt expense as a result of improved collections. Share-based compensation expense was approximately $0.6 million and $0.4 million for the three months ended June 30, 2014 and 2013, respectively, and is included in the aforementioned amounts. Selling, general and administrative expenses as a percentage of revenue decreased from 32.0% in the three months ended June 30, 2013 to 31.2% in the three months ended June 30, 2014. Research and Development Costs. Research and development costs for the three months ended June 30, 2014 and 2013 were $16.2 million and $5.6 million, respectively. Research and development costs as a percentage of revenue increased to 13.8% in the three months ended June 30, 2014 from 5.1% for the prior year period. The increase in research and development expenses is primarily due to the reduction in the capitalization rate of software development costs in the current period resulting from a trend towards shorter development cycles, the acquisition of 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, NextGen Mobile, NextGen NextPen, NextGen Community Connectivity consisting of NextGen HIE, NextGen Patient Portal (NextMD.com), and NextGen Health Quality Measures, and other enhancements to our existing products. Additions to capitalized software costs offset increases in research and development costs. For the three months ended June 30, 2014 and 2013, our additions to capitalized software were $2.9 million and $7.3 million, respectively. The decrease in capitalized software is primarily due to the cessation of software development costs capitalization at the Hospital Solutions Division as a result of the prior year impairment charge. For the three months ended June 30, 2014 and 2013, total research and development expenditures including costs expensed and costs capitalized was $19.1 million and $12.9 million, respectively. We intend to continue to invest heavily in research and development to enhance our software to meet the Meaningful Use definitions under the ARRA as well as further integrate both ambulatory and inpatient products and to 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 three months ended June 30, 2014 and 2013. Amortization of Acquired Intangible Assets. Amortization included in operating expenses related to acquired intangible assets decreased to $1.0 million for the three months ended June 30, 2014 from $1.2 million from the prior year period. Provision for Income Taxes. The provision for income taxes for the three months ended June 30, 2014 and 2013 was $2.7 million and $6.4 million, respectively. The effective tax rates were 34.0% and 33.0% for the three months ended June 30, 2014 and 2013, respectively. The effective rate for the three months ended June 30, 2014 increased as compared to the same prior year period primarily due to the absence of a federal research and development tax credit reflected in the current period, offset by the increased benefit of the foreign rate differential and decrease in qualified production activities deduction. The federal research and development tax credit statute expired on December 31, 2013 and has not been reenacted as of June 30, 2014. Liquidity and Capital Resources The following table presents selected financial statistics and information for the three months ended June 30, 2014 and 2013 (in thousands): -------------------------------------------------------------------------------- Three Months Ended June 30, 2014 2013Cash and cash equivalents and marketable securities $ 116,435 $ 130,026 Net decrease in cash and cash equivalents and marketable securities $ 2,634 $ 12,015 Net income $ 5,163 $ 12,945 Net cash provided by operating activities $ 18,565 $ 31,527 Number of days of sales outstanding (1) 87 116 _________________________ (1) Days sales outstanding is equal to accounts receivable divided by average daily revenue. Cash Flows from Operating Activities Cash provided by operations has historically been our primary source of cash and has primarily been driven by our net income, as adjusted to exclude non-cash expenses, such as depreciation, amortization of intangibles and capitalized software costs, provision 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 three months ended June 30, 2014 and 2013 (in thousands): Three Months Ended June 30, 2014 2013 Net income $ 5,163 $ 12,945 Non-cash expenses 7,874 9,301 Cash from net income (as adjusted) 13,037 22,246 Change in accounts receivable 3,172 7,503 Change in other assets and liabilities 2,356 1,778 Net cash provided by operating activities $ 18,565 $ 31,527 Net cash provided by operating activities for the three months ended June 30, 2014 and 2013 was approximately $18.6 million and $31.5 million, respectively. Cash from operations for the three months ended June 30, 2014 decreased as a result of the decline in cash from net income and a $4.3 million decrease in cash flows attributable to accounts receivable activity, offset slightly by changes in other assets and liabilities. The Company continues to place strong emphasis on working capital management and collections 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 three months ended June 30, 2014, as compared to 116 days in the same prior year period. Based on our results for the three months ended June 30, 2014, we anticipate being able to continue generating significant cash from operations for the remainder of fiscal year 2015. Cash Flows from Investing Activities Net cash used in investing activities for the three months ended June 30, 2014 and 2013 was approximately $3.2 million and $9.1 million, respectively. The $5.9 million decrease in net cash used in investing activities is primarily due to the decrease of additions to capitalized software costs by $4.4 million, plus $1.9 million in proceeds from the sales and maturities of marketable securities, offset slightly by an increase in additions to equipment and improvements. Cash Flows from Financing Activities Net cash used in financing activities for the three months ended June 30, 2014 and 2013 was $10.7 million and $10.2 million, respectively. During the three months ended June 30, 2014, we paid $10.7 million in dividends to shareholders as compared to payments of $10.4 million in dividends to shareholders and proceeds of $0.3 million from the exercise of stock options during the same prior year period. Cash and Cash Equivalents and Marketable Securities At June 30, 2014, we had combined cash and cash equivalents and marketable securities of $116.4 million, reflecting an increase of $2.6 million from the comparable balance as of March 31, 2014. This increase principally reflects 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. -------------------------------------------------------------------------------- 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 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 July 23, 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 September 12, 2014 with an expected distribution date on or about October 3, 2014. Our Board of Directors declared the following dividends during the periods presented: Declaration Date Record Date Payment Date Per Share Dividend May 28, 2014 June 13, 2014 July 3, 2014 $ 0.175 Fiscal year 2015 0.175 May 22, 2013 June 14, 2013 July 5, 2013 0.175 July 24, 2013 September 13, 2013 October 4, 2013 $ 0.175 October 23, 2013 December 13, 2013 January 3, 2014 0.175 January 22, 2014 March 14, 2014 April 4, 2014 0.175 Fiscal year 2014 $ 0.700 May 24, 2012 June 15, 2012 July 3, 2012 $ 0.175 July 25, 2012 September 14, 2012 October 5, 2012 $ 0.175 October 25, 2012 December 14, 2012 December 28, 2012 $ 0.175 January 23, 2013 March 15, 2013 April 5, 2013 $ 0.175 Fiscal year 2013 $ 0.700 Management believes that its cash, cash equivalents and marketable securities on hand at June 30, 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 June 30, 2014 and the effect that such obligations are expected to have on our liquidity and cash in future periods: For the year ended March 31, 2015 (remaining 2020 and Contractual Obligations Total nine months) 2016 2017 2018 2019 beyond Operating lease obligations $ 28,730 $ 6,161 $ 7,812 $ 5,880 $ 5,146 $ 1,971 $ 1,760 Contingent consideration and other acquisition related liabilities (excluding share-based payments) $ 625 $ 313 $ 312 - - - Total $ 29,355 $ 6,161 $ 8,125 $ 6,192 $ 5,146 $ 1,971 $ 1,760 The deferred compensation liability as of June 30, 2014 was $5,182, which is not included in the table above as the timing of future benefit payments to employees is not determinable. Recent Accounting Pronouncements -------------------------------------------------------------------------------- Refer to Note 1, "Summary of Significant Accounting Policies," of our notes to consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of new accounting standards. -------------------------------------------------------------------------------- |