##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 001-12537
 QUALITY SYSTEMS, INC.
 (Exact name of Registrant as specified in its charter)
 California
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    95-2888568
(I.R.S. Employer
Identification No.)18111 Von Karman Avenue, Suite 600, Irvine California
(Address of Principal Executive Offices)
    
    92612
(Zip Code)
 Registrants telephone number, including area code: (949) 255-2600
 þ o
 o o
  Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o
 o þ




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##### 



QUALITY SYSTEMS, INC.
 For the Quarterly Period Ended September 30, 2009
 TABLE OF CONTENTS
 Item
    
    
    
    PagePart I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2009 and March 31,
2009 (unaudited)
    
    
    3Consolidated Statements of Income for the three and six months
ended September 30, 2009 and 2008 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the three and six months
ended September 30, 2009 and 2008 (unaudited)
    
    
    5Condensed Notes to Consolidated Financial Statements (unaudited)
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    25Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4.
    
    Controls and Procedures
    
    
    48Part II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    48Item 1A.
    
    Risk Factors
    
    
    49Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3.
    
    Defaults Upon Senior Securities
    
    
    49Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    49Item 5.
    
    Other Information
    
    
    49Item 6.
    
    Exhibits
    
    
    50Signatures
    
    
    51EX-10.1EX-31.1EX-31.2EX-32.1
  2




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##### Table of Contents



PART I
 
 ITEM 1
    
     FINANCIAL STATEMENTS
 
 QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    March 31,2009
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    75,429
    
    
    $
    70,180Restricted cash
    
    
    897
    
    
    
    1,303Marketable securities
    
    
    7,448
    
    
    
    Accounts receivable, net
    
    
    97,240
    
    
    
    90,070Inventories, net
    
    
    1,245
    
    
    
    1,125Income tax receivable
    
    
    5,486
    
    
    
    5,605Net current deferred tax assets
    
    
    3,944
    
    
    
    3,994Other current assets
    
    
    7,985
    
    
    
    6,312Total current assets
    
    
    199,674
    
    
    
    178,589Marketable securities
    
    
    
    
    
    
    7,395Equipment and improvements, net
    
    
    8,026
    
    
    
    6,756Capitalized software costs, net
    
    
    9,646
    
    
    
    9,552Intangibles, net
    
    
    7,955
    
    
    
    8,403Goodwill
    
    
    29,381
    
    
    
    28,731Other assets
    
    
    2,940
    
    
    
    2,675Total assets
    
    $
    257,622
    
    
    $
    242,101LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,673
    
    
    $
    5,097Deferred revenue
    
    
    48,663
    
    
    
    47,584Accrued compensation and related benefits
    
    
    7,959
    
    
    
    9,511Dividends payable
    
    
    8,593
    
    
    
    8,529Other current liabilities
    
    
    12,951
    
    
    
    8,888Total current liabilities
    
    
    83,839
    
    
    
    79,609Deferred revenue, net of current
    
    
    552
    
    
    
    521Net deferred tax liabilities
    
    
    3,884
    
    
    
    4,566Deferred compensation
    
    
    1,674
    
    
    
    1,838Total liabilities
    
    
    89,949
    
    
    
    86,534Commitments and contingenciesShareholders equity:Common stock$0.01 par value; authorized 50,000 shares; issued and
outstanding 28,643 and 28,447 shares at September 30,
2009 and March 31, 2009, respectively
    
    
    286
    
    
    
    284Additional paid-in capital
    
    
    110,609
    
    
    
    103,524Retained earnings
    
    
    56,778
    
    
    
    51,759Total shareholders equity
    
    
    167,673
    
    
    
    155,567Total liabilities and shareholders equity
    
    $
    257,622
    
    
    $
    242,101
 
 3




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##### Table of Contents



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Software, hardware and supplies
    
    $
    22,856
    
    
    $
    21,297
    
    
    $
    40,632
    
    
    $
    42,666Implementation and training services
    
    
    3,380
    
    
    
    3,486
    
    
    
    6,837
    
    
    
    7,071System sales
    
    
    26,236
    
    
    
    24,783
    
    
    
    47,469
    
    
    
    49,737Maintenance
    
    
    21,475
    
    
    
    17,234
    
    
    
    43,115
    
    
    
    34,370Electronic data interchange services
    
    
    8,796
    
    
    
    6,985
    
    
    
    16,958
    
    
    
    13,655Revenue cycle management and related services
    
    
    8,888
    
    
    
    4,527
    
    
    
    17,880
    
    
    
    6,484Other services
    
    
    6,303
    
    
    
    5,452
    
    
    
    12,914
    
    
    
    9,959Maintenance, EDI, RCM and other services
    
    
    45,462
    
    
    
    34,198
    
    
    
    90,867
    
    
    
    64,468Total revenue
    
    
    71,698
    
    
    
    58,981
    
    
    
    138,336
    
    
    
    114,205Cost of revenue:Software, hardware and supplies
    
    
    3,737
    
    
    
    3,395
    
    
    
    6,441
    
    
    
    6,882Implementation and training services
    
    
    3,296
    
    
    
    2,626
    
    
    
    6,177
    
    
    
    5,640Total cost of system sales
    
    
    7,033
    
    
    
    6,021
    
    
    
    12,618
    
    
    
    12,522Maintenance
    
    
    3,255
    
    
    
    2,947
    
    
    
    6,280
    
    
    
    6,030Electronic data interchange services
    
    
    6,164
    
    
    
    5,256
    
    
    
    12,054
    
    
    
    10,147Revenue cycle management and related services
    
    
    6,856
    
    
    
    3,132
    
    
    
    13,378
    
    
    
    4,437Other services
    
    
    5,003
    
    
    
    3,866
    
    
    
    9,870
    
    
    
    7,313Total cost
of maintenance, EDI, RCM and other services
    
    
    21,278
    
    
    
    15,201
    
    
    
    41,582
    
    
    
    27,927Total cost of revenue
    
    
    28,311
    
    
    
    21,222
    
    
    
    54,200
    
    
    
    40,449Gross profit
    
    
    43,387
    
    
    
    37,759
    
    
    
    84,136
    
    
    
    73,756Operating expenses:Selling, general and administrative
    
    
    20,428
    
    
    
    18,283
    
    
    
    40,878
    
    
    
    33,535Research and development costs
    
    
    4,346
    
    
    
    3,342
    
    
    
    8,323
    
    
    
    6,461Total operating expenses
    
    
    24,774
    
    
    
    21,625
    
    
    
    49,201
    
    
    
    39,996Income from operations
    
    
    18,613
    
    
    
    16,134
    
    
    
    34,935
    
    
    
    33,760Interest income
    
    
    59
    
    
    
    340
    
    
    
    137
    
    
    
    714Other income
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    Income before provision for income taxes
    
    
    18,672
    
    
    
    16,474
    
    
    
    35,130
    
    
    
    34,474Provision for income taxes
    
    
    6,852
    
    
    
    5,975
    
    
    
    12,964
    
    
    
    12,861Net income
    
    $
    11,820
    
    
    $
    10,499
    
    
    $
    22,166
    
    
    $
    21,613Net income per share:Basic
    
    $
    0.41
    
    
    $
    0.38
    
    
    $
    0.78
    
    
    $
    0.78Diluted
    
    $
    0.41
    
    
    $
    0.37
    
    
    $
    0.77
    
    
    $
    0.77Weighted average shares outstanding:Basic
    
    
    28,597
    
    
    
    27,930
    
    
    
    28,545
    
    
    
    27,699Diluted
    
    
    28,742
    
    
    
    28,211
    
    
    
    28,717
    
    
    
    28,014Dividends declared per common share
    
    $
    0.30
    
    
    $
    0.30
    
    
    $
    0.60
    
    
    $
    0.55
 
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##### Table of Contents



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    22,166
    
    
    $
    21,613Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    1,798
    
    
    
    1,335Amortization of capitalized software costs
    
    
    2,851
    
    
    
    2,463Amortization of other intangibles
    
    
    725
    
    
    
    353Provision for bad debts
    
    
    1,803
    
    
    
    914Provision (reduction) for inventory obsolescense
    
    
    
    
    
    
    (13
    )Share-based compensation
    
    
    1,319
    
    
    
    1,128Deferred income tax (benefit) expense
    
    
    (631
    )
    
    
    744Tax benefit from exercise of stock options
    
    
    1,057
    
    
    
    3,153Excess tax benefit from share-based compensation
    
    
    (1,057
    )
    
    
    (3,002
    )Loss on disposal of equipment and improvements
    
    
    
    
    
    
    96Changes in
assets and liabilities net of amounts acquired:Accounts receivable
    
    
    (8,816
    )
    
    
    (12,403
    )Inventories
    
    
    (120
    )
    
    
    (43
    )Income tax receivable
    
    
    120
    
    
    
    Other current assets
    
    
    (1,723
    )
    
    
    387Other assets
    
    
    (324
    )
    
    
    (37
    )Accounts payable
    
    
    558
    
    
    
    (1,001
    )Deferred revenue
    
    
    1,110
    
    
    
    1,210Accrued compensation and related benefits
    
    
    (1,551
    )
    
    
    (21
    )Income taxes payable
    
    
    
    
    
    
    (7,067
    )Other current liabilities
    
    
    3,762
    
    
    
    5,534Deferred compensation
    
    
    (164
    )
    
    
    60Net cash provided by operating activities
    
    
    22,883
    
    
    
    15,403Cash flows from investing activities:Additions to capitalized software costs
    
    
    (2,945
    )
    
    
    (3,170
    )Additions to equipment and improvements
    
    
    (3,068
    )
    
    
    (1,470
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    8,600Purchase of Sphere Health Systems, Inc.
    
    
    (300
    )
    
    
    Purchase of HSI, including direct transaction costs
    
    
    
    
    
    
    (8,221
    )Net cash used in investing activities
    
    
    (6,313
    )
    
    
    (4,261
    )Cash flows from financing activities:Excess tax benefit from share-based compensation
    
    
    1,057
    
    
    
    3,002Proceeds from the exercise of stock options
    
    
    4,712
    
    
    
    10,798Dividends paid
    
    
    (17,090
    )
    
    
    (13,850
    )Loan repayment
    
    
    
    
    
    
    (2,258
    )Net cash used in financing activities
    
    
    (11,321
    )
    
    
    (2,308
    )Net increase in cash and cash equivalents
    
    
    5,249
    
    
    
    8,834Cash and cash equivalents at beginning of period
    
    
    70,180
    
    
    
    59,046Cash and cash equivalents at end of period
    
    $
    75,429
    
    
    $
    67,880
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##### Table of Contents



QUALITY SYSTEMS, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Supplemental disclosures of cash flow information:Cash paid during the period for income taxes, net of
refunds
    
    $
    12,363
    
    
    $
    15,442Non-cash investing and financing activities:Unrealized loss on marketable securities, net of tax
    
    $
    
    
    
    $
    (798
    )Effective May 20, 2008, the Company acquired HSI in a
transaction summarized as follows:Fair value of net assets assumed
    
    $
    
    
    
    $
    20,609Cash paid for HSI stock
    
    
    
    
    
    
    (8,241
    )Common stock issued for HSI stock
    
    
    
    
    
    
    (7,350
    )Liabilities assumed
    
    $
    
    
    
    $
    5,018Effective August 12, 2009, the Company acquired SphereHealth Systems, Inc. in a transaction
summarized as follows:Fair value of net assets assumed
    
    $
    1,085
    
    
    $
    Cash paid
    
    $
    (300
    )
    
    $
    Liabilities assumed
    
    $
    785
    
    
    $
    
 
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##### Table of Contents



QUALITY SYSTEMS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( )
 1. Basis of Presentation
  Accounting Standards
Codification Subsequent Events,
 2. Summary of Significant Accounting Policies
 Principles of Consolidation .
 Basis of Presentation.
  Revenue Recognition . Software, Revenue Recognition,
 Software, Revenue Recognition, Multiple Elements,
   7




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##### Table of Contents




    
    The fee must be negotiated at the outset of an arrangement, and generally be based
on the specific volume of products to be delivered without being subject to change based on
variable pricing mechanisms such as the number of units copied or distributed or the expected
number of users.
    
    Payment terms must not be considered extended. If a significant portion of the
fee is due more than 12 months after delivery or after the expiration of the license, the fee
is presumed not fixed and determinable.
  Construction-Type and Production-Type Contracts,
 
    
    the contract includes provisions that clearly specify the enforceable rights regarding
goods or services to be provided and received by the parties, the consideration to be
exchanged, and the manner and terms of settlement;
    
    the customer can be expected to satisfy its obligations under the contract;
    
    the Company can be expected to perform its contractual obligations; and
    
    reliable estimates of progress towards completion can be made.
   Revenue Recognition,
Products,
 
    
    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.
  8




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##### Table of Contents



Software, Revenue Recognition Hosting Arrangements,
    Cash and Cash Equivalents .
 Restricted Cash.
 Marketable Securities and ARS Put Option Rights .
   9




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##### Table of Contents



Investments  Debt and Equity Securities,
    Allowance for Doubtful Accounts .
  Inventories .
 Equipment and Improvements.
    Computers and electronic test equipment
    
    3-5 years   Furniture and fixtures
    
    5-7 years
 
    
    Leasehold improvements lesser of lease term or estimated useful life of asset
 10




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##### Table of Contents



Software Development Costs. Costs of Computer Software to be Sold, Leased or Marketed, .
 Goodwill and Intangible Assets .
 Goodwill . Intangibles  Goodwill and Other, Goodwill,
 Intangible Assets. Intangibles  Goodwill and Other,
General Intangibles Other than Goodwill,
 Long-Lived Assets. Property, Plant, and Equipment, Impairment or Disposal of
Long-Lived Assets
  Income Taxes. Income
Taxes, .
 11




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Advertising Costs.
 Marketing Assistance Agreements.
 Share-Based Compensation. Compensation  Stock Compensation, ,
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Costs and expenses:Cost of revenue
    
    $
    12
    
    
    $
    78
    
    
    $
    27
    
    
    $
    153Research and development
    
    
    20
    
    
    
    81
    
    
    
    37
    
    
    
    185Selling, general and administrative
    
    
    825
    
    
    
    262
    
    
    
    1,255
    
    
    
    790Total share-based compensation
    
    $
    857
    
    
    $
    421
    
    
    $
    1,319
    
    
    $
    1,128Amounts capitalized in software development costs
    
    
    (10
    )
    
    
    (8
    )
    
    
    (25
    )
    
    
    (18
    )Amounts charged against earnings, before income tax
benefit
    
    $
    847
    
    
    $
    413
    
    
    $
    1,294
    
    
    $
    1,110Amount of income tax benefit related to stock options
exercised during the period
    
    $
    260
    
    
    $
    129
    
    
    $
    1,057
    
    
    $
    310
 3. New Accounting Pronouncements
 Newly Adopted Accounting Standards
 Generally Accepted Accounting Principles FASB Accounting Standards
Codification TM and the
Hierarchy of Generally Accepted Accounting Principles). FASB Accounting
Standards Codification TM
 Recently Issued Accounting Standards
 Revenue Recognition (Topic 605)  Multiple-Deliverable Revenue Arrangements Software (Topic 985)  Certain Revenue Arrangements That Include Software Elements,
 12




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Recently Issued Accounting Standards (Not codified yet)
  
    
    SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment
of FASB Statement No. 140, or SFAS 166; and
    
    SFAS No. 167, Amendments to FASB Interpretation No. 46(R),or SFAS 167;
 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
 Consolidation of Variable Interest Entities (revised
December 2003)  an interpretation of ARB No. 51
 4. Fair Value Measurements
 Fair Value Measurements and Disclosures,
 
    
    Level 1  Valuations based on quoted prices in active markets for
identical assets or liabilities that the entity has the ability to
access.
    
    Level 2  Valuations based on quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable data
for substantially the full term of the assets or liabilities.
 13




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##### Table of Contents




    
    Level 3  Valuations based on inputs that are supported by
little or no market activity and that are significant to
the fair value of the assets or liabilities.
  Quoted Pricesin Active
    
    
    SignificantMarkets For
    
    
    OtherBalance as of
    
    
    Identical
    
    
    Observable
    
    
    UnobservableSeptember 30,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash and cash equivalents
    
    $
    75,429
    
    
    $
    75,429
    
    
    $
    
    
    
    $
    Restricted cash
    
    
    897
    
    
    
    897
    
    
    
    
    
    
    
    Marketable securities(1)
    
    
    7,448
    
    
    
    
    
    
    
    
    
    
    
    7,448ARS put option right
    
    
    473
    
    
    
    
    
    
    
    
    
    
    
    473$
    84,247
    
    
    $
    76,326
    
    
    $
    
    
    
    $
    7,921
 
 (1)
    
    Marketable securities consist of ARS.  Financial Instruments,
   Balance at March 31, 2009
    
    $
    7,863Transfer in/(out) of Level 3
    
    
    Proceeds from sales (at par)
    
    
    Recognized gain
    
    
    58Balance at September 30, 2009
    
    $
    7,921
 5. Composition of Certain Financial Statement Captions
  14




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##### Table of Contents



September 30,
    
    
    March 31,2009
    
    
    2009Accounts receivable, excluding undelivered software,
maintenance and services
    
    $
    73,378
    
    
    $
    64,003Undelivered software, maintenance and implementation
services billed in advance, included in deferred revenue
    
    
    27,969
    
    
    
    29,944Accounts receivable, gross
    
    
    101,347
    
    
    
    93,947Allowance for doubtful accounts
    
    
    (4,107
    )
    
    
    (3,877
    )Accounts receivable, net
    
    $
    97,240
    
    
    $
    90,070
  September 30,
    
    
    March 31,2009
    
    
    2009Computer systems and components, net of reserve for
obsolescence of $210, respectively
    
    $
    1,224
    
    
    $
    1,105Miscellaneous parts and supplies
    
    
    21
    
    
    
    20Inventories, net
    
    $
    1,245
    
    
    $
    1,125
  September 30,
    
    
    March 31,2009
    
    
    2009Payroll, bonus and commission
    
    $
    4,005
    
    
    $
    5,768Vacation
    
    
    3,954
    
    
    
    3,743Accrued compensation and related benefits
    
    $
    7,959
    
    
    $
    9,511
  September 30,
    
    
    March 31,2009
    
    
    2009Maintenance
    
    $
    8,309
    
    
    $
    9,083Implementation services
    
    
    31,552
    
    
    
    28,655Annual license services
    
    
    6,757
    
    
    
    8,176Undelivered software and other
    
    
    2,597
    
    
    
    2,191Deferred Revenue
    
    $
    49,215
    
    
    $
    48,105
 15




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##### Table of Contents



September 30,
    
    
    March 31,2009
    
    
    2009Accrued EDI expenses
    
    $
    2,548
    
    
    $
    1,258Customer deposits  UGM
    
    
    2,320
    
    
    
    Accrued royalties
    
    
    1,349
    
    
    
    933Care services liabilities
    
    
    897
    
    
    
    1,303Customer deposits  other
    
    
    798
    
    
    
    674Deferred rent
    
    
    718
    
    
    
    782Professional fees
    
    
    620
    
    
    
    409Sales tax payable
    
    
    497
    
    
    
    602Commission payable
    
    
    333
    
    
    
    385Other accrued expenses
    
    
    2,871
    
    
    
    2,542Other current liabilities
    
    $
    12,951
    
    
    $
    8,888
 6. Business Combinations
  Business Combinations,
    Current assets (consisting of accounts receivable only)
    
    $
    158Customer relationships
    
    
    149Trade names and trademarks
    
    
    15Intellectual property
    
    
    113Goodwill (including assembled workforce of $84)
    
    
    650Current liabilties, including long-term debt due within one year
    
    
    (79
    )Contingent consideration
    
    
    (706
    )Total cash consideration
    
    $
    300
 16




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##### Table of Contents



7. Goodwill
   September 30,2009NextGen Healthcare Information Systems
    
    $
    1,840Healthcare Strategic Initiatives
    
    
    10,839Practice Management Partners
    
    
    16,052Sphere Health Systems, Inc
    
    
    650$
    29,381
 8. Intangible Assets  Customer Relationships and Trade Name
  Customer
    
    
    
    
    
    
    SoftwareRelationships
    
    
    Trade Name
    
    
    Technology
    
    
    TotalBalance as of April 1, 2009
    
    $
    7,877
    
    
    $
    526
    
    
    $
    
    
    
    $
    8,403Acquisition
    
    
    164
    
    
    
    
    
    
    
    113
    
    
    
    277Amortization
    
    
    (641
    )
    
    
    (79
    )
    
    
    (5
    )
    
    
    (725
    )Balance as of September 30, 2009
    
    $
    7,400
    
    
    $
    447
    
    
    $
    108
    
    
    $
    7,955
  For the year ending March 31,2010 (remaining six months)
    
    $
    7532011
    
    
    1,5072012
    
    
    1,5072013
    
    
    1,3722014
    
    
    1,2842015 and beyond
    
    
    1,532Total
    
    $
    7,955
 9. Capitalized Software Costs
  September 30,
    
    
    March 31,2009
    
    
    2009Gross carrying amount
    
    $
    36,453
    
    
    $
    33,508Accumulated amortization
    
    
    (26,807
    )
    
    
    (23,956
    )Net capitalized software development
    
    $
    9,646
    
    
    $
    9,552Aggregate amortization expense during the six and twelve
month period
    
    $
    2,851
    
    
    $
    5,163
  17




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##### Table of Contents



September 30,
    
    
    September 30,2009
    
    
    2008Beginning of the period
    
    $
    9,552
    
    
    $
    8,852Capitalization
    
    
    2,945
    
    
    
    3,170Amortization
    
    
    (2,851
    )
    
    
    (2,463
    )End of the period
    
    $
    9,646
    
    
    $
    9,559
  For the year ending March 31,2010 (remaining six months)
    
    $
    2,8642011
    
    
    4,2422012
    
    
    2,1682013
    
    
    372Total
    
    $
    9,646
 10. Share-Based Awards
 Employee Stock Option Plans
   18




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##### Table of Contents



Weighted
    
    Weighted
    
    AggregateAverage
    
    Average
    
    IntrinsicNumber of
    
    Exercise
    
    Remaining
    
    Value (inOptions
    
    Price
    
    Contractual
    
    thousands)Outstanding, April 1, 2009
    
    
    820,082
    
    
    $
    32.39
    
    
    
    3.63Granted
    
    
    30,000
    
    
    $
    58.03
    
    
    
    7.97Exercised
    
    
    (196,130
    )
    
    $
    24.03
    
    
    
    2.52
    
    
    $
    6,826Forfeited/Canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, September 30, 2009
    
    
    653,952
    
    
    $
    36.08
    
    
    
    3.57
    
    
    $
    16,671Vested and expected to vest,
September 30, 2009
    
    
    647,258
    
    
    $
    36.04
    
    
    
    3.57
    
    
    $
    16,527
 Compensation  Stock
Compensation,
 Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008Expected life
    
    4.42 years
    
    4.01 yearsExpected volatility
    
    
    47.7% - 48.7
    %
    
    
    42.0% - 43.4
    %Expected dividends
    
    
    1.9% - 2.3
    %
    
    
    2.9% - 3.5
    %Risk-free rate
    
    
    2.4% - 2.5
    %
    
    
    3.0% - 3.4
    %
      19




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##### Table of Contents



Performance-Based Awards
   Six Months EndedSeptember 30, 2009Expected life
    
    4.42 yearsExpected volatility
    
    
    48.4
    %Expected dividends
    
    
    2.3
    %Risk-free rate
    
    
    2.5
    %
  Weighted-Non-vested
    
    Average GrantNumber of
    
    Date Fair ValueShares
    
    per ShareNon-vested, April 1, 2009
    
    
    465,345
    
    
    $
    11.74Granted
    
    
    30,000
    
    
    
    20.83Vested
    
    
    (119,956
    )
    
    
    12.15Forfeited/Canceled
    
    
    
    
    
    
    Non-vested, September 30, 2009
    
    
    375,389
    
    
    $
    12.33
  Restricted Stock Units
  20




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##### Table of Contents



11. Income Taxes
  Uncertain tax positions
   12. Net Income Per Share
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    11,820
    
    
    $
    10,499
    
    
    $
    22,166
    
    
    $
    21,613Basic net income per common share:Weighted average of common shares outstanding
    
    
    28,597
    
    
    
    27,930
    
    
    
    28,545
    
    
    
    27,699Basic net income per common share
    
    $
    0.41
    
    
    $
    0.38
    
    
    $
    0.78
    
    
    $
    0.78Net income
    
    $
    11,820
    
    
    $
    10,499
    
    
    $
    22,166
    
    
    $
    21,613Diluted net income per common share:Weighted average of common shares outstanding
    
    
    28,597
    
    
    
    27,930
    
    
    
    28,545
    
    
    
    27,699Effect of potentially dilutive securities (options)
    
    
    145
    
    
    
    281
    
    
    
    172
    
    
    
    315Weighted average of common shares outstanding  Diluted
    
    
    28,742
    
    
    
    28,211
    
    
    
    28,717
    
    
    
    28,014Diluted net income per common share
    
    $
    0.41
    
    
    $
    0.37
    
    
    $
    0.77
    
    
    $
    0.77
 21




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##### Table of Contents



13. Other Comprehensive Income.
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    11,820
    
    
    $
    10,499
    
    
    $
    22,166
    
    
    $
    21,613Other comprehensive income:Unrealized loss on marketable securities, net of
tax
    
    
    
    
    
    
    (264
    )
    
    
    
    
    
    
    (798
    )Comprehensive income
    
    $
    11,820
    
    
    $
    10,235
    
    
    $
    22,166
    
    
    $
    20,815
 14. Operating Segment Information
 Operating Segments,
  a
   
 a
    
    UNIX is a registered trademark of the AT&T Corporation. 22




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue:QSI Division
    
    $
    4,250
    
    
    $
    4,113
    
    
    $
    8,106
    
    
    $
    8,180NextGen Division
    
    
    67,448
    
    
    
    54,868
    
    
    
    130,230
    
    
    
    106,025Consolidated revenue
    
    $
    71,698
    
    
    $
    58,981
    
    
    $
    138,336
    
    
    $
    114,205Operating income:QSI Division
    
    $
    901
    
    
    $
    952
    
    
    $
    1,565
    
    
    $
    1,928NextGen Division
    
    
    21,797
    
    
    
    19,301
    
    
    
    41,176
    
    
    
    39,236Unallocated corporate expenses
    
    
    (4,085
    )
    
    
    (4,119
    )
    
    
    (7,806
    )
    
    
    (7,404
    )Consolidated operating income
    
    $
    18,613
    
    
    $
    16,134
    
    
    $
    34,935
    
    
    $
    33,760
 15. Concentration of Credit Risk
  16. Commitments, Guarantees and Contingencies
 Commitments and Guarantees
     23




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17. Subsequent Events
   24




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    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 2 of our Condensed Notes
to Consolidated Financial Statements included in this Report.
    
    Company Overview.This section provides a more detailed description
of our Company, operating segments, products and services offered.
    
    Overview of Results of Operations and Results of Operations by
Operating Divisions.These sections provide our analysis and outlook
for the significant line items on our consolidated statements of
operations, as well as other information that we deem meaningful to
understand our results of operations on both a consolidated basis and
an operating division basis.
    
    Liquidity and Capital Resources.This section provides an analysis of
our liquidity and cash flows.
    
    Recent 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
  25




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##### Table of Contents




    
    continue development and enhancement of select software solutions in target markets,
    
    continue investments in our infrastructure including but not limited to product
development, sales, marketing, implementation, and support,
    
    continue efforts to make infrastructure investments within an overall context of
maintaining reasonable expense discipline,
    
    add new customers through maintaining and expanding sales, marketing and product
development activities, and
    
    expand our relationship with existing customers through delivery of new products and
services.
 Critical Accounting Policies and Estimates
  
    
    revenue recognition,
    
    valuation of marketable securities and ARS put option rights,
    
    uncollectible accounts receivable,
    
    share based compensation,
    
    software development cost,
    
    income taxes, and
    
    business combination and goodwill.
   26




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##### Table of Contents



Revenue Recognition . Software, Revenue Recognition,
 Software, Revenue Recognition, Multiple Elements,
   
    
    The fee must be negotiated at the outset of an arrangement, and generally be based on the
specific volume of products to be delivered without being subject to change based on variable
pricing mechanisms such as the number of units copied or distributed or the expected number of
users; and
 
    
    Payment terms must not be considered extended. If a significant portion of the fee is due
more than 12 months after delivery or after the expiration of the license, the fee is presumed
not fixed or determinable.
  Construction-Type and Production-Type Contracts,
  27




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##### Table of Contents




    
    The contract includes provisions that clearly specify the enforceable rights regarding
goods or services to be provided and received by the parties, the consideration to be
exchanged, and the manner and terms of settlement;
 
    
    The customer can be expected to satisfy its obligations under the contract;
 
    
    We can be expected to perform our contractual obligations; and
 
    
    Reliable estimates of progress towards completion can be made.
   Revenue Recognition,
Products,
 
    
    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
 
    
    We do not have significant obligations for future performance in order to bring about
resale of the product by the customer.
  Software, Revenue
Recognition Hosting Arrangements,
    Valuation of marketable securities and ARS put option rights .
 28




---



##### Table of Contents



Fair Value Measurements and
Disclosures-Overall
   Allowance for Doubtful Accounts.
 Software Development Costs. Costs of Computer Software to
be Sold, Leased or Marketed, .
 Share-Based Compensation. Compensation  Stock
Compensation, ,
 Research and Development Tax Credits
 29




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##### Table of Contents



Qualified Production Activities Deduction .
 Goodwill.
 Business Combinations. Business Combinations
 
    
    future expected cash flows from acquired businesses; and
    
    the acquired companys brand and market position.
  Company Overview
      30




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##### Table of Contents



ehr epm eas epi ics mcs web ehr chs
    epm ehr
 31




---



##### Table of Contents



Overview of Our Results
 
    
    Consolidated revenue grew 21.1% in the six months ended September 30, 2009 versus the same
period in 2008 and 31.0% in the six months ended September 30, 2008 versus 2007. For the
six months ended September 30, 2009, revenue was positively impacted by the HSI and PMP
acquisitions, which companies generated $12.1 million and $9.1 million of revenue for the six
months ended September 30, 2009, respectively. The six months ended September 30, 2008
included  $4.2 million related to  the HSI acquisition. Recurring EDI and maintenance revenue contributed to an
increase of $12.0 million in revenue during the six months ended September 30, 2009 over the
same period a year ago.
 
    
    Uncertainty over the final rules regarding incentive payments tied to the ARRA negatively
impacted system sales revenue in the three month period ended June 30, 2009, however, the
September quarter indicated a modest amount of positive momentum as indicated by increased
systems sales which grew to a record $26.2 million versus $24.8 million in the year ago
quarter and $21.2 million in the prior quarter.
 
    
    Consolidated income from operations increased 3.5% in the six months ended September 30,
2009 versus the same period in 2008 and increased 27.2% in the six months ended September 30,
2008 versus 2007. For the six months ended September 30, 2009, operating income was
negatively impacted by a shift in revenue mix with an increased share of hardware, EDI, and
RCM revenue resulting in a decline in our gross profit margin. We also invested in higher
selling, general and administrative expenses in order to take full advantage of the ARRA.
 
    
    We do not believe the revenue mix changes noted above represent a change in the overall
purchasing environment. On top of the potential benefits from the recently enacted ARRA, we
have benefited and hope to continue to benefit from the increased demands on healthcare
providers for greater efficiency and lower costs, as well as increased adoption rates for
electronic health records and other technology in the healthcare arena.
 
    
    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 current economic
environment combined with unpredictability of the federal governments plans to promote
increased adoption of electronic medical records negatively impacted our fiscal 2010 first
quarter results and makes the near term achievement of such benefits and, ultimately, their
impact on system sales, uncertain.
 NextGen Division
 
    
    NextGen Division revenue increased 22.8% in the six months ended September 30, 2009 versus
2008 and 33.9% in the six months ended September 30, 2008 versus 2007. Divisional operating
income (which excludes unallocated corporate expenses) increased 4.9% in the six months ended
September 30, 2009 versus 2008 and increased 32.7% in the six months ended September 30, 2008
versus 2007.
 
    
    HSI contributed $12.1 million and $5.9 million to NextGens revenue for the six months
ended September 30, 2009 and 2008, respectively. HSIs operating income added $1.1 million
and $0.3 million to NextGens operating income during the same periods, respectively.
Increased software revenue contributed to the increase in operating income for HSI. The HSI
acquisition closed on May 20, 2008.
 
    
    PMP contributed $9.1 million to NextGens revenue for the six months ended September 30,
2009. PMPs operating income added $1.1 million to NextGens operating income during the same
period. There was no revenue or operating income included from PMP in the six months ended
September 30, 2008, as the PMP acquisition did not close until  the third
quarter of fiscal year 2009.
 
    
    Recurring revenue represented $84.3 million and accounted for 64.7% of total NextGen
revenue during the six months ended September 30, 2009 while in the same period a year ago,
recurring revenue represented 54.8% of total NextGen revenue or $58.2 million. The shift in
revenue mix resulted in lower gross margins as revenue growth is in EDI and RCM revenue, which
have lower margins than system sales revenue.
 
    
    During the six months ended September 30, 2009, we added staffing resources in anticipation
of future growth from the ARRA. We intend to continue doing so in future periods to maximize
our opportunities from the ARRA. Compensation expense increased approximately $2.6 million in
the quarter ended September 30, 2009 versus 2008.
 
    
    Our goals include taking maximum advantage of future benefits related to the ARRA and
continuing to further enhance and expand the marketing and sales of our existing products,
developing new products for targeted markets, continuing to add new customers, selling
additional software and services to existing customers, expanding penetration of connectivity
and other services to new and existing customers, and capitalizing on growth and cross selling
opportunities within the Practice Solutions arena.
 32




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##### Table of Contents



QSI Division
 
    
    Our QSI Division revenue decreased 1.0% in the six months ended September 30, 2009 versus
the same period in 2008 and increased 2.4% in the six months ended September 30, 2008 versus
the same period in 2007. The Division experienced an 18.8% decrease in operating income
(excluding unallocated corporate expenses) in the six months ended September 30, 2009 versus
the same period in 2008 as compared to a 17.8% decrease in operating income in the six months
ended September 30, 2008 versus the same period in 2007. For the six months ended September
30, 2009, operating income was negatively impacted by lower revenues as well as an increase in
selling, general and administrative expense.
 
    
    In July 2009, we licensed source code from PlanetDDS, Inc., that will allow us to deliver
hosted, web-based Software-as-a-Service (SaaS) practice management and clinical software
solutions to the dental industry. The software solution will be marketed primarily to the
multi-location dental group practice market for which QSI has historically been a dominate
player. This new software solution brings the QSI division to the forefront of the emergence
of internet based applications and cloud computing and represents a significant growth
opportunity for the QSI division to sell both to QSIs existing customer base as well as new
customers.
 
    
    Our goal for the QSI 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 NextDDS product. The QSI division also
intends to leverage the NextGen sales force to sell its dental EMR software to practices that
provide both medical and dental services such as Federal Qualified Health Centers which are
receiving grants as part of the American Reinvestment and Recovery Act.
  33




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Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,(Unaudited)
    
    2009
    
    2008
    
    2009
    
    2008Revenues:Software, hardware and supplies
    
    
    31.9
    %
    
    
    36.1
    %
    
    
    29.4
    %
    
    
    37.4
    %Implementation and training services
    
    
    4.7
    
    
    
    5.9
    
    
    
    4.9
    
    
    
    6.2System
    
    
    36.6
    
    
    
    42.0
    
    
    
    34.3
    
    
    
    43.6Maintenance
    
    
    30.0
    
    
    
    29.2
    
    
    
    31.2
    
    
    
    30.1Electronic data interchange services
    
    
    12.3
    
    
    
    11.9
    
    
    
    12.3
    
    
    
    11.9Revenue cycle management
    
    
    12.4
    
    
    
    7.7
    
    
    
    12.9
    
    
    
    5.7Other services
    
    
    8.8
    
    
    
    9.2
    
    
    
    9.3
    
    
    
    8.7Maintenance, EDI, RCM and other
services
    
    
    63.4
    
    
    
    58.0
    
    
    
    65.7
    
    
    
    56.4Total
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Software, hardware and supplies
    
    
    5.2
    
    
    
    5.8
    
    
    
    4.7
    
    
    
    6.0Implementation and training services
    
    
    4.6
    
    
    
    4.4
    
    
    
    4.5
    
    
    
    4.9Total cost of system sales
    
    
    9.8
    
    
    
    10.2
    
    
    
    9.1
    
    
    
    10.9Maintenance
    
    
    4.5
    
    
    
    5.0
    
    
    
    4.5
    
    
    
    5.3Electronic data interchange services
    
    
    8.6
    
    
    
    8.9
    
    
    
    8.7
    
    
    
    8.9Revenue cycle management
    
    
    9.6
    
    
    
    5.3
    
    
    
    9.7
    
    
    
    3.9Other services
    
    
    7.0
    
    
    
    6.6
    
    
    
    7.1
    
    
    
    6.4Total cost of maintenance, EDI, RCM and other
services
    
    
    29.7
    
    
    
    25.8
    
    
    
    30.1
    
    
    
    24.5Total cost of revenue
    
    
    39.5
    
    
    
    36.0
    
    
    
    39.2
    
    
    
    35.4Gross profit
    
    
    60.5
    
    
    
    64.0
    
    
    
    60.8
    
    
    
    64.6Operating expenses:Selling, general and administrative
    
    
    28.5
    
    
    
    31.0
    
    
    
    29.6
    
    
    
    29.4Research and development
    
    
    6.1
    
    
    
    5.7
    
    
    
    6.0
    
    
    
    5.7Income from operations
    
    
    26.0
    
    
    
    27.3
    
    
    
    25.3
    
    
    
    29.5Interest income
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.1
    
    
    
    0.6Other income (expense)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before provision for income taxes
    
    
    26.0
    
    
    
    27.9
    
    
    
    25.4
    
    
    
    30.1Provision for income taxes
    
    
    9.6
    
    
    
    10.1
    
    
    
    9.4
    
    
    
    11.3Net income
    
    
    16.5
    %
    
    
    17.8
    %
    
    
    16.0
    %
    
    
    18.8
    %
 For the Three-Month Periods Ended September 30, 2009 versus 2008
 Net Income
 
    
    an increase in systems sales to $26.2 million dollars
versus $24.8 million a year ago;
    
    an increase of recurring revenue including RCM, maintenance, and EDI revenue;
    
    offset by an increase in selling, general and administrative expenses related to additional headcounts
and sales and marketing expenses as well as a decline in our gross profit margin due primarily
to both a shift in revenue mix with increased RCM revenue and lower gross margins related to
RCM revenue.
 Revenue.
 34




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System Sales .
   Hardware, Third
    
    
    ImplementationParty Software
    
    
    and Training
    
    
    Total SystemSoftware
    
    
    and Supplies
    
    
    Services
    
    
    SalesThree months ended
September 30, 2009QSI Division
    
    $
    557
    
    
    $
    204
    
    
    $
    145
    
    
    $
    906NextGen Division
    
    
    19,817
    
    
    
    2,278
    
    
    
    3,235
    
    
    
    25,330Consolidated
    
    $
    20,374
    
    
    $
    2,482
    
    
    $
    3,380
    
    
    $
    26,236Three months ended
September 30, 2008QSI Division
    
    $
    235
    
    
    $
    404
    
    
    $
    278
    
    
    $
    917NextGen Division
    
    
    18,673
    
    
    
    1,985
    
    
    
    3,208
    
    
    
    23,866Consolidated
    
    $
    18,908
    
    
    $
    2,389
    
    
    $
    3,486
    
    
    $
    24,783
    ehr epm
  35




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##### Table of Contents



Maintenance, EDI, Revenue Cycle Management and Other Services .
  Revenue CycleMaintenance
    
    
    EDI
    
    
    Management
    
    
    Other
    
    
    TotalThree months ended
September 30, 2009QSI Division
    
    $
    1,786
    
    
    $
    1,288
    
    
    $
    
    
    
    $
    271
    
    
    $
    3,345NextGen Division
    
    
    19,689
    
    
    
    7,508
    
    
    
    8,888
    
    
    
    6,032
    
    
    
    42,117Consolidated
    
    $
    21,475
    
    
    $
    8,796
    
    
    $
    8,888
    
    
    $
    6,303
    
    
    $
    45,462Three months ended
September 30, 2008QSI Division
    
    $
    1,759
    
    
    $
    1,121
    
    
    $
    
    
    
    $
    316
    
    
    $
    3,196NextGen Division
    
    
    15,475
    
    
    
    5,864
    
    
    
    4,527
    
    
    
    5,136
    
    
    
    31,002Consolidated
    
    $
    17,234
    
    
    $
    6,985
    
    
    $
    4,527
    
    
    $
    5,452
    
    
    $
    34,198
   36




---



##### Table of Contents



NextGen
    
    QSI
    
    ConsolidatedMaintenance
    
    EDI
    
    Maintenance
    
    EDI
    
    Maintenance
    
    EDISeptember 30, 2008
    
    
    1,199
    
    
    
    1,259
    
    
    
    249
    
    
    
    173
    
    
    
    1,448
    
    
    
    1,432Billing sites added
    
    
    227
    
    
    
    398
    
    
    
    19
    
    
    
    11
    
    
    
    246
    
    
    
    409Billing sites removed
    
    
    (80
    )
    
    
    (304
    )
    
    
    (13
    )
    
    
    (27
    )
    
    
    (93
    )
    
    
    (331
    )September 30, 2009
    
    
    1,346
    
    
    
    1,353
    
    
    
    255
    
    
    
    157
    
    
    
    1,601
    
    
    
    1,510
 Cost of Revenue.
   Three months ended September 30,2009
    
    
    %
    
    
    2008
    
    
    %QSI DivisionRevenue
    
    $
    4,250
    
    
    
    100.0
    %
    
    $
    4,113
    
    
    
    100.0
    %Cost of revenue
    
    
    1,818
    
    
    
    42.8
    %
    
    
    1,946
    
    
    
    47.3
    %Gross profit
    
    $
    2,432
    
    
    
    57.2
    %
    
    $
    2,167
    
    
    
    52.7
    %NextGen DivisionRevenue
    
    $
    67,448
    
    
    
    100.0
    %
    
    $
    54,868
    
    
    
    100.0
    %Cost of revenue
    
    
    26,493
    
    
    
    39.3
    %
    
    
    19,276
    
    
    
    35.1
    %Gross profit
    
    $
    40,955
    
    
    
    60.7
    %
    
    $
    35,592
    
    
    
    64.9
    %ConsolidatedRevenue
    
    $
    71,698
    
    
    
    100.0
    %
    
    $
    58,981
    
    
    
    100.0
    %Cost of revenue
    
    
    28,311
    
    
    
    39.5
    %
    
    
    21,222
    
    
    
    36.0
    %Gross profit
    
    $
    43,387
    
    
    
    60.5
    %
    
    $
    37,759
    
    
    
    64.0
    %
   37




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##### Table of Contents



Hardware,
    
    Payroll andThird Party
    
    related
    
    
    
    
    
    
    
    
    
    Total Cost
    
    GrossSoftware
    
    Benefits
    
    EDI
    
    Other
    
    of Revenue
    
    ProfitThree months ended
September 30, 2009QSI Division
    
    
    7.6
    %
    
    
    13.6
    %
    
    
    16.9
    %
    
    
    4.6
    %
    
    
    42.8
    %*
    
    
    57.2
    %NextGen Division
    
    
    3.7
    %
    
    
    18.7
    %
    
    
    8.1
    %
    
    
    8.8
    %
    
    
    39.3
    %
    
    
    60.7
    %Consolidated
    
    
    3.9
    %
    
    
    18.4
    %
    
    
    8.6
    %
    
    
    8.6
    %
    
    
    39.5
    %
    
    
    60.5
    %Three months ended
September 30, 2008QSI Division
    
    
    9.2
    %
    
    
    19.2
    %
    
    
    16.3
    %
    
    
    2.6
    %
    
    
    47.3
    %
    
    
    52.7
    %NextGen Division
    
    
    4.5
    %
    
    
    14.5
    %
    
    
    8.7
    %
    
    
    7.4
    %
    
    
    35.1
    %
    
    
    64.9
    %Consolidated
    
    
    4.8
    %
    
    
    14.9
    %
    
    
    9.3
    %
    
    
    7.0
    %
    
    
    36.0
    %
    
    
    64.0
    %
 
 *
    
    does not add due to rounding       38




---



##### Table of Contents



Selling, General and Administrative Expenses.
 
    
    $0.9 million increase relates to selling, general and administrative expenses at our
Practice Solutions operations. Almost all of the $0.9 million increase was attributed
to PMP which was not included in the prior year quarter;
    
    $0.4 million increase in marketing and tradeshows in the NextGen Division;
    
    $1.2 million increase in compensation expense in the NextGen Division as a result of
headcount additions; and
    
    $0.4 million net decrease in other selling, general and administrative expenses in the
NextGen Division, of which approximately $0.7 million was attributable to decreased proxy contest
related legal fees.
   Research and Development Costs.
 Interest Income.
  Provision for Income Taxes
 39




---



##### Table of Contents



For the Six-Month Periods Ended September 30, 2009 versus 2008
 Net Income
 
    
    an increase in consolidated revenue, attributable to growth in RCM revenue by HSI and PMP,
which companies generated $12.1 million and $9.1 million of revenue for the six months ended
September 30, 2009, respectively. The six months ended September 30, 2008 included only the
HSI acquisition. Recurring EDI and maintenance revenue contributed to an increase of $12.0
million in revenue during the six months ended September 30, 2009 over the same period a year
ago offset by:
    
    a decline in our gross profit margin due to shift in revenue mix with increased EDI and RCM
revenue; and
    
    a decline in the gross profit margin achieved from RCM revenues related to certain start up
and integration costs; and
    
    an increase in selling, general and administrative expenses as a percentage of revenue; and
    
    a decrease in interest income related primarily to comparatively lower interest rates earned
on our cash which is invested primarily in tax free money market accounts.
 Revenue.
 System Sales .
   Hardware, Third
    
    
    ImplementationParty Software
    
    
    and Training
    
    
    Total SystemSoftware
    
    
    and Supplies
    
    
    Services
    
    
    SalesSix months ended
September 30, 2009QSI Division
    
    $
    739
    
    
    $
    457
    
    
    $
    354
    
    
    $
    1,550NextGen Division
    
    
    36,062
    
    
    
    3,374
    
    
    
    6,483
    
    
    
    45,919Consolidated
    
    $
    36,801
    
    
    $
    3,831
    
    
    $
    6,837
    
    
    $
    47,469Six months ended
September 30, 2008QSI Division
    
    $
    652
    
    
    $
    710
    
    
    $
    502
    
    
    $
    1,864NextGen Division
    
    
    37,065
    
    
    
    4,239
    
    
    
    6,569
    
    
    
    47,873Consolidated
    
    $
    37,717
    
    
    $
    4,949
    
    
    $
    7,071
    
    
    $
    49,737
  40




---



##### Table of Contents



ehr epm
  Maintenance, EDI, Revenue Cycle Management and Other Services .
  41




---



##### Table of Contents



Maintenance
    
    
    EDI
    
    
    Revenue Cycle
Management
    
    
    Other
    
    
    TotalSix months ended
September 30, 2009QSI Division
    
    $
    3,567
    
    
    $
    2,491
    
    
    $
    
    
    
    $
    499
    
    
    $
    6,557NextGen Division
    
    
    39,548
    
    
    
    14,467
    
    
    
    17,880
    
    
    
    12,415
    
    
    
    84,310Consolidated
    
    $
    43,115
    
    
    $
    16,958
    
    
    $
    17,880
    
    
    $
    12,914
    
    
    $
    90,867Six months ended
September 30, 2008QSI Division
    
    $
    3,557
    
    
    $
    2,257
    
    
    $
    
    
    
    $
    502
    
    
    $
    6,316NextGen Division
    
    
    30,813
    
    
    
    11,398
    
    
    
    6,484
    
    
    
    9,457
    
    
    
    58,152Consolidated
    
    $
    34,370
    
    
    $
    13,655
    
    
    $
    6,484
    
    
    $
    9,959
    
    
    $
    64,468
   NextGen
    
    QSI
    
    ConsolidatedMaintenance
    
    EDI
    
    Maintenance
    
    EDI
    
    Maintenance
    
    EDISeptember 30, 2008
    
    
    1,199
    
    
    
    1,259
    
    
    
    249
    
    
    
    173
    
    
    
    1,448
    
    
    
    1,432Billing sites added
    
    
    227
    
    
    
    398
    
    
    
    19
    
    
    
    11
    
    
    
    246
    
    
    
    409Billing sites removed
    
    
    (80
    )
    
    
    (304
    )
    
    
    (13
    )
    
    
    (27
    )
    
    
    (93
    )
    
    
    (331
    )September 30, 2009
    
    
    1,346
    
    
    
    1,353
    
    
    
    255
    
    
    
    157
    
    
    
    1,601
    
    
    
    1,510
 Cost of Revenue.
   42




---



##### Table of Contents



Six months ended September 30,2009
    
    
    %
    
    
    2008
    
    
    %QSI DivisionRevenue
    
    $
    8,106
    
    
    
    100.0
    %
    
    $
    8,180
    
    
    
    100.0
    %Cost of revenue
    
    
    3,609
    
    
    
    44.5
    %
    
    
    3,787
    
    
    
    46.3
    %Gross profit
    
    $
    4,497
    
    
    
    55.5
    %
    
    $
    4,393
    
    
    
    53.7
    %NextGen DivisionRevenue
    
    $
    130,230
    
    
    
    100.0
    %
    
    $
    106,025
    
    
    
    100.0
    %Cost of revenue
    
    
    50,591
    
    
    
    38.8
    %
    
    
    36,662
    
    
    
    34.6
    %Gross profit
    
    $
    79,639
    
    
    
    61.2
    %
    
    $
    69,363
    
    
    
    65.4
    %ConsolidatedRevenue
    
    $
    138,336
    
    
    
    100.0
    %
    
    $
    114,205
    
    
    
    100.0
    %Cost of revenue
    
    
    54,200
    
    
    
    39.2
    %
    
    
    40,449
    
    
    
    35.4
    %Gross profit
    
    $
    84,136
    
    
    
    60.8
    %
    
    $
    73,756
    
    
    
    64.6
    %
   Hardware,
    
    Payroll andThird Party
    
    related
    
    
    
    
    
    
    
    
    
    Total Cost
    
    GrossSoftware
    
    Benefits
    
    EDI
    
    Other
    
    of Revenue
    
    ProfitSix months ended
September 30, 2009QSI Division
    
    
    7.8
    %
    
    
    14.5
    %
    
    
    17.5
    %
    
    
    4.7
    %
    
    
    44.5
    %
    
    
    55.5
    %NextGen Division
    
    
    3.1
    %
    
    
    18.6
    %
    
    
    8.2
    %
    
    
    9.0
    %
    
    
    38.8
    %*
    
    
    61.2
    %Consolidated
    
    
    3.4
    %
    
    
    18.4
    %
    
    
    8.7
    %
    
    
    8.7
    %
    
    
    39.2
    %
    
    
    60.8
    %Six months ended
September 30, 2008QSI Division
    
    
    7.9
    %
    
    
    19.6
    %
    
    
    15.7
    %
    
    
    3.1
    %
    
    
    46.3
    %
    
    
    53.7
    %NextGen Division
    
    
    4.4
    %
    
    
    12.8
    %
    
    
    8.5
    %
    
    
    8.9
    %
    
    
    34.6
    %
    
    
    65.4
    %Consolidated
    
    
    4.7
    %
    
    
    13.8
    %
    
    
    9.0
    %
    
    
    7.9
    %
    
    
    35.4
    %
    
    
    64.6
    %
 
 *
    
    does not add due to rounding    43




---



##### Table of Contents



Selling, General and Administrative Expenses.
 
    
    $2.6 million increase relates to selling, general and administrative expenses at our
Practice Solutions operations, consisting of PMP and HSI, of which $1.7 million attributed
to PMP which was not included in the prior year period;
    
    $1.2 million increase in marketing and tradeshows in the NextGen Division;
    
    $2.0 million increase in compensation expense in the NextGen Division as a result of
headcount additions;
    
    $0.8 million increase in bad debt expense in the NextGen Division;
    
    $0.4 million increase in corporate related expenses; and a
    
    $0.4 million net increase in other selling, general and administrative expenses in the
NextGen Division, of which approximately $0.5 million was
attributable to decreased proxy contest
related legal fees.
   Research and Development Costs.
 Interest Income.
 44




---



##### Table of Contents



Other Income (Expense).
 Provision for Income Taxes
 Liquidity and Capital Resources
  Six months ended September 30,2009
    
    2008Cash and cash equivalents
    
    $
    75,429
    
    
    $
    67,880Net increase in cash and cash equivalents during the six
month period
    
    $
    5,249
    
    
    $
    8,834Net income during the six month period
    
    $
    22,166
    
    
    $
    21,613Net cash provided by operations during the six month
period
    
    $
    22,883
    
    
    $
    15,403Number of days of sales outstanding at start of the
period
    
    
    125
    
    
    
    136Number of days of sales outstanding at the end of the
period
    
    
    124
    
    
    
    140
 Cash Flow from Operating Activities
   45




---



##### Table of Contents



Six months ended September 30,2009
    
    
    2008Net income
    
    $
    22,166
    
    
    $
    21,613Non-cash expenses
    
    
    7,865
    
    
    
    7,171Change in deferred revenue
    
    
    1,110
    
    
    
    1,210Change in accounts receivable
    
    
    (8,816
    )
    
    
    (12,403
    )Change in other assets and liabilities
    
    
    558
    
    
    
    (2,188
    )Net cash provided by operating activities
    
    $
    22,883
    
    
    $
    15,403
 Net Income .
 Non-Cash Expenses .
 Deferred Revenue.
 Accounts Receivable.
 
    
    NextGen Division revenue grew 22.8% and 33.9% on a year-over-year basis, in the six month
periods ended September 30, 2009 and 2008, respectively;
    
    Turnover of the NextGen Division accounts receivable is also slower than the QSI Division
due to the fact that the majority of the QSI Divisions revenue is derived from maintenance
and EDI services which typically have shorter payment terms than systems sales related revenue
at the NextGen Division sales.
   Cash flows from investing activities
  Cash flows from financing activities
  46




---



##### Table of Contents



Cash and cash equivalents and marketable securities
       Contractual Obligations
  Year Ending March 31,2010 (remaining six months)
    
    $
    2,1812011
    
    
    4,3792012
    
    
    2,5052013
    
    
    9852014 and beyond
    
    
    135$
    10,185
 New Accounting Pronouncements
 New Accounting Pronouncements,
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
  47




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   
 PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  48




---



##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
  
 ITEM 5. OTHER INFORMATION
         49




---



##### Table of Contents



ITEM 6. EXHIBITS
  10.1
    
    Form of First Amended and Restated Indemnification Agreement *31.1
    
    Certification of Principal Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
    
    Certification of Principal Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. *
 
 *
    
    Filed herewith. 50




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##### Table of Contents



SIGNATURES
  QUALITY SYSTEMS, INC.Date:  November 02, 2009
    By:
    /s/ Steven PlochockiSteven T. PlochockiChief Executive Officer; Principal Executive OfficerDate:  November 02, 2009
    By:
    /s/ Paul HoltPaul A. HoltChief Financial Officer; Principal Accounting
Officer 51