##### 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 December 31, 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 December 31, 2009
 TABLE OF CONTENTS
 Item
    
    
    
    PagePart I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of December 31, 2009 and March 31, 2009 (unaudited)
    
    
    3Consolidated Statements of Income for the three and nine months ended December 31, 2009 and 2008 (unaudited)
    
    
    4Consolidated Statements of Cash Flows for the three and nine months ended December 31, 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
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 4.
    
    Controls and Procedures
    
    
    49Part II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    50Item 1A.
    
    Risk Factors
    
    
    50Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 3.
    
    Defaults Upon Senior Securities
    
    
    50Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    50Item 5.
    
    Other Information
    
    
    50Item 6.
    
    Exhibits
    
    
    51Signatures
    
    
    52EX-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
 December 31,
    
    
    March 31,2009
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    79,111
    
    
    $
    70,180Restricted cash
    
    
    1,514
    
    
    
    1,303Marketable securities
    
    
    7,454
    
    
    
    Accounts receivable, net
    
    
    101,660
    
    
    
    90,070Inventories, net
    
    
    1,433
    
    
    
    1,125Income tax receivable
    
    
    3,117
    
    
    
    5,605Net current deferred tax assets
    
    
    4,848
    
    
    
    3,994Other current assets
    
    
    6,603
    
    
    
    6,312Total current assets
    
    
    205,740
    
    
    
    178,589Marketable securities
    
    
    
    
    
    
    7,395Equipment and improvements, net
    
    
    7,962
    
    
    
    6,756Capitalized software costs, net
    
    
    9,958
    
    
    
    9,552Intangibles, net
    
    
    7,577
    
    
    
    8,403Goodwill
    
    
    32,884
    
    
    
    28,731Other assets
    
    
    4,100
    
    
    
    2,675Total assets
    
    $
    268,221
    
    
    $
    242,101LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,433
    
    
    $
    5,097Deferred revenue
    
    
    55,658
    
    
    
    47,584Accrued compensation and related benefits
    
    
    7,254
    
    
    
    9,511Dividends payable
    
    
    8,598
    
    
    
    8,529Other current liabilites
    
    
    12,878
    
    
    
    8,888Total current liabilites
    
    
    88,821
    
    
    
    79,609Deferred revenue, net of current
    
    
    443
    
    
    
    521Net deferred tax liabilities
    
    
    3,589
    
    
    
    4,566Deferred compensation
    
    
    1,897
    
    
    
    1,838Total liabilites
    
    
    94,750
    
    
    
    86,534Commitments and contingenciesShareholders equityCommon Stock
$0.01 par value; authorized 50,000 shares;
issued and outstanding 28,660 and 28,447
shares at December 31, 2009 and March 31,
2009, respectively
    
    
    287
    
    
    
    284Additional paid-in capital
    
    
    111,852
    
    
    
    103,524Retained earnings
    
    
    61,332
    
    
    
    51,759Total shareholders equity
    
    
    173,471
    
    
    
    155,567Total liabilities and shareholders equity
    
    $
    268,221
    
    
    $
    242,101
 
 3




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##### Table of Contents



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Software, hardware and supplies
    
    $
    24,346
    
    
    $
    22,336
    
    
    $
    64,978
    
    
    $
    65,002Implementation and training services
    
    
    3,313
    
    
    
    2,675
    
    
    
    10,150
    
    
    
    9,746System sales
    
    
    27,659
    
    
    
    25,011
    
    
    
    75,128
    
    
    
    74,748Maintenance
    
    
    22,139
    
    
    
    19,152
    
    
    
    65,254
    
    
    
    53,522Electronic data interchange services
    
    
    8,897
    
    
    
    8,008
    
    
    
    25,855
    
    
    
    21,663Revenue cycle management and related services
    
    
    9,602
    
    
    
    6,835
    
    
    
    27,482
    
    
    
    13,319Other services
    
    
    6,665
    
    
    
    6,473
    
    
    
    19,579
    
    
    
    16,432Maintenance, EDI, RCM and
other services
    
    
    47,303
    
    
    
    40,468
    
    
    
    138,170
    
    
    
    104,936Total revenues
    
    
    74,962
    
    
    
    65,479
    
    
    
    213,298
    
    
    
    179,684Cost of revenue:Software, hardware and supplies
    
    
    2,810
    
    
    
    3,030
    
    
    
    9,251
    
    
    
    9,912Implementation and training services
    
    
    2,898
    
    
    
    2,143
    
    
    
    9,075
    
    
    
    7,783Total cost of system sales
    
    
    5,708
    
    
    
    5,173
    
    
    
    18,326
    
    
    
    17,695Maintenance
    
    
    3,392
    
    
    
    2,826
    
    
    
    9,672
    
    
    
    8,856Electronic data interchange services
    
    
    6,525
    
    
    
    5,541
    
    
    
    18,579
    
    
    
    15,688Revenue cycle management and related services
    
    
    7,124
    
    
    
    4,475
    
    
    
    20,502
    
    
    
    8,912Other services
    
    
    5,560
    
    
    
    5,085
    
    
    
    15,430
    
    
    
    12,398Total cost of
maintenance, EDI, RCM and
other services
    
    
    22,601
    
    
    
    17,927
    
    
    
    64,183
    
    
    
    45,854Total cost of revenue
    
    
    28,309
    
    
    
    23,100
    
    
    
    82,509
    
    
    
    63,549Gross profit
    
    
    46,653
    
    
    
    42,379
    
    
    
    130,789
    
    
    
    116,135Operating expenses:Selling, general and administrative
    
    
    21,951
    
    
    
    18,601
    
    
    
    62,829
    
    
    
    52,136Research and development costs
    
    
    3,954
    
    
    
    3,624
    
    
    
    12,277
    
    
    
    10,085Total operating expenses
    
    
    25,905
    
    
    
    22,225
    
    
    
    75,106
    
    
    
    62,221Income from operations
    
    
    20,748
    
    
    
    20,154
    
    
    
    55,683
    
    
    
    53,914Interest income
    
    
    43
    
    
    
    328
    
    
    
    180
    
    
    
    1,042Other income
    
    
    136
    
    
    
    
    
    
    
    194
    
    
    
    Income before provision for income taxes
    
    
    20,927
    
    
    
    20,482
    
    
    
    56,057
    
    
    
    54,956Provision for income taxes
    
    
    7,775
    
    
    
    7,332
    
    
    
    20,739
    
    
    
    20,193Net income
    
    $
    13,152
    
    
    $
    13,150
    
    
    $
    35,318
    
    
    $
    34,763Net income per share:Basic
    
    $
    0.46
    
    
    $
    0.46
    
    
    $
    1.24
    
    
    $
    1.25Diluted
    
    $
    0.46
    
    
    $
    0.46
    
    
    $
    1.23
    
    
    $
    1.23Weighted average shares outstanding:Basic
    
    
    28,667
    
    
    
    28,340
    
    
    
    28,586
    
    
    
    27,913Diluted
    
    
    28,833
    
    
    
    28,473
    
    
    
    28,755
    
    
    
    28,275Dividends declared per common share
    
    $
    0.30
    
    
    $
    0.30
    
    
    $
    0.90
    
    
    $
    0.85
 
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##### Table of Contents



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedDecember 31,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    35,318
    
    
    $
    34,763Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    2,717
    
    
    
    2,165Amortization of capitalized software costs
    
    
    4,326
    
    
    
    3,787Amortization of other intangibles
    
    
    1,101
    
    
    
    677Provision for bad debts
    
    
    2,753
    
    
    
    1,218Reduction for inventory obsolescense
    
    
    
    
    
    
    (13
    )Share-based compensation
    
    
    1,448
    
    
    
    1,591Deferred income tax (benefit) expense
    
    
    (1,831
    )
    
    
    85Tax benefit from exercise of stock options
    
    
    1,166
    
    
    
    3,120Excess tax benefit from share-based compensation
    
    
    (1,166
    )
    
    
    (2,948
    )Loss on disposal of equipment and improvements
    
    
    
    
    
    
    96Changes in assets and liabilities, net of amounts acquired:Accounts receivable
    
    
    (14,186
    )
    
    
    (20,695
    )Inventories
    
    
    (308
    )
    
    
    (216
    )Income tax receivable
    
    
    2,488
    
    
    
    (341
    )Other current assets
    
    
    (342
    )
    
    
    842Other assets
    
    
    (1,425
    )
    
    
    153Accounts payable
    
    
    (682
    )
    
    
    (924
    )Deferred revenue
    
    
    7,996
    
    
    
    2,570Accrued compensation and related benefits
    
    
    (2,257
    )
    
    
    (34
    )Income taxes payable
    
    
    
    
    
    
    (1,541
    )Other current liabilities
    
    
    2,645
    
    
    
    3,078Deferred compensation
    
    
    59
    
    
    
    (182
    )Net cash provided by operating activities
    
    
    39,820
    
    
    
    27,251Cash flows from investing activities:Additions to capitalized software costs
    
    
    (4,732
    )
    
    
    (4,485
    )Additions to equipment and improvements
    
    
    (3,923
    )
    
    
    (2,085
    )Proceeds from sale of marketable securities
    
    
    
    
    
    
    12,275Purchase of Sphere Health Systems, Inc.
    
    
    (300
    )
    
    
    Purchase of HSI, including direct transaction costs
    
    
    
    
    
    
    (8,241
    )Purchase of PMP, including direct transaction costs
    
    
    
    
    
    
    (16,934
    )Payment of contingent consideration related to
acquisition of PMP
    
    
    (2,700
    )
    
    
    Net cash used in investing activities
    
    
    (11,655
    )
    
    
    (19,470
    )Cash flows from financing activities:Excess tax benefit from share-based compensation
    
    
    1,166
    
    
    
    2,948Proceeds from the exercise of stock options
    
    
    5,283
    
    
    
    11,173Dividends paid
    
    
    (25,683
    )
    
    
    (22,252
    )Loan repayments
    
    
    
    
    
    
    (3,268
    )Net cash used in financing activities
    
    
    (19,234
    )
    
    
    (11,399
    )Net increase (decrease) in cash and cash equivalents
    
    
    8,931
    
    
    
    (3,618
    )Cash and cash equivalents at beginning of period
    
    
    70,180
    
    
    
    59,046Cash and cash equivalents at end of period
    
    $
    79,111
    
    
    $
    55,428
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##### Table of Contents



QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 Nine Months EndedDecember 31,2009
    
    
    2008Supplemental disclosures of cash flow information:Cash paid during the period for income taxes,
net of refunds
    
    $
    18,782
    
    
    $
    18,339Non-cash investing and financing activities:Unrealized gain on marketable securities, net of tax
    
    $
    
    
    
    $
    196Issuance of stock options with fair value of $433 in
connection with the acquisition of PMP
    
    $
    433
    
    
    $
    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 October 28, 2008, the Company acquired PMP in a
transaction summarized as follows:Fair value of net assets assumed
    
    $
    
    
    
    $
    23,859Cash paid for PMP stock
    
    
    
    
    
    
    (16,934
    )Common stock issued for PMP stock
    
    
    
    
    
    
    (2,750
    )Liabilities assumed
    
    $
    
    
    
    $
    4,175Effective August 12, 2009, the Company acquired Sphere
Health Systems, Inc. in a transaction summarized
as follows:Fair value of net assets assumed
    
    $
    1,453
    
    
    $
    Cash paid
    
    
    (300
    )
    
    
    Liabilities assumed
    
    $
    1,153
    
    
    $
    
 
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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.
  Business Segments.
 Revenue Recognition . Software, Revenue Recognition,
 Software, Revenue Recognition, Multiple Elements,
  7




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
    
    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
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
    
    the Company does not have significant obligations for future performance in order
to bring about resale of the product by the customer.
  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 .
  10




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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
 Software Development Costs. Costs of Computer Software to be Sold, Leased or Marketed, .
 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
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Costs and expenses:Cost of revenue
    
    $
    18
    
    
    $
    28
    
    
    $
    45
    
    
    $
    181Research and development
    
    
    26
    
    
    
    38
    
    
    
    63
    
    
    
    223Selling, general and administrative
    
    
    85
    
    
    
    397
    
    
    
    1,340
    
    
    
    1,187Total share-based compensation
    
    
    129
    
    
    
    463
    
    
    
    1,448
    
    
    
    1,591Amounts capitalized in software
development costs
    
    
    (1
    )
    
    
    (4
    )
    
    
    (26
    )
    
    
    (22
    )Amounts charged against earnings,
before income tax benefit
    
    $
    128
    
    
    $
    459
    
    
    $
    1,422
    
    
    $
    1,569Related income tax benefit
    
    
    (48
    )
    
    
    (164
    )
    
    
    (526
    )
    
    
    (576
    )Decrease in net income
    
    $
    80
    
    
    $
    295
    
    
    $
    896
    
    
    $
    993Decrease in basic earnings per share
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.04Decrease in diluted earnings per share
    
    $
    
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.04
 3. New Accounting Pronouncements
 Newly Adopted Accounting Standards
 12




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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,
 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.
    
    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.
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Quoted Pricesin Active
    
    
    SignificantMarkets for
    
    
    OtherBalance at
    
    
    Identical
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash and cash equivalents
    
    $
    79,111
    
    
    $
    79,111
    
    
    $
    
    
    
    $
    Restricted cash
    
    
    1,514
    
    
    
    1,514
    
    
    
    
    
    
    
    Marketable securities (1)
    
    
    7,454
    
    
    
    
    
    
    
    
    
    
    
    7,454ARS put option rights
    
    
    604
    
    
    
    
    
    
    
    
    
    
    
    604$
    88,683
    
    
    $
    80,625
    
    
    $
    
    
    
    $
    8,058
 
 (1)
    
    Marketable securities consist of ARS.  Financial Instruments,
  Balance at March 31, 2009
    
    $
    7,863Transfer in/(out) of Level 3
    
    
    Proceeds from sale (at par)
    
    
    Recognized gain
    
    
    195Balance at December 31, 2009
    
    $
    8,058
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5. Composition of Certain Financial Statement Captions
  December 31,
    
    
    March 31,2009
    
    
    2009Accounts receivable, excluding undelivered software,
maintenance and services
    
    $
    72,646
    
    
    $
    64,003Undelivered software, maintenance and implementation
services billed in advance, included in deferred
revenue
    
    
    33,392
    
    
    
    29,944Accounts receivable, gross
    
    
    106,038
    
    
    
    93,947Allowance for doubtful accounts
    
    
    (4,378
    )
    
    
    (3,877
    )Accounts receivable, net
    
    $
    101,660
    
    
    $
    90,070
  December 31,
    
    
    March 31,2009
    
    
    2009Computer systems and components, net of reserve for
obsolescence of $210, respectively
    
    $
    1,412
    
    
    $
    1,105Miscellaneous parts and supplies
    
    
    21
    
    
    
    20Inventories, net
    
    $
    1,433
    
    
    $
    1,125
  December 31,
    
    
    March 31,2009
    
    
    2009Payroll, bonus and commission
    
    $
    3,224
    
    
    $
    5,768Vacation
    
    
    4,030
    
    
    
    3,743Accrued compensation and related benefits
    
    $
    7,254
    
    
    $
    9,511
  December 31,
    
    
    March 31,2009
    
    
    2009Maintenance
    
    $
    10,426
    
    
    $
    9,083Implementation services
    
    
    33,847
    
    
    
    28,655Annual license services
    
    
    7,631
    
    
    
    8,176Undelivered software and other
    
    
    4,197
    
    
    
    2,191Deferred revenue
    
    $
    56,101
    
    
    $
    48,105
 15




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##### Table of Contents



December 31,
    
    
    March 31,2009
    
    
    2009Accrued EDI expense
    
    $
    2,641
    
    
    $
    1,258Care services liabilities
    
    
    1,512
    
    
    
    1,303Accrued royalties
    
    
    1,404
    
    
    
    933Contingent consideration related to acquisition
    
    
    1,074
    
    
    
    Customer deposits
    
    
    860
    
    
    
    674Professional services
    
    
    802
    
    
    
    409Deferred rent
    
    
    680
    
    
    
    782Sales tax payable
    
    
    483
    
    
    
    602Commission payable
    
    
    345
    
    
    
    385Other accrued expenses
    
    
    3,077
    
    
    
    2,542Other current liabilities
    
    $
    12,878
    
    
    $
    8,888
 6. Business Combinations
       Current assets (consisting of accounts receivable only)
    
    $
    158Customer relationships
    
    
    156Intellectual property
    
    
    119Goodwill (including assembled workforce of $84)
    
    
    1,020Current liabilities, including long-term debt due within one year
    
    
    (79
    )Contingent consideration
    
    
    (1,074
    )Total cash consideration
    
    $
    300
 16




---



##### Table of Contents



7. Goodwill
   December 31,2009NextGen Healthcare Information Systems
    
    $
    1,840Healthcare Strategic Initiatives
    
    
    10,839Practice Management Partners
    
    
    19,185Sphere Health Systems, Inc.
    
    
    1,020$
    32,884
 8. Intangible Assets
  Customer
    
    
    
    
    
    
    SoftwareRelationships
    
    
    Trade Name
    
    
    Technology
    
    
    TotalBalance as of April 1, 2009
    
    $
    7,877
    
    
    $
    526
    
    
    $
    
    
    
    $
    8,403Acquisition
    
    
    156
    
    
    
    
    
    
    
    119
    
    
    
    275Amortization
    
    
    (968
    )
    
    
    (119
    )
    
    
    (14
    )
    
    
    (1,101
    )Balance as of December 31, 2009
    
    $
    7,065
    
    
    $
    407
    
    
    $
    105
    
    
    $
    7,577
  For the year ended March 31,2010 (remaining three months)
    
    $
    3772011
    
    
    1,5072012
    
    
    1,5072013
    
    
    1,3712014
    
    
    1,2842015
    
    
    1,531Total
    
    $
    7,577
 17




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##### Table of Contents



9. Capitalized Software Costs
  December 31,
    
    
    March 31,2009
    
    
    2009Gross carrying amount
    
    $
    38,240
    
    
    $
    33,508Accumulated amortization
    
    
    (28,282
    )
    
    
    (23,956
    )Net capitalized software
    
    $
    9,958
    
    
    $
    9,552Aggregate amortization expense during the
nine and twelve
month periods,
respectively
    
    $
    4,326
    
    
    $
    5,163
  Nine Months EndedDecember 31,2009
    
    
    2008Beginning of the period
    
    $
    9,552
    
    
    $
    8,852Capitalization
    
    
    4,732
    
    
    
    4,485Amortization
    
    
    (4,326
    )
    
    
    (3,787
    )End of the period
    
    $
    9,958
    
    
    $
    9,550
  For the year ended March 31,2010 (remaining three months)
    
    $
    1,5292011
    
    
    4,8452012
    
    
    2,7652013
    
    
    819Total
    
    $
    9,958
 10. Share-Based Awards
 Employee Stock Option Plans
   18




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##### Table of Contents



WeightedWeighted
    
    Average
    
    AggregateAverage
    
    Remaining
    
    IntrinsicNumber of
    
    Exercise
    
    Contractual
    
    ValueOptions
    
    Price
    
    Life
    
    (in thousands)Outstanding, April 1, 2009
    
    
    820,082
    
    
    $
    32.39
    
    
    
    3.63Granted
    
    
    168,425
    
    
    $
    59.52
    
    
    
    7.89Exercised
    
    
    (212,799
    )
    
    $
    24.82
    
    
    
    2.57
    
    
    $
    7,302Forfeited/canceled
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Outstanding, December 31, 2009
    
    
    775,708
    
    
    $
    40.36
    
    
    
    4.15
    
    
    $
    17,408Vested and expected to vest,
December 31, 2009
    
    
    767,143
    
    
    $
    40.30
    
    
    
    4.14
    
    
    $
    17,261
 Compensation  Stock
Compensation,
 Nine Months EndedDecember 31,2009
    
    2008Expected life
    
    

    4.42 years
    
  


    
    4.01 yearsExpected volatility
    
    
    45.9% - 48.7
    %
    
    
    42.0% - 46.7
    %Expected dividends
    
    
    1.9% - 2.3
    %
    
    
    2.9% - 3.5
    %Risk-free rate
    
    
    2.19% - 2.54
    %
    
    
    1.07% - 3.4
    %
    19




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Performance-Based Awards
  20




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##### Table of Contents



Nine MonthsEndedDecember 31,2009Expected life
    
    
    4.42 yearsExpected volatility
    
    
    48.4
    %Expected dividends
    
    
    2.3
    %Risk-free rate
    
    
    2.5
    %
  WeightedNon-vested
    
    AverageNumber of
    
    Grant DateOptions
    
    Fair ValueOutstanding, April 1, 2009
    
    
    465,345
    
    
    $
    11.74Granted
    
    
    168,425
    
    
    
    19.97Vested
    
    
    (137,743
    )
    
    
    12.15Forfeited/canceled
    
    
    
    
    
    
    Outstanding, December 31, 2009
    
    
    496,027
    
    
    $
    14.42
  Restricted Stock Units
   11. Income Taxes
  21




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##### Table of Contents



Uncertain tax positions
   12. Net Income Per Share
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    13,152
    
    
    $
    13,150
    
    
    $
    35,318
    
    
    $
    34,763Basic net income per share:Weighted average shares outstanding  Basic
    
    
    28,667
    
    
    
    28,340
    
    
    
    28,586
    
    
    
    27,913Basic net income per common share
    
    $
    0.46
    
    
    $
    0.46
    
    
    $
    1.24
    
    
    $
    1.25Net income
    
    $
    13,152
    
    
    $
    13,150
    
    
    $
    35,318
    
    
    $
    34,763Diluted net income per share:Weighted average shares outstanding  Basic
    
    
    28,667
    
    
    
    28,340
    
    
    
    28,586
    
    
    
    27,913Effect of potentially dilutive securities
    
    
    166
    
    
    
    133
    
    
    
    169
    
    
    
    362Weighted
average shares outstanding 
Diluted
    
    
    28,833
    
    
    
    28,473
    
    
    
    28,755
    
    
    
    28,275Diluted net income per common share
    
    $
    0.46
    
    
    $
    0.46
    
    
    $
    1.23
    
    
    $
    1.23
   22




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##### Table of Contents



13. Other Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    13,152
    
    
    $
    13,150
    
    
    $
    35,318
    
    
    $
    34,763Other comprehensive income:Unrealized loss on marketable
securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Comprehensive income
    
    $
    13,152
    
    
    $
    13,150
    
    
    $
    35,318
    
    
    $
    34,959
 14. Operating Segment Information
 Operating Segments,
  a
   
 a
    
    UNIX is a registered trademark of the AT&T
Corporation. 23




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue:QSI Division
    
    $
    4,368
    
    
    $
    3,969
    
    
    $
    12,474
    
    
    $
    12,149NextGen Division
    
    
    70,594
    
    
    
    61,510
    
    
    
    200,824
    
    
    
    167,535Consolidated revenue
    
    $
    74,962
    
    
    $
    65,479
    
    
    $
    213,298
    
    
    $
    179,684Operating income:QSI Division
    
    $
    916
    
    
    $
    944
    
    
    $
    2,481
    
    
    $
    2,872NextGen Division
    
    
    24,539
    
    
    
    22,821
    
    
    
    65,715
    
    
    
    62,057Unallocated corporate expense
    
    
    (4,707
    )
    
    
    (3,611
    )
    
    
    (12,513
    )
    
    
    (11,015
    )Consolidated operating income
    
    $
    20,748
    
    
    $
    20,154
    
    
    $
    55,683
    
    
    $
    53,914
 15. Concentration of Credit Risk
  16. Commitments, Guarantees and Contingencies
 Commitments and Guarantees
     24




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##### Table of Contents



17. Subsequent Events
   25




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##### Table of Contents



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
  26




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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.
   27




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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,
  28




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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 .
 29




---



##### 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
 30




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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
      31




---



##### Table of Contents



epm ehr
  ehr epm eas epi ics mcs web ehr chs
    Overview of Our Results
 32




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##### Table of Contents




    
    Consolidated revenue grew 18.7% in the nine months ended December 31, 2009 versus the same
period in 2008 and 32.8% in the nine months ended December 31, 2008 versus 2007. For the
nine months ended December 31, 2009, revenue was positively impacted by growth in recurring
revenue including maintenance, EDI and revenue cycle management
revenues which grew 22%, 19% and 106% respectively. Revenue cycle management revenue was also higher as a result of a full nine
months of results in the nine month period ended December 31, 2009 versus seven months for HSI
and two months for PMP in the same period ended December 31, 2008. HSI and PMP generated $18.6
million and $13.8 million of revenue for the nine months ended December 31, 2009,
respectively. The nine months ended December 31, 2008 included $10.7 million and $2.6 million
of revenue related to the HSI and PMP, respectively, versus zero in the nine month period
ended December 31, 2007. Recurring EDI and maintenance revenue contributed to an increase of
$15.9 million in revenue during the nine months ended December 31, 2009 over the same period a
year ago.
    
    Uncertainty over the final rules regarding incentive payments tied to the ARRA continued to
negatively impacted system sales revenue in the three and nine month periods ended December
31, 2009, however, the December quarter reflected positive momentum as indicated by increased
pipelines and systems sales which grew to a record $27.7 million versus $25.0 million in the
year ago quarter.
    
    Consolidated income from operations increased 3.3% in the nine months ended December 31,
2009 versus the same period in 2008 and increased 27.4% in the nine months ended December 31,
2008 versus 2007. For the nine months ended December 31, 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 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, makes the near term achievement of such
benefits and, ultimately, their impact on system sales, uncertain.
 NextGen Division
 
    
    NextGen Division revenue increased 19.9% in the nine months ended December 31, 2009 versus
2008 and 36.0% in the nine months ended December 31, 2008 versus 2007. Divisional operating
income (which excludes unallocated corporate expenses) increased 5.9% in the nine months ended
December 31, 2009 versus 2008 and increased 30.9% in the nine months ended December 31, 2008
versus 2007.
    
    HSI contributed $18.6 million and $10.7 million to NextGens revenue for the nine months
ended December 31, 2009 and 2008, respectively. HSIs operating income added $1.4 million and
$0.6 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 $13.8 million and $2.6 million to NextGens revenue for the nine months
ended December 31, 2009 and 2008, respectively. PMPs operating income added $1.9 million to
NextGens operating income during the nine months ended December 31, 2009. Increased software
revenue contributed to the increase in operating income for PMP. PMPs operating income had
minimal impact to NextGens operating income during the same prior year period as the PMP
acquisition did not close until the third quarter of fiscal year 2009.
    
    Recurring revenue, consisting of maintenance, EDI and RCM, represented $109.4 million and
accounted for 54.5% of total NextGen revenue during the nine months
ended December 31, 2009. In
the same period a year ago, recurring revenue represented 47.5% of total NextGen revenue or
$79.6 million.
    
    During the nine months ended December 31, 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.
    
    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.
 33




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##### Table of Contents



QSI Division
 
    
    Our QSI Division revenue increased 2.7% in the nine months ended December 31, 2009 versus
the same period in 2008 and increased 0.7% in the nine months ended December 31, 2008 versus
the same period in 2007. The Division experienced a 13.6% decrease in operating income
(excluding unallocated corporate expenses) in the nine months ended December 31, 2009 versus
the same period in 2008 as compared to a 4.1% decrease in operating income in the nine months
ended December 31, 2008 versus the same period in 2007. For the nine months ended December
31, 2009, operating income was negatively impacted by increased selling, general and
administrative expenses.
    
    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.
 34




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Three Months Ended
    
    Nine Months EndedDecember 31,
    
    December 31,2009
    
    2008
    
    2009
    
    2008Revenues:Software, hardware and supplies
    
    
    32.5
    %
    
    
    34.1
    %
    
    
    30.4
    %
    
    
    36.2
    %Implementation and training services
    
    
    4.4
    
    
    
    4.1
    
    
    
    4.8
    
    
    
    5.4System sales
    
    
    36.9
    
    
    
    38.2
    
    
    
    35.2
    
    
    
    41.6Maintenance
    
    
    29.5
    
    
    
    29.3
    
    
    
    30.6
    
    
    
    29.8Electronic data interchange services
    
    
    11.9
    
    
    
    12.2
    
    
    
    12.1
    
    
    
    12.1Revenue cycle management and related services
    
    
    12.8
    
    
    
    10.4
    
    
    
    12.9
    
    
    
    7.4Other services
    
    
    8.9
    
    
    
    9.9
    
    
    
    9.2
    
    
    
    9.1Maintenance, EDI, RCM and other services
    
    
    63.1
    
    
    
    61.8
    
    
    
    64.8
    
    
    
    58.4Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenue:Software, hardware and supplies
    
    
    3.7
    
    
    
    4.6
    
    
    
    4.3
    
    
    
    5.5Implementation and training services
    
    
    3.9
    
    
    
    3.3
    
    
    
    4.3
    
    
    
    4.3Total cost of system sales
    
    
    7.6
    
    
    
    7.9
    
    
    
    8.6
    
    
    
    9.8Maintenance
    
    
    4.5
    
    
    
    4.3
    
    
    
    4.5
    
    
    
    4.9Electronic data interchange services
    
    
    8.7
    
    
    
    8.5
    
    
    
    8.7
    
    
    
    8.7Revenue cycle management and related services
    
    
    9.5
    
    
    
    6.8
    
    
    
    9.6
    
    
    
    5.0Other services
    
    
    7.4
    
    
    
    7.8
    
    
    
    7.2
    
    
    
    6.9Total cost of maintenance, EDI, RCM and
other services
    
    
    30.1
    
    
    
    27.4
    
    
    
    30.0
    
    
    
    25.5Total cost of revenue
    
    
    37.7
    
    
    
    35.3
    
    
    
    38.6
    
    
    
    35.3Gross profit
    
    
    62.3
    
    
    
    64.7
    
    
    
    61.4
    
    
    
    64.7Operating expenses:Selling, general and administrative
    
    
    29.3
    
    
    
    28.4
    
    
    
    29.5
    
    
    
    29.0Research and development costs
    
    
    5.3
    
    
    
    5.5
    
    
    
    5.8
    
    
    
    5.6Total operating expenses
    
    
    34.6
    
    
    
    33.9
    
    
    
    35.3
    
    
    
    34.6Income from operations
    
    
    27.7
    
    
    
    30.8
    
    
    
    26.1
    
    
    
    30.1Interest income
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.6Other income
    
    
    0.2
    
    
    
    
    
    
    
    0.1
    
    
    
    Income before provision for income taxes
    
    
    28.0
    
    
    
    31.3
    
    
    
    26.3
    
    
    
    30.7Provision for income taxes
    
    
    10.4
    
    
    
    11.2
    
    
    
    9.7
    
    
    
    11.2Net income
    
    
    17.6
    %
    
    
    20.1
    %
    
    
    16.6
    %
    
    
    19.5
    %
 For the Three-Month Periods Ended December 31, 2009 versus 2008
 Net Income
 
    
    an increase in systems sales to $27.7 million dollars versus $25.0 million a year ago;
 35




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##### Table of Contents




    
    an increase of recurring revenue including RCM, maintenance, and EDI revenue; and
    
    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.
 System Sales .
   Hardware, Third
    
    
    Implementation
    
    
    TotalParty Software
    
    
    and Training
    
    
    SystemSoftware
    
    
    and Supplies
    
    
    Services
    
    
    SalesThree months ended
December 31, 2009QSI Division
    
    $
    477
    
    
    $
    404
    
    
    $
    193
    
    
    $
    1,074NextGen Division
    
    
    22,622
    
    
    
    843
    
    
    
    3,120
    
    
    
    26,585Consolidated
    
    $
    23,099
    
    
    $
    1,247
    
    
    $
    3,313
    
    
    $
    27,659Three months ended
December 31, 2008QSI Division
    
    $
    103
    
    
    $
    309
    
    
    $
    220
    
    
    $
    632NextGen Division
    
    
    21,046
    
    
    
    878
    
    
    
    2,455
    
    
    
    24,379Consolidated
    
    $
    21,149
    
    
    $
    1,187
    
    
    $
    2,675
    
    
    $
    25,011
    36




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##### Table of Contents



ehr epm
  Maintenance, EDI, Revenue Cycle Management and Other Services .
  Revenue CycleMaintenance
    
    
    EDI
    
    
    Management
    
    
    Other
    
    
    TotalThree months ended
December 31, 2009QSI Division
    
    $
    1,821
    
    
    $
    1,274
    
    
    $
    
    
    
    $
    198
    
    
    $
    3,293NextGen Division
    
    
    20,318
    
    
    
    7,623
    
    
    
    9,602
    
    
    
    6,467
    
    
    
    44,010Consolidated
    
    $
    22,139
    
    
    $
    8,897
    
    
    $
    9,602
    
    
    $
    6,665
    
    
    $
    47,303Three months ended
December 31, 2008QSI Division
    
    $
    1,784
    
    
    $
    1,348
    
    
    $
    
    
    
    $
    205
    
    
    $
    3,337NextGen Division
    
    
    17,368
    
    
    
    6,660
    
    
    
    6,835
    
    
    
    6,268
    
    
    
    37,131Consolidated
    
    $
    19,152
    
    
    $
    8,008
    
    
    $
    6,835
    
    
    $
    6,473
    
    
    $
    40,468
   Cost of Revenue.
 37




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##### Table of Contents



Three months ended December 31,2009
    
    
    %
    
    
    2008
    
    
    %QSI DivisionRevenue
    
    $
    4,368
    
    
    
    100.0
    %
    
    $
    3,969
    
    
    
    100.0
    %Cost of revenue
    
    
    1,884
    
    
    
    43.1
    
    
    
    1,864
    
    
    
    47.0Gross profit
    
    $
    2,484
    
    
    
    56.9
    %
    
    $
    2,105
    
    
    
    53.0
    %NextGen DivisionRevenue
    
    $
    70,594
    
    
    
    100.0
    %
    
    $
    61,510
    
    
    
    100.0
    %Cost of revenue
    
    
    26,425
    
    
    
    37.4
    
    
    
    21,236
    
    
    
    34.5Gross profit
    
    $
    44,169
    
    
    
    62.6
    %
    
    $
    40,274
    
    
    
    65.5
    %ConsolidatedRevenue
    
    $
    74,962
    
    
    
    100.0
    %
    
    $
    65,479
    
    
    
    100.0
    %Cost of revenue
    
    
    28,309
    
    
    
    37.8
    
    
    
    23,100
    
    
    
    35.3Gross profit
    
    $
    46,653
    
    
    
    62.2
    %
    
    $
    42,379
    
    
    
    64.7
    %
   Hardware,
    
    Payroll andThird Party
    
    Related
    
    
    
    
    
    
    
    
    
    Total CostSoftware
    
    Benefits
    
    EDI
    
    Other
    
    of Revenue
    
    TotalThree months ended
December 31, 2009QSI Division
    
    
    8.4
    %
    
    
    13.1
    %
    
    
    15.2
    %
    
    
    6.4
    %
    
    
    43.1
    %
    
    
    56.9
    %NextGen Division
    
    
    1.3
    %
    
    
    17.4
    %
    
    
    8.3
    %
    
    
    10.4
    %
    
    
    37.4
    %
    
    
    62.6
    %Consolidated
    
    
    1.7
    %
    
    
    17.2
    %
    
    
    8.7
    %
    
    
    10.2
    %
    
    
    37.8
    %
    
    
    62.2
    %Three months ended
December 31, 2008QSI Division
    
    
    6.3
    %
    
    
    19.7
    %
    
    
    17.9
    %
    
    
    3.1
    %
    
    
    47.0
    %
    
    
    53.0
    %NextGen Division
    
    
    2.4
    %
    
    
    16.6
    %
    
    
    7.3
    %
    
    
    8.2
    %
    
    
    34.5
    %
    
    
    65.5
    %Consolidated
    
    
    2.6
    %
    
    
    16.9
    %
    
    
    8.0
    %
    
    
    7.8
    %
    
    
    35.3
    %
    
    
    64.7
    %
 38




---



##### Table of Contents



Selling, General and Administrative Expenses.
 
    
    $1.8 million increase in compensation expense in the NextGen Division as a result of
headcount additions.
    
    $1.0 million increase in corporate expense, primarily related to headcount additions;
and
    
    $0.6 million net increase in other selling, general and administrative expenses in the
NextGen Division.
   39




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##### Table of Contents



Research and Development Costs.
 Interest Income.
  Provision for Income Taxes
 For the Nine-Month Periods Ended December 31, 2009 versus 2008
 Net Income
 
    
    an increase in consolidated revenue, attributable to growth in RCM revenue by HSI and
PMP, which companies generated $18.6 million and $13.8 million of revenue for the nine months
ended December 31, 2009, respectively. Recurring EDI and maintenance revenue contributed to
an increase of $15.9 million in revenue during the nine months ended December 31, 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
 
    
    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 .
 40




---



##### Table of Contents



41




---



##### Table of Contents



Hardware, Third
    
    
    Implementation
    
    
    TotalParty Software
    
    
    and Training
    
    
    SystemSoftware
    
    
    and Supplies
    
    
    Services
    
    
    SalesNine months ended December 31, 2009QSI Division
    
    $
    1,216
    
    
    $
    861
    
    
    $
    547
    
    
    $
    2,624NextGen Division
    
    
    58,684
    
    
    
    4,217
    
    
    
    9,603
    
    
    
    72,504Consolidated
    
    $
    59,900
    
    
    $
    5,078
    
    
    $
    10,150
    
    
    $
    75,128Nine months ended December 31, 2008QSI Division
    
    $
    755
    
    
    $
    1,019
    
    
    $
    722
    
    
    $
    2,496NextGen Division
    
    
    58,111
    
    
    
    5,117
    
    
    
    9,024
    
    
    
    72,252Consolidated
    
    $
    58,866
    
    
    $
    6,136
    
    
    $
    9,746
    
    
    $
    74,748
    ehr epm
  Maintenance, EDI, Revenue Cycle Management and Other Services .
  42




---



##### Table of Contents



Revenue CycleMaintenance
    
    
    EDI
    
    
    Management
    
    
    Other
    
    
    TotalNine months ended December 31, 2009QSI Division
    
    $
    5,388
    
    
    $
    3,765
    
    
    $
    
    
    
    $
    697
    
    
    $
    9,850NextGen Division
    
    
    59,866
    
    
    
    22,090
    
    
    
    27,482
    
    
    
    18,882
    
    
    
    128,320Consolidated
    
    $
    65,254
    
    
    $
    25,855
    
    
    $
    27,482
    
    
    $
    19,579
    
    
    $
    138,170Nine months ended December 31, 2008QSI Division
    
    $
    5,341
    
    
    $
    3,605
    
    
    $
    
    
    
    $
    707
    
    
    $
    9,653NextGen Division
    
    
    48,181
    
    
    
    18,058
    
    
    
    13,319
    
    
    
    15,725
    
    
    
    95,283Consolidated
    
    $
    53,522
    
    
    $
    21,663
    
    
    $
    13,319
    
    
    $
    16,432
    
    
    $
    104,936
   Cost of Revenue.
  43




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##### Table of Contents



Nine months ended December 31,2009
    
    
    %
    
    
    2008
    
    
    %QSI DivisionRevenue
    
    $
    12,474
    
    
    
    100.0
    %
    
    $
    12,149
    
    
    
    100.0
    %Cost of revenue
    
    
    5,493
    
    
    
    44.0
    
    
    
    5,651
    
    
    
    46.5Gross profit
    
    $
    6,981
    
    
    
    56.0
    %
    
    $
    6,498
    
    
    
    53.5
    %NextGen DivisionRevenue
    
    $
    200,824
    
    
    
    100.0
    %
    
    $
    167,535
    
    
    
    100.0
    %Cost of revenue
    
    
    77,016
    
    
    
    38.3
    
    
    
    57,898
    
    
    
    34.6Gross profit
    
    $
    123,808
    
    
    
    61.7
    %
    
    $
    109,637
    
    
    
    65.4
    %ConsolidatedRevenue
    
    $
    213,298
    
    
    
    100.0
    %
    
    $
    179,684
    
    
    
    100.0
    %Cost of revenue
    
    
    82,509
    
    
    
    38.7
    
    
    
    63,549
    
    
    
    35.4Gross profit
    
    $
    130,789
    
    
    
    61.3
    %
    
    $
    116,135
    
    
    
    64.6
    %
   Hardware,
    
    Payroll andThird Party
    
    Related
    
    
    
    
    
    
    
    
    
    Total CostSoftware
    
    Benefits
    
    EDI
    
    Other
    
    of Revenue
    
    TotalNine months ended
December 31, 2009QSI Division
    
    
    8.0
    %
    
    
    14.0
    %
    
    
    16.7
    %
    
    
    5.3
    %
    
    
    44.0
    %
    
    
    56.0
    %NextGen Division
    
    
    2.5
    %
    
    
    18.2
    %
    
    
    8.2
    %
    
    
    9.4
    %
    
    
    38.3
    %
    
    
    61.7
    %Consolidated
    
    
    2.8
    %
    
    
    18.0
    %
    
    
    8.7
    %
    
    
    9.2
    %
    
    
    38.7
    %
    
    
    61.3
    %Nine months ended
December 31, 2008QSI Division
    
    
    7.4
    %
    
    
    19.6
    %
    
    
    16.4
    %
    
    
    3.1
    %
    
    
    46.5
    %
    
    
    53.5
    %NextGen Division
    
    
    3.4
    %
    
    
    14.3
    %
    
    
    7.8
    %
    
    
    9.1
    %
    
    
    34.6
    %
    
    
    65.4
    %Consolidated
    
    
    3.7
    %
    
    
    14.7
    %
    
    
    8.4
    %
    
    
    8.6
    %
    
    
    35.4
    %
    
    
    64.6
    %
   44




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##### Table of Contents



Selling, General and Administrative Expenses.
 
    
    $3.6 million increase in  selling, general and administrative expenses at our
Practice Solutions operations, consisting of PMP and HSI.
    
    $3.8 million increase in compensation expense in the NextGen Division primarily as a
result of headcount additions;
    
    $1.4 million increase in marketing and tradeshows in the
NextGen Division; and a
    
    $1.5 million increase in corporate related expenses, primarily as a result of headcount
additions
   Research and Development Costs.
 45




---



##### Table of Contents



Interest Income.
  Other Income (Expense).
 Provision for Income Taxes
 Liquidity and Capital Resources
  Nine Months EndedDecember 31,2009
    
    2008Cash and cash equivalents
    
    $
    79,111
    
    
    $
    55,428Net increase (decrease) in cash and cash equivalents
    
    $
    8,931
    
    
    $
    (3,618
    )Net income during the nine month period
    
    $
    35,318
    
    
    $
    34,763Net cash provided by operations
    
    $
    39,820
    
    
    $
    27,251Number of days of sales outstanding at the
start of the period
    
    
    125
    
    
    
    136Number of days of sales outstanding at the
end of the period
    
    
    124
    
    
    
    140
 46




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##### Table of Contents



Cash Flow from Operating Activities
   Nine Months EndedDecember 31,2009
    
    
    2008Net income
    
    $
    35,318
    
    
    $
    34,763Non-cash expenses
    
    
    10,514
    
    
    
    9,778Change in deferred revenue
    
    
    7,996
    
    
    
    2,570Change in accounts receivable
    
    
    (14,186
    )
    
    
    (20,695
    )Change in other assets and liabilities
    
    
    178
    
    
    
    835Net cash provided by operating activities
    
    $
    39,820
    
    
    $
    27,251
 Net Income .
 Non-Cash Expenses .
 Deferred Revenue.
 Accounts Receivable.
 
    
    NextGen Division revenue grew 19.9% and 36.0% on a year-over-year basis, in the nine month
periods ended December 31, 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.
   47




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##### Table of Contents



Cash flows from investing activities
  Cash flows from financing activities
  Cash and cash equivalents and marketable securities
     48




---



##### Table of Contents



Contractual Obligations
  Year ended March 31,2010 (remaining three months)
    
    $
    1,2652011
    
    
    4,3102012
    
    
    2,4042013
    
    
    9572014 and beyond
    
    
    135$
    9,071
 New Accounting Pronouncements
 New Accounting Pronouncements,
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  49




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##### Table of Contents



Changes in Internal Control over Financial Reporting
   
 PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 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
  50




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##### Table of Contents



ITEM 6. EXHIBITS
  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. 51




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##### Table of Contents



SIGNATURES
  QUALITY SYSTEMS, INC.Date:  February 1, 2010
    By:
    /s/ Steven PlochockiSteven T. PlochockiChief Executive Officer; Principal Executive OfficerDate:  February 1, 2010
    By:
    /s/ Paul HoltPaul A. HoltChief Financial Officer; Principal Accounting
Officer 52