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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
                                  FORM 10-KSB

                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended March 31, 1996
                                              --------------
                         Commission file number 0-13801
                                                -------
                             QUALITY SYSTEMS, INC.
     ----------------------------------------------------------------------
             (Name of Small Business Issuer in Its Charter)

           California                                      95-2888568
     -------------------------------               ------------------------
     (State or Other Jurisdiction of                   (I.R.S. Employer
     Incorporation or Organization)                     Identification No.)

     17822 East 17th Street, Tustin, California                    92680
     ------------------------------------------                  ----------
      (Address of Principal Executive Offices)                   (Zip Code)

     Issuer's telephone number, including area code: (714) 731-7171
                                                     --------------
     Securities registered pursuant to Section 12(b) of the Act: None

     Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                 ---------------------------------------------
                                (Title of Class)

     Check whether the Issuer:  (1) filed all reports required to be filed
     by Section 13 or 15(d) of the Exchange Act during the preceding 12
     months (or for such shorter period that the registrant was required to
     file such reports); and (2) has been subject to such filing
     requirements for the past 90 days.  Yes [ X ] No [  ]

     Check if there is no disclosure of delinquent filers in response to
     Item 405 of Regulation S-B contained in this form, and no disclosure
     will be contained, to the best of Registrant's knowledge, in
     definitive proxy or information statements incorporated by reference
     in Part III of this Form 10-KSB or any amendment to this
     Form 10-KSB. [ X ]

     The Issuer's revenues for the year ended March 31, 1996 were
     $16,732,000.

          As of May 31, 1996, the aggregate market value of the Common
     Stock held by non-affiliates was approximately $124.8 million.

     ======================================================================
                             Exhibit Index on sequentially numbered Page 33

                                      -1-                Page 1 of 58 pages

     
          On May 31, 1996, 5,963,337 shares of the Issuer's Common Stock
     were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE


          Certain information required by Item 9 of Part III as well as all
     of the information required by Items 10, 11, and 12 of Part III of the
     Form 10-KSB are incorporated by reference from Registrant's Definitive
     Proxy Statement for its 1996 annual meeting which is to be filed with
     the Commission on or before July 29, 1996.















































                                      -2-

     
                                     PART I
     Item 1.  DESCRIPTION OF BUSINESS.
              ------------------------

     GENERAL

     Quality Systems, Inc. ("QSI" or the "Company") develops and markets
     health care information systems that automate medical and dental group
     practices, physician hospital organizations ("PHO's"), management
     service organizations ("MSOs"), health maintenance organizations
     ("HMOs") and community health centers.  In response to the growing
     need for more comprehensive, cost-effective information solutions for
     physician and dental practice management, the Company's systems
     provide clients with the ability to redesign patient care and other
     workflow processes, to improve productivity and reduce information
     processing and administrative costs and to provide multi-site access
     to patient information.  The Company's proprietary software systems
     include general patient information and summary medical records,
     appointment scheduling, billing, insurance claims submission and
     processing, managed care implementation and referral management,
     treatment outcome studies, treatment planning, drug formularies, word
     processing and accounting.  In addition to providing fully integrated
     information solutions to its clients, the Company provides
     comprehensive hardware and software installation, maintenance and
     support services, system training services and electronic claims
     submission services.  The Company is also introducing patient medical
     records automation for medical and dental practices utilizing
     proprietary software developed by Clinitec International Inc.
     ("Clinitec"), a developer of electronic medical records software
     systems.  In May 1996, Clinitec became a wholly-owned subsidiary of
     the Company.  As a result of the May 1996 acquisition of Clinitec, the
     Company anticipates taking a net write off for purchased in-process
     research and development of approximately $8.3 million during the June
     30, 1996 quarter.  (See "Item 1. Description of Business.  Clinitec".)

     The Company currently has an installed base of more than 475 operating
     health care information systems serving PHOs, MSOs, HMOs and other
     health care organizations, each of which consists of one to 120
     physicians or dentists.  It is estimated that the physician practice
     management information systems market is currently $1.8 billion.  The
     Company believes that as health care providers are increasingly
     required to reduce costs while maintaining the quality of health care,
     the Company will be able to capitalize on its strategy of providing
     fully integrated information systems and superior customer service.

     QSI is a California corporation formed in 1974.  The Company was
     founded with an early focus on providing information systems and
     services primarily for dental group practices.  The Company's initial
     "turnkey" systems were designed to improve productivity while reducing
     information processing costs and personnel requirements.  In the
     mid-1980's, the Company capitalized on the opportunity presented by
     the increasing pressure of cost containment on physicians and health
     care organizations and further expanded its information processing
     systems into the broader medical market.  Today, the Company develops
     and provides integrated UNIX-based* health care information systems
     for both the medical and dental markets.  These systems operate on a

     * UNIX is a registered trademark of AT&T Corporation.
                                      -3-

     
     stand-alone basis or in a networked environment and are expandable to
     accommodate client needs.

     Augmenting its practice management software, the Company added
     Clinitec's electronic medical records software to its product line
     in 1995 and completed its acquisition of Clinitec in May 1996.
     Clinitec's principal product, NextGen*, permits scanning, annotation,
     retrieval and analysis of medical records in all formats, from
     documents to photographs and X-rays.  NextGen has been developed using
     a client/server platform, a graphical user interface for compatibility
     with UNIX, Microsoft Windows**, Windows NT** and Windows 95**
     operating systems, and a relational database for flexibility in screen
     customization and logic flow.  The Company is also in the process of
     developing an alternative client/server version of its "back office"
     products utilizing a graphical user interface with screens and
     templates similar to those in the NextGen product to enable a more
     seamless integration of the QSI and NextGen applications.  With the
     addition of NextGen, the Company is able to provide its clients with a
     comprehensive information management solution.  NextGen, in
     conjunction with the Company's practice management software, was first
     installed at a beta site in August 1995 and is currently being
     installed in several additional sites.  It is anticipated that release
     of the combined systems will commence in the quarter ending June 30,
     1996.  (See "Item 1. Description of Business. - Clinitec".)

     INDUSTRY BACKGROUND

     To compete in the changing health care environment, physicians and
     other outpatient care providers are increasingly joining and
     affiliating with other physicians, managed care organizations,
     hospitals and others enterprises to form larger health care
     organizations such as PHOs, MSOs and HMOs.  These organizations are
     designed to take advantage of economies of scale associated with
     managing health care services for large patient populations across
     inpatient and outpatient settings, while achieving improved quality,
     reduced costs and strengthened negotiating positions with managed care
     entities.  In the managed care environment, health care organizations
     are increasingly entering into contracts which define the terms under
     which care is administered.  The expansion in the number of managed
     care and third-party payor organizations, as well as additional
     government regulation and changes in reimbursement models, has greatly
     increased the complexity of pricing policies, billing procedures and
     reimbursement policies impacting medical practices.  In addition, to
     operate effectively, health care organizations must efficiently manage
     patient care and other workflow processes which may extend across
     multiple care locations and business entities.

     To compete under the constraints of managed care while maintaining
     quality of services, health care organizations have placed increasing
     demands on their information systems.  Initially, these information
     systems automated financial and administrative functions.  As it
     became necessary to manage patient flow processes, the need arose to

     *    NextGen is a registered trademark of Clinitec International, Inc.
     **   Microsoft Windows, Windows NT and Windows 95 are registered
          trademarks of Microsoft Corporation.


                                      -4-

     
     integrate all levels of "back-office" data with clinical information
     such as patient test results and office visits.  Particularly for
     larger organizations and group practices, the Company believes
     information systems must allow enterprise-wide exchange of patient
     information incorporating administrative, financial and clinical
     information from multiple entities, while focusing on the physician as
     the primary care giver.  In addition, large health care organizations
     increasingly require information systems that can deliver
     high-performance in environments with multiple concurrent computer
     users.

     Many existing health care information systems, including systems
     designed for physicians and small group practices, were designed for
     limited administrative tasks such as billing and scheduling and can
     neither accommodate multiple computing environments nor operate
     effectively across multiple locations and entities.  As the health
     care industry continues to evolve, physician groups and health care
     organizations will increasingly require systems that compile
     structured clinical information from multiple sources and enable
     measurement of treatment outcomes and mangement of clinical processes.
     Such systems must be integrated with financial and administrative
     information systems in order to maintain patient flow while continuing
     to reduce costs and improve quality of care.  The Company believes
     that systems which integrate patient clinical data with
     administrative, financial and other practice management data are best
     positioned to succeed in the current managed care environment.

     As health care organizations transition to new platforms and newer
     technologies, they will be migrating toward the implementation of
     enterprise-wide, patient-centered computing systems embedded with
     automated patient medical records.  These organizations cannot afford
     significant downtime or re-education, nor can they risk choosing a
     system which has not proven its ability to handle high volume
     processing with continuous dependability.  The Company believes that
     successful systems vendors in the market will have a sufficient
     installed base and adequate resources to offer high quality, fully
     integrated products and the value-added services needed to expand and
     support clients throughout this evolution process.

     Similarly, the dental industry has seen consolidation of dental
     practices in recent times.  This consolidation, as with the physician
     marketplace, has created business organizations which require more
     sophisticated computer information systems.

     THE QSI SOLUTION

     In response to the growing need for more comprehensive, cost-effective
     health care information solutions for physician and dental practice
     management, the Company's systems provide clients with the ability to
     redesign patient care and other workflow processes and improve
     productivity through multi-site and multi-entry access to patient
     information.  Utilizing proven third-party hardware solutions combined
     with the Company's proprietary software configured to maximize the
     efficiency of a health care organization's information processing
     requirements, the Company's solutions enable a seamless integration of
     a variety of administrative and patient information operations.  With


                                      -5-

     
     the addition of Clinitec's product line, the Company provides clients
     with an integrated medical records management system as part of a
     total information management solution.  Leveraging over 20 year of
     experience in the health care information services industry, the
     Company believes that it continues to distinguish its solutions by
     providing its clients with sophisticated, full-featured software
     systems along with comprehensive systems implementation, maintenance
     and support.

     QSI's systems automate many aspects of group practice management,
     including the retention of general patient information, appointment
     scheduling, billing, insurance claims submission and processing,
     managed care implementation and referral management, treatment outcome
     studies, treatment planning, drug formularies, word processing and
     accounting.  The Company primarily uses the IBM RS6000* central
     processing unit and IBM'S AIX** version of the UNIX operating system
     as a platform for its application software, which enables the Company
     to continue providing a wide range of flexible and functional systems
     to accommodate clients from solo practitioner to large group
     practices.

































     *  RS6000 is a registered trademark of International Business Machines
        Corporation.
     ** AIX is a registered trademark of International Business Machines
        Corporation.

                                      -6-

     
     PRODUCTS

     The Company's health care information systems consist primarily of
     proprietary software applications and third-party hardware and
     software.  The systems range in capacity from one to hundreds of
     users, allowing the Company to address the needs of both small and
     large clients.  The software configuration of a typical system
     includes a basic medical or dental application and additional software
     applications.  A typical system also consists of third party hardware
     components, including a UNIX-based central processing unit, disk
     drives, a magnetic tape unit, video display terminals, PCs, one or
     more printers, and telecommunications equipment.  The systems are
     modular in design and may be expanded to grow with changing client
     requirements.

     The Company purchases all the hardware components of its systems as
     well as the requisite operating system licenses from manufacturers or
     distributors of those components.  It assembles and tests the hardware
     components and incorporates QSI's proprietary application software and
     other third party software into completed systems.  The Company
     provides systems tailored to accommodate particular client
     requirements. The Company continually evaluates the hardware
     components of its systems with a view to utilizing hardware that is
     functional, reliable and cost-effective.

     The Company's systems include application and system software modules
     that provide comprehensive solutions for physician and dental
     practices.  Clients typically purchase a base medical or dental
     application and add on additional applications as desired.  Add-on
     applications include such modules as managed care, electronic medical
     records, patient eligibility, electronic claims and patient statements
     processing, various proprietary and third party accounting and word
     processing packages.  Systems have ranged in price from approximately
     $10,000 to over $900,000 depending upon size of group practice, number
     of system users and number of sites.

     The Company continues to make enhancements to its hardware and
     software packages to provide increased functionality and flexibility
     to its clients.  Recent enhancements include additional interfaces for
     electronic claims submission and insurance payments, increased ability
     to control managed care plans and fees, electronic patient
     eligibility verification, applications for community health centers,
     drug formulary tracking, enhanced patient scheduling, and software to
     support paperless collections.  The Company has continued to take
     advantage of new releases in the IBM RS6000 family, as well as new
     PC-based products utilizing the SCO* UNIX operating system.  This
     introduction of a PC-based UNIX system for physician and dental group
     practices allowed the Company increased pricing flexibility and
     enabled the Company's systems to be used in smaller practice settings.
     In addition, the Company has added enhanced telecommunications,
     full-featured color terminals and more versatile printer options.


     * SCO is a registered trademark of Santa Cruz Operation, Inc.



                                      -7-


     
     CLINITEC

     In April 1995, the Company entered into a strategic relationship with
     Clinitec, a developer of electronic medical records software systems.
     In May 1995 as part of this relationship, the Company acquired a 25%
     equity interest in Clinitec for $1.0 million.  In May 1996, the
     Company acquired the remaining 75% of Clinitec for approximately $4.9
     million in cash plus 309,846 shares of QSI Common Stock.  For purposes
     of the acquisition, the shares were valued at approximately $6.9
     million, or $22.25 per share, for a total purchase price of
     approximately $11.8 million for this remaining 75% ownership interest.
     QSI intends to maintain Clinitec as a separate subsidiary and sell
     Clinitec software products in conjunction with QSI products, as well
     as on a stand-alone basis.  For accounting purposes, the acquisition
     will be treated as a purchase transaction during the quarter ending
     June 30, 1996.  In connection with this accounting treatment, the
     Company anticipates taking a net write off for purchased in-process
     research and development of approximately $8.3 million during the June
     30, 1996 quarter.  The exact amount of the write off is subject to
     change based upon the final determination of the purchase price
     allocation.

     Clinitec was formed in January 1994 to develop and market electronic
     medical records software systems.  Clinitec's proprietary software
     products are new and Clinitec has sold only a limited quantity
     of these products to date.  In addition, there can be no assurance
     that Clinitec's products will achieve broad market acceptance.

     Clinitec's software product, NextGen, has been developed using a
     graphical user interface client/server platform for compatibility with
     the UNIX, Microsoft Windows, Windows NT and Windows 95 operating
     systems and a relational database back end to permit flexibility in
     screen customization and logic flow.  NextGen operates in a
     client/server environment, using a desktop, laptop or pen-based PC
     configuration.  Medical records data can include:

           * User customized templates for data capture and automatic
             document generation.

           * Scanned or electronically acquired images, including X-rays
             and photographs.

           * Other records, documents and notes, including
             electronically captured handwriting and annotations.

           * Digital voice recordings embedded in documents.

     In addition, specific templates designed into the system will permit
     research and analysis of particular conditions and diagnoses,
     including the interaction between various prescribed pharmaceuticals,
     and will allow for extensive outcomes reporting.

     Clinitec offers software applications that are complementary to those
     offered by QSI.  The key "back office" applications incorporated into
     QSI's solutions such as practice management, eligibility, claims
     processing and accounting can be augmented by the "front office"
     applications of the NextGen software.  Because the Company's products
     are UNIX-based, the Company is able to add NextGen as part of an
     integrated system.  To address the client/server marketplace, the

                                      -8-
     
     Company is in the process of developing an alternative version of its
     products for the client/server environment.  In addition to a
     graphical user interface, these client/server versions will include
     screens and templates similar to those in NextGen to enable a more
     seamless integration of the QSI and NextGen applications.  The Company
     intends to leverage its existing client base for sales of NextGen.

     SALES AND MARKETING

     The Company sells and markets its products nationwide through a direct
     sales force operating from sales offices in California, Florida,
     Georgia, Massachusetts, New York and Texas.  The Company's sales and
     marketing employees identify and contact prospective clients by a
     variety of means, including referrals from existing clients and
     contacts at professional society meetings and seminars with persons
     involved in group practice as well as trade journal advertising,
     direct mail advertising, and telemarketing.  These employees are
     knowledgeable about medical and dental group practice management, as
     well as computer applications.  Typically, these employees make
     presentations to potential clients by demonstrating the QSI system and
     its capabilities on the prospective client's premises.  In addition,
     the Company performs remote demonstrations by utilizing a prospective
     client's PC or by sending the prospective client a telecommunications
     kit including a terminal.

     The Company's sales cycle can vary significantly and typically ranges
     from three to 12 months from initial contact to contract execution.
     Systems are normally delivered to a customer within 30 to 60 days of
     receipt of a system order, and therefore, the Company does not believe
     data pertaining to backlog is meaningful.  Standard payment terms
     include a 25% down payment with the balance due when the hardware is
     installed and the installed system is ready for training.  As part of
     the fees paid by its clients, the Company receives up-front licensing
     fees, a monthly service fee based on client configuration and the
     number of user ports and a nominal annual license renewal fee based
     on the number of user ports.

     Several clients have purchased the Company's system and, in turn, are
     providing time-share services to local single and group practice
     practitioners.  Under the time-share agreements, the client provides
     the use of its system for a fee to one or more practitioners.
     Although the Company does not receive a fee directly from the
     time-share client, implementation of time-share arrangements has
     resulted in the purchase of additional system capacity by the client
     offering the time-share services, as well as new system purchases made
     by the time-share clients.  The Company continues to concentrate its
     sales and marketing efforts on medical and dental practices, dental
     schools, physician clinics, MSOs, PHOs and community health centers.
     MSOs and PHOs to which the Company has sold systems provide use of the
     Company's software to those group and single practices associated with
     the organization or hospital on either a time-sharing basis or by
     directing the Company to contract with those practices for the sale of
     stand-alone turnkey systems.

     The Company has entered into marketing assistance agreements with
     certain of its clients pursuant to which the clients allow the Company
     to demonstrate to potential clients the use of systems on the existing
     clients' premises.  In addition, the Company has established certain

     of its clients as dealers for its systems.  Through this arrangement,
                                      -9-
     
     the dealer markets and sells QSI systems to prospects in a local
     territory.  These prospects are generally smaller health care
     facilities than those actively pursued by the Company.  The Company's
     PC-based products are well suited to this dealer marketing.  In
     addition, the dealer typically provides a variety of ongoing services
     for its clients.  Dealers are compensated based on system size and
     profitability, and the services which they perform in lieu of the
     Company.

     The Company often assists prospective clients in identifying third
     party sources for financing the purchase of QSI systems.  The
     financing usually is obtained by the client directly from
     institutional lenders and typically takes the form of a loan from the
     institution secured by the system to be purchased.  Most of the
     clients purchasing QSI systems have been assisted by the Company in
     finding sources of financing for such purchases.

     The Company has numerous clients and does not believe that the loss of
     any single client would have a material adverse effect on the Company.
     No client accounted for ten percent or more of net revenues during
     fiscal years ended March 31, 1996, 1995 or 1994.

     Clinitec sells and markets its products to individual and group
     medical practices nationwide through a direct sales force operating
     from its Pennsylvania corporate headquarters and sales offices in
     California, Florida and Texas.  Clinitec's sales and marketing
     employees identify and contact prospective clients by a variety of
     means, including referrals from existing clients, trade journal
     advertising, contacts at professional society meetings and seminars,
     and regional and national industry specialty trade shows.  Typically,
     these employees make presentations to potential clients by
     demonstrating the Clinitec system and its capabilities on the
     prospective client's premises.  Clinitec's sales cycle can vary
     significantly and typically ranges from three to 12 months from
     initial contact to contract execution.  Since inception, a system has
     typically been delivered to a customer within 30 to 60 days following
     receipt of a system order and, therefore, data pertaining to backlog
     is not meaningful.  As part of the fees paid by its clients, Clinitec
     receives up-front licensing fees and a quarterly service fee based on
     system configuration.  Within the last year, Clinitec has entered into
     several third party marketing agreements, including an April 1995
     agreement with QSI, whereby Clinitec has granted non-exclusive
     marketing rights to its software products for medical applications.
     To date, revenues generated under these agreements have not been
     material.

     CUSTOMER SERVICE AND SUPPORT

     The Company believes its success is attributable in part to its
     exceptional customer service and support.  The Company provides
     support to its clients seven days a week, 24 hours a day.  In
     addition, the Company's policy is to respond to user defined
     system-down emergencies with a response time of 15 minutes or less.
     All Company systems have a dedicated computer port for dial-up remote
     access, facilitating rapid response by QSI technicians to system
     inquiries. Most inquiries can be resolved without the need to dispatch
     Company technicians.  These support services also provide the Company

     with the opportunity to monitor changes in each client's information

                                      -10-
     
     processing requirements and to recommend the purchase of system
     hardware or software enhancements designed to satisfy these additional
     requirements.  The Company believes that its commitment to provide
     extensive support has contributed significantly to the development of
     its business.

     The Company offers clients support services for all system components,
     including hardware and software maintenance, for a fixed monthly fee.
     In the last five years, more than 90% of the Company's clients have
     elected to purchase the Company's maintenance and support services.
     Hardware maintenance services are coordinated through the Company's
     headquarters in California, with support from field service locations
     in Northern and Southern California, New Jersey, North Carolina and
     Wisconsin.  The Company also subcontracts with IBM to perform specific
     hardware maintenance tasks under QSI's direction.  This arrangement
     has provided the Company with economies of scale associated with IBM's
     service infrastructure while still maintaining service standards.

     The Company's continuing system software support staff operates from
     the Company's offices in California and a location in Virginia.  The
     support staff is comprised of specialists who are knowledgeable in the
     area of hardware and software technology as well as in the day-to-day
     operations of a group practice.  The Company's on-line access to all
     client systems enables the support staff to provide immediate
     assistance to clients.  This assistance ranges from correcting minor
     procedural problems in the client's system to performing complex data
     base reconstructions or software updates.  The Company also utilizes
     an automated on-line support system which assists clients in resolving
     minor problems and facilitates automated electronic retrieval of
     problems along with symptoms following a client's call to the
     Company's automated support system.  Additionally, the on-line support
     system maintains a complete call record at the clients' facility and
     the Company.

     IMPLEMENTATION AND TRAINING

     The Company provides implementation and training services from its
     headquarters in California as well as remote locations in Florida,
     Kansas, Texas, and Washington.  The Company believes that its system
     delivery, implementation and support services are key elements of its
     successful client relationships.  When a client signs a contract for
     the purchase of a system, a client manager, trained in physician
     and/or dental group practice procedures, is assigned to ensure that
     the client is fully informed of system options and that the proper
     system configuration is installed.  This information is determined
     through discussions with the client and observation of the client's
     practice.  Once the set of software features is established, the
     software configuration unique to a given client can be created in an
     automated fashion.

     Before activation of the client's system, Company personnel convert
     the relevant client data onto the system.  Typically, the Company
     interfaces electronically to convert the client's data from another
     computer system, allowing for a quick, cost-effective and accurate
     conversion.  The system is then subjected to extensive testing which
     includes processing representative data using the client's system

     configuration.  In some situations, the data may have been previously
     maintained by the client on ledger cards or other hard copy.  In such

                                      -11-
     
     situations, the Company typically uses its data entry staff to input
     the required data.

     One or more trainers experienced in group practice procedures are
     assigned to conduct an intensive training program for the client's
     employees.  The program includes a combination of computer assisted
     instruction ("CAI"), remote training techniques and training classes
     conducted by QSI staff at the client's office(s).  CAI consists of
     workbooks, computer interaction and personal instruction.  CAI is
     also offered to clients, for an additional charge, after the initial
     training program is completed for the purpose of training new and
     additional employees.  Remote training allows a trainer at the
     Company's office to train one or more people at a client site via
     telephone and computer connection, thus allowing an interactive and
     office-specific mode of training without the expense and time required
     for travel.  The Company also provides ongoing training through
     electronic classrooms where employees at different locations from the
     same or different companies can simultaneously interact on-line with a
     trainer.  In addition, the Company's on-line "help" documentation
     feature facilitates client training as well as ongoing support.

     Clinitec provides implementation and training from its corporate
     headquarters in Pennsylvania.  Clinitec believes that systems
     delivery, implementation and support services are key elements of
     successful client relationships.  When a client signs a contract for
     the purchase of a system, Clinitec's customer service manager, in
     conjunction with the client, creates and coordinates a detailed system
     implementation and training plan.  The customer service manager is
     responsible for the internal coordination of Clinitec's implementation
     team, training department and knowledge-base development group.
     Clinitec also assigns to each client a training and implementation
     specialist who is experienced with information flow within a medical
     practice/organization.  Training is provided at the client's site.

     COMPETITION

     The market for health care information systems is intensely
     competitive and the Company faces significant competition from a
     number of different sources.  In addition, several of the Company's
     competitors have significantly greater financial, technical, product
     development and marketing resources than the Company.  The Company
     believes its principal competitive advantages are the features and
     capabilities of its products and services, its high level of customer
     support and its 20 year experience in the industry.  The industry is
     highly fragmented and includes numerous competitors, none of which
     the Company believes dominates the overall market for group practice
     management systems.  The Company has not encountered substantial
     competition in the dental group practices market of six or more
     dentists.  The Company believes that numerous firms sell computerized
     data processing systems to group dental practices consisting of five
     or fewer dentists.

     Among the Company's principal competitors for medical group practice
     clients are health care information systems companies such as IDX
     Corporation, Medic Computer Systems, Physician Computer Networks,

     Inc., and Cycare Systems, Inc.  Furthermore, the Company also competes
     indirectly and to varying degrees with other major health care
     information companies, information management companies generally,

                                      -12-
     
     and other software developers which may more directly enter the
     markets in which the Company competes.  There can be no assureance
     that future competition will not have a material adverse effect on the
     Company's business, financial condition and results of operations.
     Competitive pressures and other factors, such as new product
     introductions by the Company or its competitors, may result in price
     erosion that could have a material adverse effect on the Company's
     business, financial condition and results of operations.

     The market for electronic medical records systems is highly
     competitive and subject to rapid changes in technology.  The Company
     expects that market competition will increase as new competitors enter
     the marketplace.  The industry is highly fragmented and includes
     numerous competitors, none of which the Company believes dominates the
     electronic medical records market.  Many of the Company's competitors
     have substantially greater name recognition and technical, marketing
     and financial resources.  Among the principal competitors for
     Clinitec's software products are MedicaLogic, Inc., Datamedic Corp.
     and Azron Incorporated.  The Company believes its principal
     competitive advantages are the features and flexibility of Clinitec's
     NextGen products.  There can be no assurance that future competition
     or new product introductions will not have a material adverse effect
     on the Company's business, financial condition and results of
     operations.  In addition, Clinitec's software products are new and
     Clinitec has sold only a limited quantity of its principal products to
     date.  There can be no assurance that Clinitec's products will achieve
     broad market acceptance.

     PRODUCT ENHANCEMENT AND DEVELOPMENT

     The computer software and hardware and medical practice management
     industries are characterized by rapid technological change requiring
     the Company to engage in continuing efforts to improve its systems.
     During fiscal years 1996, 1995 and 1994 the Company expended
     approximately $1.9 million, $1.5 million and $1.3 million,
     respectively, on research and development activities.  In addition,
     many of the Company's product enhancements have resulted from software
     development work performed under contracts with QSI clients.  To the
     extent that the Company fails to achieve technological advances
     comparable to those made by others in the computer and health care
     practice management industries, its products and services may become
     obsolete.

     GOVERNMENTAL REGULATION

     The health care industry is subject to changing political, economic
     and regulatory influences that may affect the procurement processes
     and operation of health care facilities.  During the past several
     years, the health care industry has been subject to an increase in
     governmental regulation of, among other things, reimbursement rates
     and certain capital expenditures.  Certain legislators have announced
     that they intend to examine proposals to reform certain aspects of the
     U.S. health care system including proposals which may increase
     governmental involvement in health care, lower reimbursement rates and

     otherwise change the operating environment for the Company's clients.
     Health care providers may react to these proposals and the uncertainty
     surrounding such proposals by curtailing or deferring investments,
     including those for the Company's systems and related services.  On

                                      -13-
     
     the other hand, changes in the regulatory environment have increased
     and may continue to increase the needs of health care organizations
     for cost-effective data management and thereby enhance the
     marketability of the Company's systems and related services.  The
     Company cannot predict what impact, if any, such proposals or health
     care reforms might have on the Company's business, financial condition
     and results of operations.

     The Company's software may be subject to regulation by the U.S. Food
     Administration (the "FDA") as a medical device.  Such regulation could
     require the registration of the applicable manufacturing facility and
     software/hardware products, application of detailed recordkeeping and
     manufacturing standards, and FDA approval or clearance prior to
     marketing.  An approval or clearance could create delays in marketing,
     and the FDA could require supplemental filings or object to certain of
     these applications.

     EMPLOYEES

     As of May 31, 1996, the Company employed 128 persons of which 118 were
     full time employees.  Systems analysts, programmers and qualified
     sales and marketing personnel are in short supply and, consequently,
     competition for such individuals is intense.  The Company believes
     that its future success depends in part upon recruiting and retaining
     qualified marketing and technical personnel as well as other
     employees.  The Company considers its employee relations to be good.

     RISK FACTORS

     Except for the historical information contained herein, the matters
     discussed in this Annual Report on Form 10-KSB are forward-looking
     statements which involve risk and uncertainties, including but not
     limited to economics, competitive, governmental and technological
     factors affecting the Company's operations, markets, products,
     services and prices and other factors discussed in the Company's
     filings with the Securities and Exchange Commission.

     DEPENDENCE ON PRINCIPAL PRODUCT AND NEW PRODUCT DEVELOPMENT - The
     Company currently derives substantially all of its net revenues from
     sales of its health care information systems and related services. The
     Company believes that a primary factor in the market acceptance of its
     systems has been its ability to meet the needs of users of health care
     information systems.  The Company's future financial performance will
     depend in large part on the Company's ability to continue to meet the
     increasingly sophisticated needs of its clients through the timely
     development and successful introduction of new and enhanced versions
     of its systems and other complementary products.  The Company has
     historically expended a significant amount of its net revenues on
     product development and believes that significant continuing product
     development efforts will be required to sustain the Company's growth.

     There can be no assurance that the Company will be successful in its
     product development efforts, that the market will continue to accept

     the Company's existing or new products, or that products or product
     enhancements will be developed in a timely manner, meet the
     requirements of health care providers or achieve market acceptance.
     If new products or product enhancements do not achieve market
     acceptance, the Company's business, operating results and financial

                                      -14-
     
     condition could be adversely affected.  At certain times in the past,
     the Company has also experienced delays in purchases of its products
     by clients anticipating the launch of new products by the Company.
     There can be no assurance that material order deferrals in
     anticipation of new product introductions will not occur.

     COMPETITION - The market for health care information systems is
     intensely competitive and the Company faces significant competition
     from a number of different sources.  In addition, several of the
     Company's competitors have significantly greater financial,
     technical, product development and marketing resources than the
     Company.  The industry is highly fragmented and includes numerous
     competitors, none of which the Company believes dominates the overall
     market for group practice management systems.

     Among the Company's principal competitors are health care information
     systems companies such as IDX Corporation, Medic Computer Systems,
     Physician Computer Networks, Inc., and Cycare Systems, Inc.
     Furthermore, the Company also competes indirectly and to varying
     degrees with other major health care information companies,
     information management companies generally, and other software
     developers which may more directly enter the markets in which the
     Company competes.  There can be no assurance that future competition
     will not have a material adverse effect on the Company's business,
     financial condition and results of operations.  Competitive pressures

     and other factors, such as new product introductions by the Company or
     its competitors, may result in price erosion that could have a
     material adverse effect on the Company's business, financial condition
     and results of operations.

     The Company believes that once a health care provider has chosen a
     particular health care information system vendor, the provider will,
     for a period of time, be more likely to rely on that vendor for its
     future information system requirements.  As the health care industry
     undergoes further consolidation, each sale of the Company's systems
     assumes even greater importance to the Company's business, financial
     condition and results of operations.  The Company's inability to make
     initial sales of its systems to health care providers that are
     replacing or substantially modifying their health care information
     systems could have a material adverse effect on the Company's
     business, financial condition and results of operations.

     TECHNOLOGICAL CHANGE - The software market generally is characterized
     by rapid technological change, changing customer needs, frequent new
     product introductions and evolving industry standards.  The
     introduction of products incorporating new technologies and the
     emergence of new industry standards could render the Company's
     existing products obsolete and unmarketable.  There can be no
     assurance that the Company will be successful in developing and
     marketing new products that respond to technological changes or
     evolving industry standards.  If the Company is unable, for

     technological or other reasons, to develop and introduce new products
     in a timely manner in response to changing market conditions or
     customer requirements, the Company's business, results of operations
     and financial condition could be materially adversely affected.

                                      -15-
     
     The Company is currently developing a new generation of its software
     products that will be designed for the client/server environment.
     There can be no assurance that the Company will successfully develop
     these new software products or that these products will operate
     successfully on the principal client/server operating systems, which
     include UNIX, Microsoft Windows, Windows NT and Windows 95, or that
     any such development, even if successful, will be completed
     concurrently with or prior to introduction by competitors of products
     designed for the client/server environment.  Any such failure or delay
     could adversely affect the Company's competitive position or could
     make the Company's current product line designed for the UNIX
     environment obsolete.

     FLUCTUATION IN QUARTERLY OPERATING RESULTS - The Company's revenues
     and operating results have in the past fluctuated, and may in the
     future fluctuate, from quarter to quarter and period to period as a
     result of a number of factors including, without limitation, the size
     and timing of orders from clients; the length of sales cycles and
     installation processes; the ability of the Company's clients to obtain
     financing for the purchase of the Company's products; changes in
     pricing policies or price reductions by the Company or its
     competitors; the timing of new product announcements and product
     introductions by the Company or its competitors; the availability and
     cost of supplies; the financial stability of major clients; market
     acceptance of new products, applications and product enhancements; the
     Company's ability to develop, introduce and market new products,
     applications and product enhancements and to control costs; the
     Company's success in expanding its sales and marketing programs;
     deferrals of client orders in anticipation of new products,
     applications or product enhancements; changes in Company strategy;
     personnel changes; and general economic factors.

     The Company's products are generally shipped as orders are received
     and accordingly, the Company has historically operated with little
     backlog.  As a result, sales in any quarter are dependent on orders
     booked and shipped in that quarter and are not predicatable with any
     degree of certainty.  In addition, the Company's initial contact with
     a potential customer depends in significant part on the customer's
     decision to replace, or substantially modify, its existing information
     system.  How and when to implement, replace or substantially modify an
     information system are major decisions for health care providers.
     Accordingly, the sales cycle for the Company's systems can vary
     significantly and typically ranges from three to 12 months from
     initial contact to contract execution and the installation cycle is
     typically two to three months from contract execution to completion of
     installation.  Because a significant percentage of the Company's
     expenses are relatively fixed, a variation in the timing of systems
     sales and installations can cause significant variations in operating
     results from quarter to quarter.  As a result, the Company believes
     that interim period-to-period comparisons of its results of operations
     are not necessarily meaningful and should not be relied upon as
     indications of future performance.



     Further, the Company's historical operating results are not
     necessarily indicative of future performance for any particular period
     and there can be no assurance that the Company's recent revenue growth
     or its profitability will continue on a quarterly or annual basis.
     Due to all of the foregoing factors, it is possible that in some

                                      -16-
     
     future quarter the Company's operating results may be below the
     expectations of public market analysts and investors.  In such event,
     the price of the Company's Common Stock would likely be materially
     adversely affected.

     PROPRIETARY TECHNOLOGY - The Company is heavily dependent on the
     maintenance and protection of its intellectual property and relies
     largely on license agreements, confidentiality procedures and employee
     nondisclosure agreements to protect its intellectual property.  The
     Company's software is not patented and existing copyright laws offer
     only limited practical protection.  There can be no assurance that the
     legal protections and precautions taken by the Company will be
     adequate to prevent misappropriation of the Company's technology or
     that competitors will not independently develop technologies
     equivalent or superior to the Company's.  Further, the laws of some
     foreign countries do not protect the Company's proprietary rights to
     as great an extent as do the laws of the United States.

     The Company does not believe that its operations or products infringe
     on the intellectual property rights of others.  However, there can be
     no assurance that others will not assert infringement or trade secret
     claims against the Company with respect to its current or future
     products or that any such assertion will not require the Company to
     enter into a license agreement or royalty arrangements with the party
     asserting the claim.  As competing health care information systems
     increase in complexity and overall capabilities and the functionality
     of these systems further overlaps, providers of such systems may
     become increasingly subject to infringement claims.  Responding to and
     defending any such claims may distract the attention of Company
     management and have a material adverse effect on the Company's
     business, financial condition and results of operations.  In addition,
     claims may be brought against third parties from which the Company
     purchases software, and such claims could adversely affect the
     Company's ability to access third party software for its systems.

     CLINITEC - A principal component of the Company's business strategy is
     the acquisition of Clinitec (see "Item 1. Description of Business. -
     Clinitec").  The Company's future financial results will depend in
     part on the Company's ability to successfully integrate Clinitec's
     business with the Company's, including Clinitec's ability to hire and
     retain high quality personnel for its operations.  There can be no
     assurance that the Company will be able to successfully coordinate its
     business activities with those of Clinitec.  Furthermore, there can be
     no assurance that the Company will be successful in integrating
     Clinitec products with those of the Company or that the acquisition of
     Clinitec will not have an adverse effect upon the Company's operating
     results.  In addition, Clinitec was formed in January 1994 to develop
     and market electronic medical records software systems.  Clinitec's
     proprietary software products are new and Clinitec has sold only a
     limited quantity of these products to date.  There can be no assurance
     that Clinitec's products will achieve broad market acceptance.


     ABILITY TO MANAGE GROWTH - The Company has recently experienced a
     period of growth and increased personnel which has placed, and will
     continue to place, a significant strain on the Company's resources.
     The Company anticipates expanding its overall software development,
     marketing, sales, client management and training capacity.  In the
     event the Company is unable to identify, hire, train and retain

                                      -17-
     
     qualified individuals in such capacities within a reasonable time
     frame, such failure could have a material adverse effect on the
     Company.  In addition, the Company's ability to manage future
     increases, if any, in the scope of its operations or personnel will
     depend on significant expansion of its research and development,
     marketing and sales, management and financial and administrative
     capabilities.  The failure of the Company's management to effectively
     manage expansion in its business could have a material adverse effect
     on the Company's business, results of operations and financial
     condition.

     PRODUCT LIABILITY - Certain of the Company's products provide
     applications that relate to patient medical information.  Any failure
     by the Company's products to provide accurate and timely information
     could result in claims against the Company.  The Company maintains
     insurance to protect against claims associated with the use of its
     products, but there can be no assurance that its insurance coverage
     would adequately cover any claim asserted against the Company.  A
     successful claim brought against the Company in excess of its
     insurance coverage could have a material adverse effect on the
     Company's business, financial condition and results of operations.
     Even unsuccessful claims could result in the Company's expenditure of
     funds in litigation and management time and resources.  There can be
     no assurance that the Company will not be subject to product liability
     claims, that such claims will not result in liability in excess of its
     insurance coverage, that the Company's insurance will cover such
     claims or that appropriate insurance will continue to be available to
     the Company in the future at commercially reasonable rates.  Such
     claims could have a material adverse affect on the Company's business,
     financial condition and results of operations.

     UNCERTAINTY IN HEALTH CARE INDUSTRY; GOVERNMENT REGULATION - The
     health care industry is subject to changing political, economic and
     regulatory influences that may affect the procurement processes and
     operation of health care facilities.  During the past several years,
     the health care industry has been subject to an increase in
     governmental regulation of, among other things, reimbursement rates
     and certain capital expenditures.  Certain legislators have announced
     that they intend to examine proposals to reform certain aspects of the
     U.S. health care system including proposals which may increase
     governmental involvement in health care, lower reimbursement rates and
     otherwise change the operating environment for the Company's clients.
     Health care providers may react to these proposals and the uncertainty
     surrounding such proposals by curtailing or deferring investments,
     including those for the Company's systems and related services.  Cost
     containment measures instituted by health care providers as a result
     of regulatory reform or otherwise could result in greater selectivity
     in the allocation of capital funds.  Such selectivity could have an
     adverse effect on the Company's ability to sell its systems and
     related services.  The Company cannot predict what impact, if any,

     such proposals or health care reforms might have on its business,
     financial condition and results of operations.

     The Company's software may be subject to regulation by the U.S. Food
     and Drug Administration (the "FDA") as a medical device.  Such
     regulation could require the registration of the applicable
     manufacturing facility and software/hardware products, application of
     detailed recordkeeping and manufacturing standards, and FDA approval

                                      -18-
     
     or clearance prior to marketing.  An approval or clearance could
     create delays in marketing, and the FDA could require supplemental
     filings or object to certain of these applications.

     DEPENDENCE UPON KEY PERSONNEL - The Company's future performance also
     depends in significant part upon the continued service of its key
     technical and senior management personnel, many of whom have been with
     the Company for a significant period of time.  Because the Company has
     a relatively small number of employees when compared to other leading
     companies in the same industry, its dependence on maintaining its
     employees is particularly significant.  The Company is also dependent
     on its ability to attract and retain high quality personnel,
     particularly highly skilled software engineers for applications
     development.  The industry is characterized by a high level of
     employee mobility and aggressive recruiting of skilled personnel.
     There can be no assurance that the Company's current employees will
     continue to work for the Company.  Loss of services of key employees
     could have a material adverse effect on the Company's business,
     results of operations and financial condition.  The Company does not
     maintain key man life insurance on any of its employees.  The Company
     may need to grant additional options to key employees and provide
     other forms of incentive compensation to attract and retain such key
     personnel.

     Item 2.  DESCRIPTION OF PROPERTIES.
              --------------------------

     The Company's principal administrative, data processing, marketing and
     development operations are located in approximately 15,800 square feet
     of leased space in Tustin, California under a lease which expires in
     October 1996.  In addition, the Company leases approximately 13,200
     square feet of space in Santa Ana, California to house its assembly
     and warehouse operations, and an aggregate of 1,875 square feet of
     space in Florida, Georgia, New York, Texas and Washington to house
     additional sales, training and service operations.  These leases,
     including options, have expiration dates ranging from month-to-month
     to October 31, 1996 and provide for aggregate annual rental payments
     of approximately $385,000.  The Company believes that its facilities
     are adequate for its current needs and that suitable additional or
     substitute space is available, if needed.

     Item 3.  LEGAL PROCEEDINGS.
              ------------------

     The Company is a party to various legal proceedings incidental to its
     business, none of which are considered by the Company to be material.


     Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

              ----------------------------------------------------

     No matter was submitted to a vote of security holders during the
     fourth quarter of fiscal year 1996.


                                      -19-

     
                                    PART II

     Item 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
              ---------------------------------------------------------
     

     The Company's Common Stock is traded on the Nasdaq National Market
     under the symbol "QSII".  The following table sets forth for the
     quarters indicated, the reported high and low closing sales prices as
     reported by Nasdaq.  The quotations reflect inter-dealer prices,
     without retail markup, markdown, or commissions and may not
     necessarily represent actual transactions.

     
Quarter Ended High Low ------------------ -------- -------- June 30, 1994 7.00 4.00 September 30, 1994 4.75 3.50 December 31, 1994 4.38 2.50 March 31, 1995 3.75 2.00 June 30, 1995 5.13 3.00 September 30, 1995 17.88 4.63 December 31, 1995 32.25 12.88 March 31, 1996 30.00 18.00
At May 31, 1996 there were approximately 191 holders of record. The Company estimates the number of beneficial holders of its Common Stock to be in excess of 1,400. Through May 31, 1996, the Company has not paid cash dividends on shares of its Common Stock. The Company anticipates that all future earnings, if any, will be retained for use in the Company's business and it does not anticipate paying any cash dividends in the future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. -20- Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ----------------------------------------------------------- GENERAL Since fiscal 1994, approximately one-half of the Company's revenues have been derived from sales of computer systems, upgrades and supplies, with the balance derived from systems maintenance agreements and other support services. On sales of its systems, upgrades and supplies, the Company recognizes revenues upon shipment of products. Revenues attributable to the Company's software products included with the systems are also recognized upon shipment, unless the Company's installation obligations after shipment are significant, in which case revenues are recognized on a percentage of completion basis. Revenues from systems maintenance are typically recognized ratably over the life of the contract. In the last five years, more than 90% of the Company's clients have elected to purchase the Company's maintenance and support services. During the past five years, the Company's systems sales have been impacted by a number of factors which have had the effect of reducing systems sales and systems upgrade sales while at the same time increasing the relative profitability of these sales. Historically, the cost for the hardware components used in the Company's systems have consistently declined while the performance and capacity of such components have continually increased. Consistent with the marketplace, the Company has adjusted its systems pricing to its clients to reflect these decreased hardware costs. In addition, the Company increasingly encounters prospective clients that already own, or desire to acquire from third parties, significant quantities of hardware which may be utilized with the Company's software. In such instances, the sales generated from such clients are lower than they otherwise would be. As a result of these market changes, the Company has increasingly focused its efforts on the sale of its software user licenses and services, resulting in higher margins. Aiding these efforts has been the continuing increase in the capacity of the hardware components which the Company markets. The Company has had a growing market for the sale of additional software user licenses to its existing clients because such clients can often add more software user capacity to their system with minimal or no change to their current central processing unit. Such clients frequently also purchase hardware peripherals from the Company for use with the newly purchased software user licenses. During fiscal 1996, the Company's system revenues significantly increased. The Company attributes this increase to the dynamic changes currently occurring in the health care industry and to growing acceptance of the Company's products and services. Health care providers, faced with economic pressures to reduce costs and increase productivity, are increasingly aligning with HMOs, hospitals and other health care organizations as well as consolidating with other health care providers into larger, more efficient business entities. This trend results in an increase in the number of large and complex health care organizations that are potential clients for the Company's sophisticated systems. In addition, the continued growth of these -21- organizations after they become clients of the Company presents the potential for the Company to increase sales of upgrades and additional software user licenses. The Company's ability to address the complex software requirements of such newly forming or growing business entities, in particular in the area of managed care, is a key to success in this changing health care delivery environment. The sales cycle for the Company's systems typically ranges from three to 12 months from initial contact to contract execution. The installation cycle is typically two to three months from contract execution to completion of installation. Because a significant percentage of the Company's expenses are relatively fixed, a variation in the timing of systems sales and installations can cause significant variations in operating results from quarter to quarter. The Company's products are generally shipped as orders are received and accordingly, the Company has historically operated with little backlog. As a result, sales in any quarter are dependent on orders booked and shipped in that quarter and are not predictable with any degree of certainty. As a result, the Company believes that interim period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. The Company's research and development expenses consist primarily of personnel and equipment costs required to conduct the Company's product development effort. The Company believes that significant investments in research and development are required to remain competitive. As a consequence, in recent years, the Company has increased the amount of its expenditures on research and development, mainly through the employment of additional development personnel. Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional development costs are capitalized and amortized over periods ranging from three to five years. With the completion in May 1996 of the Company's acquisition of Clinitec International, Inc., the Company expects to take a net writeoff for purchased in-process research and development of approximately $8.3 million during the quarter ending June 30, 1996. The exact amount of the writeoff will be subject to change pending ultimate purchase allocations to be made by the Company. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Financial Statements and related notes thereto included elsewhere herein. Historical results of operations, percentage margin fluctuations and any trends that may be inferred from the discussion below are not necessarily indicative of the operating results for any future period. -22- RESULTS OF OPERATIONS The following table sets forth for the periods indicated, the percentage of net revenues represented by each item in the Company's statements of income.
Years Ended March 31, ---------------------- 1996 1995 1994 ----- ----- ----- Net Revenues: Sales of computer systems, upgrades and supplies 57.5% 47.1% 52.3% Maintenance and other services 42.5 52.9 47.7 ----- ----- ----- 100.0 100.0 100.0 Cost of Products and Services 47.4 50.3 55.5 ----- ----- ----- Gross Profit 52.6 49.7 44.5 Selling, General and Administrative Expenses 23.3 29.3 26.0 Research and Development Costs 9.4 12.2 11.2 ----- ----- ----- Income from Operations 19.9 8.2 7.3 Investment Income 3.2 3.6 3.4 Equity in Loss of Clinitec International, Inc. (.3) - - ----- ----- ----- Income before Provision for Income Taxes 22.8 11.8 10.7 Provision for Income Taxes 9.1 3.8 3.0 ----- ----- ----- Net Income 13.7% 8.0% 7.7% ===== ===== =====
-23- FOR THE YEARS ENDED MARCH 31, 1996 AND 1995. Net income for the year ended March 31, 1996 increased 138.4% to $2.3 million from $1.0 million for the year ended March 31, 1995. Similarly, net income per share on a fully diluted basis increased to $0.48 from $0.21. A discussion of the components of the Company's statements of income for the two years in the period ended March 31, 1996 follows. Net Revenues. Net revenues for the year ended March 31, 1996 increased 38.9% to $16.7 million from $12.0 million for the year ended March 31, 1995. This increase was due primarily to sales of computer systems, upgrades (including software user licenses) and supplies which in total grew 69.4% to $9.6 million from $5.7 million. This growth resulted from an increase in the number of larger systems and increased sales of upgrades. Net revenues from maintenance and other services grew 11.6% to $7.1 million from $6.4 million as a result of a growing client base for recurring services and increased time and materials billings for additional services. Cost of Products and Services. Cost of products and services for the year ended March 31, 1996 increased 30.8% to $7.9 million from $6.1 million for the year ended March 31, 1995. This increase was due primarily to the increases in systems sold and net revenues. As a percentage of net revenues, costs of products and services decreased to 47.4% from 50.3% due to an increase in the proportion of net revenues with higher gross margins. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 1996 increased 10.2% to $3.9 million from $3.5 million for the year ended March 31, 1995 as a result of increases in selling efforts and sales personnel. However, since net revenues grew more rapidly between fiscal 1996 and fiscal 1995 as compared to the growth in selling, general and administrative expenses during the comparable period, selling, general and administrative expenses as a percentage of net revenues declined to 23.3% in fiscal 1996 as compared to 29.3% in fiscal 1995. Research and Development Costs. Research and development costs for the year ended March 31, 1996 increased 6.8% to $1.6 million from $1.5 million for the year ended March 31, 1995. Total research and development costs and capitalized software costs for the year ended March 31, 1996 increased 33.5% to $1.9 million from $1.5 million for the year ended March 31, 1995. The Company anticipates increased expenditures in fiscal 1997 in capitalized software in connection with developing an alternate version of certain of its products for the client/server environment to take advantage of new more powerful technologies and to allow for a more seamless integration of the Company's and Clinitec's applications. With the completion of the acquisition of Clinitec in May 1996, the Company also anticipates an increase in research and development costs related to Clinitec's ongoing product development. Investment Income. Investment income for the year ended March 31, 1996 increased 24.2% to $533,000 from $429,000 for the year ended March 31, 1995 primarily as a result of an increase in funds available for investment during fiscal 1996 as compared to fiscal 1995. The -24- increase in available funds for investment was significantly augmented during March 1996 with the receipt of $20.2 million in net proceeds from the completion of the Company's secondary public offering. Provision for Income Taxes. The provision for income taxes for the year ended March 31, 1996 increased 237.3% to $1.5 million from $453,000 for the year ended March 31, 1995. This increase in fiscal 1996 was due to increased earnings before the provision for income taxes and an increase in the Company's effective tax rate. The effective tax rates for fiscal 1996 and 1995 were 40.0% and 32.0%, respectively. The effective rate for fiscal 1995 was lower than the effective rate for fiscal 1996 due to utilization in fiscal 1995 of a deferred tax valuation allowance related to net operating loss carryforwards. All of the Company's net operating loss carryforwards were utilized during fiscal 1995 and as such there were no similar tax benefits available for use in fiscal 1996. FOR THE YEARS ENDED MARCH 31, 1995 AND 1994. Net income for the year ended March 31, 1995 increased 6.2% to $1.0 million from $0.9 million for the year ended March 31, 1994. Similarly, net income per share on a fully diluted basis increased to $0.21 from $0.20. A discussion of the components of the Company's statements of income for the two years in the period ended March 31, 1995 follows. Net Revenues. Net revenues were relatively unchanged for the year ended March 31, 1995 increasing 2.5% to $12.0 million from $11.8 million for the year ended March 31, 1994. Revenues derived from maintenance and other services increased 13.6% to $6.4 million from $5.6 million as a result of the Company's larger installed base of systems and higher prices for services. Revenues attributable to sales of computer systems, upgrades and supplies decreased 7.6% to $5.7 million from $6.1 million due to decreased systems sales during fiscal 1995. Cost of Products and Services. Cost of products and services for the year ended March 31, 1995 decreased 7.2% to $6.1 million from $6.5 million for the year ended March 31, 1994. This decrease was due to an increase in the proportion of revenues from lower cost items comprising net revenues and also resulted in these costs, as a percentage of net revenues, decreasing to 50.3% from 55.5%. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended March 31, 1995 increased 15.9% to $3.5 million from $3.1 million for the year ended March 31, 1994 as result of increases in selling efforts and sales personnel, thereby increasing these expenses, as a percentage of net revenues, to 29.3% from 26.0%. Research and Development Costs. The amount of expenditures charged to research and development costs for the year ended March 31, 1995 increased 11.3% to $1.5 million from $1.3 million for the year ended March 31, 1994, and as a percentage of net revenues, to 12.2% from 11.2%. This increase was primarily attributable to development of enhancements and additions to the Company's systems. -25- Investment Income. Investment income for the year ended March 31, 1995 increased 7.3% to $429,000 from $400,000 for the year ended March 31, 1994. This increase was due to an increase in funds available for investment. Provision for Income Taxes. The provision for income taxes for the year ended March 31, 1995 increased 29.8% to $453,000 from $349,000 for the year ended March 31, 1994. This was due to increased earnings before the income tax provision and an increase in effective tax rates. The effective tax rates for the respective periods were 32.0% and 27.8%. These lower than normal rates were due to utilization of a deferred tax valuation allowance related to net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through cash generated from operations. Net cash provided by operating activities was $2.7 million, $1.2 million and $1.2 million for the the years ended March 31, 1996, 1995 and 1994, respectively. Net cash provided from operating activities consists principally of net income plus increases in accounts payable and income taxes payable offset by an increase in accounts receivables. The increase in accounts receivable results primarily from increased sales and the timing of sales in fiscal 1996. Net cash provided by (used in) investing activities was $(1.3) million, $3.6 million and $(4.0) million for the years ended March 31, 1996, 1995 and 1994, respectively. Net cash provided by (used in) investing activities consists principally of changes in short-term investments as well as additions to equipment and improvements and capitalized software. Net cash used in investing activities for the year ended March 31, 1996 was also impacted by the Company's purchase of a 25% ownership interest in Clinitec for $1.0 million during the year. Net cash provided by financing activities was $20.4 million, $0.2 million and $0.4 million for the years anded March 31, 1996, 1995 and 1994, respectively. Net cash provided by financing activities for the year ended March 31, 1996 consists of $20.2 million of net proceeds from the Company's March 1996 secondary public offering of one million shares of the Company's Common Stock and $0.2 million of proceeds from the exercise of employee stock options during the year. Net cash provided by financing activities for the years ended March 31, 1995 and 1994 consists of the proceeds from the exercise of employee stock options. At March 31, 1996, the Company had cash and cash equivalents of $27.9 million and short-term investments of $1.1 million. Short-term investments include debt securities issued by foreign governments of $314,000 and an investment in a fund which trades in special situation securities of $500,000. The Company does not believe these investments have significant principal risk; however, there can be no assurance that the markets for these securities will not change, causing a loss of principal. -26- In May 1995, QSI acquired a 25% ownership interest in Clinitec for $1.0 million in cash. In May 1996, the Company acquired the remaining 75% of Clinitec for $4.9 million in cash and 309,846 shares of QSI Common Stock and merged Clinitec with and into a newly formed wholly- owned subsidiary of the Company. For purposes of the May 1996 transaction, the shares were valued at $6.9 million or $22.25 per share. Except for the Company's purchase in May 1996 of the remaining 75% ownership interest in Clinitec and QSI's intention to expend funds on capitalized software in connection with alternative versions of certain of its products for the client/server environment to take advantage of more powerful technologies and to enable a more seamless integration of the Company's and Clinitec's NextGen applications, the Company has no significant capital commitments and currently anticipates that additions to property, plant and equipment for fiscal 1997 will be comparable to recent past years. The Company believes that its current cash balances and cash flow from operations, if any, will be sufficient to meet its working capital and capital expenditure requirements though fiscal 1997. Item 7. FINANCIAL STATEMENTS -------------------- The Financial Statements of the Company identified in the Index to Financial Statements appearing under "Item 13. Exhibits and Reports on Form 8-K" of this report are incorporated by reference to Item 13. -27- Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ---------------------------------------------------------- None -28- PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT. ------------------------------------------------------------- EXECUTIVE OFFICERS OF REGISTRANT. ---------------------------------
The executive officers of the Company as of March 31, 1996 were as follows: Name Age Position ---- --- -------- Sheldon Razin 58 Chairman of the Board, Chief Executive Officer, President and Director Robert J. Beck 56 Executive Vice President Robert G. McGraw 38 Vice President - Chief Financial Officer Greg Flynn 38 Vice President - Sales and Marketing Abe LaLande 45 Vice President - Hardware Research and Development Donn Neufeld 39 Vice President - Software and Operations Janet Razin 56 Vice President, Corporate Secretary and Director Irma G. Carmona 40 Corporate Controller Executive officers of the Company are elected by, and serve at the discretion of, the Board of Directors. Additional information regarding the Company's executive officers is set forth below.
-29- Sheldon Razin is the founder of the Company and has served as Chairman of the Board of Directors and Chief Executive Officer since the Company's inception. He also has served as the Company's President since its inception except for the period from August 1990 to August 1991. Additionally, Mr. Razin served as Treasurer from the Company's inception until October 1982. Prior to founding the Company, he held various technical and managerial positions with Rockwell International Corporation and was a founder of the Company's predecessor, Quality Systems, a sole proprietorship engaged in the development of software for commercial and space applications and in management consulting work. Mr. Razin holds a B.S. degree in Mathematics from the Massachusetts Institute of Technology. Mr. Razin is the husband of Janet Razin. Robert J. Beck joined the Company, and has served as its Executive Vice President, since April 1992. In this capacity, he is heavily involved in the Company's sales and marketing efforts. Mr. Beck has been associated with turnkey healthcare computing applications since 1975, holding a variety of increasingly responsible management positions in several companies. Prior to joining the Company, Mr. Beck served as Executive Vice President of Sandata, a provider of DME and Home Health Care Turnkey Systems. Mr. Beck's experience includes founding and running a corporation, The Hamilton Computer Group, Inc., which was at one time a major competitor to the Company. He holds a B.A. degree in Mathematics and Statistics from Hunter College. Robert G. McGraw joined the Company in February 1996 as Chief Financial Officer. Prior to joining the Company, Mr. McGraw was the Chief Financial Officer of CVD Financial Corporation, an asset-based commercial lender, from March 1994 to February 1996. He was an independent financial consultant from August 1989 to February 1991 and from March 1992 to February 1994. From March 1991 to February 1992, Mr. McGraw was Chief Financial Officer of MGV International, Inc., a diversified middle market company with a personal computer manufacturing plant and wholesale distribution operations. Mr. McGraw is a Certified Public Accountant and holds an M.B.A. from UCLA and a B.A. with highest honors in Business Economics from the University of California, Santa Barbara. Greg Flynn has served as the Company's Vice President Sales and Marketing since January 1996 after serving as Vice President Administration since June 1992. In these capacities, Mr. Flynn has been responsible for numerous functions related to sales and the ongoing management of the Company. Previously, Mr. Flynn served as the Company's Vice President Corporate Communications. Since joining the Company in January 1982, Mr. Flynn has held a variety of increasingly responsible management positions within the organization. Prior to joining the Company, Mr. Flynn was a scriptreader/script consultant for a film production company. He holds a B.A. degree in English from the University of California, Santa Barbara. -30- Abe LaLande has served as the Company's Vice President Hardware Research and Development since February 1989. From 1979 to 1982, he served as the Company's senior field service engineer, and from 1982 to 1988, he served as Vice President Field Service and Production. During fiscal 1989, Mr. LaLande left the Company for three months to work for Toshiba America, Inc. Prior to joining the Company, Mr. LaLande held various senior field service engineering positions with Mini-Computer Systems (October 1978 to April 1979), Varian Associates (February 1978 to October 1978) and General Automation (July 1977 to February 1978), all of which are computer manufacturing companies. He holds an A.A. degree in Electronic Engineering from Fullerton College and an A.S. degree in Computer Science from Control Data Institute. Donn Neufeld has served as the Company's Vice President-Software and Operations since January 1996 and as Vice President - Operations from June 1986 until January 1996. From April 1981 until June 1986, Mr. Neufeld held the position of Manager of Customer Support. He joined the Company in December 1980 as part of the System Generation Department. Prior to joining the Company, Mr. Neufeld was a System Analyst/Programmer at Loma Linda University Medical Center. Janet Razin has served as a Director, Vice President and Corporate Secretary since the Company's inception and served as the Company's controller until November 1981. She served as Vice President Chief Financial Officer from October 1982 until October 1984. Prior to joining the Company, she was a computer programmer for Rockwell International Corporation. Mrs. Razin holds a B.A. degree in Mathematics from Northeastern University. Mrs. Razin is the wife of Sheldon Razin. Irma G. Carmona has served as the Company's Corporate Controller since June 1994. Since joining the Company in February 1980, Ms. Carmona has held a variety of increasingly responsible financial positions within the organization including Manager of Accounting from June 1984 until June 1994. Prior to joining the Company, Ms. Carmona was a staff accountant for Thomas Cook Bankers. Except for information concerning the Company's executive officers which is included above, the information required by Item 9 is incorporated by reference from the Company's definitive proxy statement to be filed with the Commission on or before July 29, 1996 for the Company's 1996 annual shareholders' meeting. -31- Item 10. EXECUTIVE COMPENSATION. ----------------------- The information required by Item 10 is incorporated herein by reference from the Company's definitive proxy statement scheduled to be filed with the Commission on or before July 29, 1996 for the Company's 1996 annual shareholders' meeting. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT. ----------- The information required by Item 11 is incorporated herein by reference from the Company's definitive proxy statement scheduled to be filed with the Commission on or before July 29, 1996 for the Company's 1996 annual shareholders' meeting. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ----------------------------------------------- The information required by Item 12 is incorporated herein by reference from the Company's definitive proxy statement scheduled to be filed with the Commission on or before July 29, 1996 for the Company's 1996 annual shareholders' meeting. -32- Item 13. EXHIBITS AND REPORTS ON FORM 8-K. ---------------------------------
(a) Index to Financial Statements Page ----------------------------- ---- Independent Auditors' Report F-1 Balance Sheets at March 31, 1996 and 1995 F-2 Statements of Income for the Years Ended March 31, 1996, 1995 and 1994 F-3 Statements of Shareholders' Equity for the Years Ended March 31, 1996, 1995 and 1994 F-4 Statements of Cash Flows for the Years Ended March 31 1996, 1995 and 1994 F-6 Notes to Financial Statements F-8
(b) Exhibits. INDEX TO EXHIBITS Sequential Page Exhibit No. ------- ---------- 3.1 Articles of Incorporation of the Company, as amended, are hereby incorporated by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1984, File No. 2-80056. 3.2 Bylaws of the Company, as amended, are hereby incorporated by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1, File No. 2-80056. 3.2.1 Certificate of Amendment of Bylaws of the Registrant is hereby incorporated by reference to Exhibit 3.2.1 to the Registrant's Registration Statement on Form S-1, File No. 333-00161. 10.2 1989 Incentive Stock Option Plan is hereby incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-31949. 10.2.1 Form of Incentive Stock Option Agreement is hereby incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, File No. 333-00161. -33- INDEX TO EXHIBITS (Continued) Sequential Page Exhibit No. ------- ---------- 10.2.2 Form of Non-Qualified Stock Option Agreement is hereby incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, File No. 333-00161. 10.3 Form of Incentive Stock Option Agreement is hereby incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, File No. 2-80056. 10.4 1993 Deferred Compensation Plan, is hereby incorporated by reference to Exhibit 10.5 to the Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1994, File No. 0-13801. 10.5 Lease Agreement dated March 11, 1993 between the Registrant and Craig Development Corporation, is hereby incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 1993 File No. 0-13801. 10.6 Lease agreement dated September 12, 1994 between the Registrant and Koll/Realty Orangewood Business Center General Partnership, is hereby incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1995, File No. 0-13801. 10.7 Series "A" Convertible Preferred Stock Purchase Agreement, as amended, dated April 21, 1995 between the Registrant and Clinitec International, Inc., is hereby incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1995, File No. 0-13801. 10.8 Form of Indemnification Agreement is hereby incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1, File No. 333-00161. 10.9 Marketing agreement, as amended, dated April 1, 1995 between the Registrant and Clinitec International, Inc., is hereby incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1995, File No. 0-13801. 10.10 Agreement and Plan of Merger, dated May 16, 1996, by and among Quality Systems, Inc., CII Acquisition Corporation, Clinitec International, Inc. and certain shareholders of Clinitec International, Inc. and certain exhibits is hereby incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K, dated May 17, 1996 and filed May 30, 1996. -34- INDEX TO EXHIBITS (Continued) Sequential Page Exhibit No. ------- ---------- 10.11 Employment agreement dated May 16, 1996 by and between CII Acquisition Corporation and Patrick Cline is hereby incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K/A dated May 17, 1996 and filed June 21, 1996. 23.1 Independent Auditor's Consent - Deloitte & Touche LLP., is filed herewith. F-22 27.1 Financial Data Schedule, is filed herewith. List of Compensation Plans: 10.2 1989 Incentive Stock Option Plan is hereby incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8, File No. 33-31949. 10.2.1 Form of Incentive Stock Option Agreement is hereby incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1, File No. 333-00161. 10.2.2 Form of Non-Qualified Stock Option Agreement is hereby incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1, File No. 333-00161. 10.4.2 Profit Sharing and Retirement Plan, as amended, is hereby incorporated by reference to Exhibit 10.4.2 to the Registrant's Annual Report on Form 10-KSB for the year ended March 31, 1994, File No. 0-13801. 10.4.3 Profit Sharing and Retirement Plan, amendments No. 2 and 3, as amended, is filed herewith. F-20 (c) Reports on form 8-K: None -35- SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QUALITY SYSTEMS, INC. By: /s/SHELDON RAZIN Date: June 12, 1996 ----------------------------- --------------------------- SHELDON RAZIN Chairman of the Board of Directors and President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/SHELDON RAZIN Chairman of the Board of -------------------------- Directors and President June 12, 1996 SHELDON RAZIN (Principal Executive Officer) /s/JANET RAZIN -------------------------- Vice President, June 12, 1996 JANET RAZIN Secretary and Director /s/ROBERT MCGRAW -------------------------- Vice President, June 12, 1996 ROBERT MCGRAW Chief Financial Officer (Principal Financial and Accounting Officer) /s/JOHN BOWERS, M.D. -------------------------- Director June 12, 1996 JOHN BOWERS, M.D. /s/WILLIAM BOWERS -------------------------- Director June 12, 1996 WILLIAM BOWERS /s/GEORGE BRISTOL -------------------------- Director June 12, 1996 GEORGE BRISTOL /s/PATRICK CLINE -------------------------- Director June 12, 1996 PATRICK CLINE /s/GRAEME FREHNER -------------------------- Director June 12, 1996 GRAEME FREHNER /s/GORDON SETRAN -------------------------- Director June 12, 1996 GORDON SETRAN
-36- INDEPENDENT AUDITORS' REPORT ---------------------------- Board of Directors and Shareholders Quality Systems, Inc. We have audited the accompanying balance sheets of Quality Systems, Inc. as of March 31, 1996 and 1995, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Quality Systems, Inc. as of March 31, 1996 and 1995, and the results of its operations and its cash flows for the three years in the period ended March 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Costa Mesa, California May 31, 1996 F-1 QUALITY SYSTEMS, INC. BALANCE SHEETS
March 31, ------------------------ ASSETS 1996 1995 ----------- ----------- Current Assets: Cash and cash equivalents $27,872,000 $ 6,085,000 Short-term investments 1,072,000 1,237,000 Accounts receivable, less allowance for doubtful accounts of $ 126,000 and $ 77,000, respectively 4,751,000 2,997,000 Inventories 853,000 783,000 Deferred tax asset - 199,000 Other current assets 135,000 74,000 ----------- ----------- Total current assets 34,683,000 11,375,000 Equipment and Improvements, net 572,000 535,000 Capitalized Software Costs, net 599,000 502,000 Investment in Clinitec International, Inc. 976,000 - Other Assets 442,000 256,000 ----------- ----------- Total assets $37,272,000 $12,668,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,706,000 $ 597,000 Deferred service revenue 1,031,000 952,000 Estimated costs to complete system installations 402,000 217,000 Income taxes payable - 473,000 Other current liabilities 1,348,000 1,104,000 ----------- ----------- Total current liabilities 4,487,000 3,343,000 Deferred Tax Liability 84,000 137,000 ----------- ----------- Total liabilities 4,571,000 3,480,000 ----------- ----------- Commitments and Contingencies Shareholders' Equity: Common stock, $.01 par value, 20,000,000 shares authorized, 5,653,491 and 4,535,866 shares issued and outstanding, respectively 56,000 45,000 Additional paid-in capital 27,148,000 5,978,000 Unrealized loss on available-for-sale securities (44,000) (83,000) Retained earnings 5,541,000 3,248,000 ----------- ----------- Total shareholders' equity 32,701,000 9,188,000 ----------- ----------- Total liabilities and shareholders' equity $37,272,000 $12,668,000 =========== ===========
See notes to financial statements. F-2 QUALITY SYSTEMS, INC. STATEMENTS OF INCOME
Years Ended March 31, ----------------------------------- 1996 1995 1994 ----------- ----------- ----------- Net Revenues: Sales of computer systems, upgrades and supplies $ 9,623,000 $ 5,681,000 $ 6,146,000 Maintenance and other services 7,109,000 6,368,000 5,606,000 ----------- ----------- ----------- 16,732,000 12,049,000 11,752,000 Cost of Products and Services 7,929,000 6,060,000 6,527,000 ----------- ----------- ----------- Gross Profit 8,803,000 5,989,000 5,225,000 Selling, General and Administrative Expenses 3,897,000 3,536,000 3,052,000 Research and Development Costs 1,567,000 1,467,000 1,318,000 ---------- ---------- ---------- Income from Operations 3,339,000 986,000 855,000 Investment Income 533,000 429,000 400,000 Equity in Loss of Clinitec International, Inc. (51,000) - - ---------- ---------- ---------- Income before Provision for Income Taxes 3,821,000 1,415,000 1,255,000 Provision for Income Taxes 1,528,000 453,000 349,000 ---------- ---------- ---------- Net Income $2,293,000 $ 962,000 $ 906,000 ========== ========== ========== Net Income per Share: Primary $0.48 $0.21 $0.21 ===== ===== ===== Fully diluted $0.48 $0.21 $0.20 ===== ===== =====
See notes to financial statements. F-3
QUALITY SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY Unrealized Common Loss on Shares Issued Additional Available- ------------------ Paid-in for-sale Retained Number Amount Capital Securities Earnings ---------- ------- ---------- ----------- ---------- Balance at April 1, 1993 4,186,616 $42,000 $5,100,000 $ - $1,380,000 Exercise of stock options 258,500 2,000 400,000 - - Tax benefit resulting from stock options - - 289,000 - - Unrealized loss, net of $60,000 tax benefit - - - (79,000) - Net income - - - - 906,000 ---------- ------- ---------- ----------- ---------- Balance at March 31, 1994 4,445,116 44,000 5,789,000 (79,000) 2,286,000 Exercise of stock options 90,750 1,000 150,000 - - Tax benefit resulting from stock options - - 39,000 - - Unrealized loss, net of $3,000 tax benefit - - - (4,000) - Net income - - - - 962,000 ---------- ------- ---------- ----------- ---------- Balance at March 31, 1995 4,535,866 45,000 5,978,000 (83,000) 3,248,000 See notes to financial statements. F-4 QUALITY SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (Continued) Unrealized Common Loss on Shares Issued Additional Available- ------------------ Paid-in for-sale Retained Number Amount Capital Securities Earnings ---------- ------ ----------- ----------- ---------- Sale of stock in secondary offering 1,000,000 10,000 20,244,000 - - Exercise of stock options 117,625 1,000 181,000 - - Tax benefit resulting from stock options - - 745,000 - - Unrealized gain, net of $29,000 tax provision - - - 39,000 - Net income - - - - 2,293,000 ---------- ------ ----------- ---------- ---------- Balance at March 31, 1996 5,653,491 $56,000 $27,148,000 $ (44,000) $5,541,000 ========= ======= =========== ========== ==========
See notes to financial statements. F-5
QUALITY SYSTEMS, INC. STATEMENTS OF CASH FLOWS Years Ended March 31, ----------------------------------- 1996 1995 1994 ----------- ---------- ------------ Cash Flows from Operating Activities: Net income $2,293,000 $ 962,000 $ 906,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 496,000 418,000 404,000 Realized (gains) losses from sales of short-term investments 10,000 (151,000) (194,000) Unrealized (gains) losses on trading securities (90,000) (82,000) 99,000 Equity in loss of Clinitec International, Inc. 51,000 - - Gain on sales of fixed assets (8,000) - - Deferred income taxes 180,000 (62,000) - Changes in: Accounts receivable (1,754,000) (267,000) (284,000) Inventories (70,000) 112,000 56,000 Other current assets 19,000 13,000 15,000 Accounts payable 1,109,000 (252,000) (153,000) Deferred service revenue 79,000 76,000 32,000 Estimated costs to complete system installations 185,000 (130,000) 115,000 Income taxes payable, and taxes related to equity accounts 163,000 515,000 263,000 Other current liabilities 25,000 66,000 (57,000) ---------- ---------- ---------- Net Cash Provided By Operating Activities 2,688,000 1,218,000 1,202,000 ---------- ---------- ---------- See notes to financial statements. F-6 QUALITY SYSTEMS, INC. STATEMENTS OF CASH FLOWS (continued) Years Ended March 31, ---------------------------------- 1996 1995 1994 ----------- ---------- ------------ Cash Flows from Investing Activities: Proceeds from sales of short-term investments 1,426,000 12,725,000 10,074,000 Purchases of short-term investments (1,114,000) (8,758,000)(13,810,000) Additions to equipment and improvements, net (240,000) (162,000) (101,000) Additions to capitalized software costs (382,000) (191,000) (183,000) Investment in Clinitec International, Inc. (1,027,000) - - Change in other assets - 9,000 17,000 ------------ ---------- ------------ Net Cash Provided By (Used In) Investing Activities (1,337,000) 3,623,000 (4,003,000) ------------ ---------- ------------ Cash Flows from Financing Activities: Proceeds from exercise of stock options 182,000 151,000 402,000 Proceeds from issuance of common stock 21,030,000 - - Common stock issuance costs (776,000) - - ------------ ---------- ------------ Net Cash Provided By Financing Activities 20,436,000 151,000 402,000 ------------ ---------- ------------ Net Increase (Decrease) in Cash and Cash Equivalents 21,787,000 4,992,000 (2,399,000) Cash and Cash Equivalents, beginning of year 6,085,000 1,093,000 3,492,000 ------------ ---------- ------------ Cash and Cash Equivalents, end of year $27,872,000 $6,085,000 $ 1,093,000 ============ ========== ============
Supplemental Information - During fiscal 1996, 1995 and 1994 the Company made income tax payments of $1,146,000, $10,000 and $86,000, respectively. See notes to financial statements. F-7 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 1 - DESCRIPTION OF BUSINESS Quality Systems, Inc. ("QSI" or the "Company") develops and markets proprietary information systems for medical and dental group practices, physician hospital organizations, management service organizations, health maintenance organizations and community health centers. The Company's proprietary software systems include summary medical records and general patient information, appointment scheduling, billing, insurance claims submission and processing, managed care implementation and referral management, treatment outcome studies, treatment planning, drug formularies, word processing and accounting. In addition to providing fully integrated solutions to its client, the Company provides its clients with comprehensive hardware and software maintenance and support services, system training services and electronic claims submission services. In May 1995, the Company acquired an ownership interest in a developer of an electronic medical records product (see Note 11). NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition - Licenses, sales of computer systems and system upgrades are recognized at the time the basic software and hardware is shipped and the estimated costs to complete the system are not considered significant in accordance with Statement of Position 91-1, "Software Revenue Recognition". Estimated costs to complete are normally insignificant and are charged to expense in the period in which the sales are recognized. These costs typically include labor and travel costs associated with training, installation and data conversion. If estimated costs to complete are significant, revenue is recognized on a percentage of completion basis. Maintenance revenue is recognized ratably over the life of the contract. Advance maintenance revenue billings are included in deferred service revenue on the accompanying balance sheets. Sales of supplies are recognized at the time of shipment. Cash equivalents - The Company considers all highly liquid interest earning deposits purchased with an original maturity of three months or less to be cash equivalents. Short-term investments - The Company classifies its short-term investments into one of the following categories: Held to maturity - Debt securities for which the Company has the intent and the ability to hold to maturity. Trading - Debt securities that do not meet the "intent-to-hold" criterion and equity securities, both of which are bought and held principally for the purpose of being sold in the near term. F-8 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) Available-for-sale - Debt securities that do not meet the "intent-to-hold" criterion and equity securities that are not classified as trading securities. Held to maturity securities are carried in the balance sheet at cost (unless there is a decline in the value of the individual securities that is not due to temporary declines), and realized gains and losses are recorded in the income statement in the period that they are earned or incurred. Trading securities are carried in the balance sheet at fair market value and unrealized gains and losses are recorded in the statement of income. Available-for-sale securities are carried in the balance sheet at fair market value; realized gains and losses are recorded in the statement of income when they are earned or incurred, and unrealized gains and losses, net of tax effect, are recognized as a component of shareholders' equity. Realized gains and losses from investment transactions are determined on a first-in, first-out basis. Accounts Receivable - A majority of the Company's system sales are financed by third-party sources, while the Company provides credit for most maintenance contract sales. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential credit losses, which have been within management's expectations. Inventories - Inventories are valued at lower of cost (first-in, first-out) or market. Certain inventories are maintained for customer support pursuant to service agreements and are amortized over a five-year period using the straight-line method. Equipment and Improvements - Equipment and improvements are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of equipment and improvements are provided over the estimated useful lives of the assets, or the related lease terms if shorter, by the straight-line method. Useful lives range from five to seven years. Software Development Costs - Development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional development costs are capitalized in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed". Such costs are amortized over the lesser of five years or the economic life of the related product. Beginning in fiscal 1996, the amortization period for new costs was changed to three years, the impact of which was immaterial in fiscal F-9 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) 1996. The Company performs an annual review of the recoverability of such capitalized software costs. At the time a determination has been made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts would be written off. Income Taxes - Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. Valuation allowances are established as a reduction of net deferred tax assets when management cannot determine that the recoverability of such assets is probable. Earnings per Share - The difference between primary and fully diluted earnings per share for each of the years ended March 31, 1996 and 1995 was not significant and earnings per share was calculated based on the weighted average number of common shares and common share equivalents outstanding of 4,788,000 and 4,606,000, respectively. Primary and fully diluted earnings per share for the year ending March 31, 1994 are based on the weighted average number of common shares and common share equivalents outstanding of 4,342,000 and 4,461,000, respectively. Common stock equivalents consist primarily of stock options and are calculated using the treasury stock method. Stock-Based Compensation - In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.123, "Accounting For Stock-Based Compensation" ("SFAS No. 123"), which will be effective for the Company beginning April 1, 1996. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board Opinion No. 25 ("APB. 25"), which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB. 25 to its stock-based compensation awards to employees and will disclose the required pro forma effect on net income and earnings per share beginning in fiscal 1997. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results in future periods could differ from those estimates made in the current year. F-10 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) Reclassifications - Certain amounts in the accompanying financial statements have been reclassified to conform with the March 31, 1996 presentation. NOTE 3 - CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
At March 31, 1996 and 1995, the Company had cash equivalents of $27,079,000 and $5,349,000, respectively, invested in a major national brokerage firm's institutional fund that specializes in U.S. government securities and commercial paper with high credit ratings. Short-term investments consist of the following components: March 31, ---------------------- 1996 1995 ---------- ---------- Trading securities $ 758,000 $ 927,000 Available-for-sale securities 314,000 310,000 ---------- ---------- $1,072,000 $1,237,000 ========== ==========
The following is a summary of available-for-sale securities:
March 31, ----------------------- 1996 1995 ---------- ---------- Aggregate market $ 314,000 $ 310,000 Gross unrealized holding losses $ 78,000 $ 146,000 Amortized cost basis for debt securities issued by foreign governments, denominated in U.S. dollars. $ 392,000 $ 456,000
F-11 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued)
Investment income for each of the three years ended March 31, 1996 consists of the following: Years Ended March 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Interest income $ 433,000 $ 196,000 $ 305,000 Net gains (losses) on short-term investments -- Realized (10,000) 151,000 194,000 Unrealized 90,000 82,000 (99,000) Other 20,000 - - ---------- ---------- ---------- $ 533,000 $ 429,000 $ 400,000 ========== ========== ==========
F-12 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) NOTE 4 - CAPITALIZED SOFTWARE COSTS
Capitalized software costs at March 31, 1996 and 1995 were net of accumulated amortization of $867,000 and $582,000, respectively. Information related to net capitalized software costs is as follows: Years Ended March 31, --------------------------------- 1996 1995 1994 --------- --------- --------- Beginning of year $ 502,000 $ 509,000 $ 491,000 Capitalized 382,000 191,000 183,000 Amortization (285,000) (198,000) (165,000) --------- --------- --------- End of year $ 599,000 $ 502,000 $ 509,000 ========= ========= =========
NOTE 5 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
March 31, ---------------------------- 1996 1995 ---------- ---------- INVENTORIES: Computer systems and components $ 509,000 $ 420,000 Replacement parts for certain client systems, net of accumulated amortization of $1,015,000 and $1,026,000, respectively 295,000 308,000 Miscellaneous parts and supplies 49,000 55,000 ---------- ---------- $ 853,000 $ 783,000 ========== ==========
F-13 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued)
EQUIPMENT AND IMPROVEMENTS: March 31, ----------------------------- 1996 1995 ------------- -------------- Computers and electronic test equipment $1,393,000 $1,251,000 Furniture and fixtures 330,000 312,000 Vehicles 88,000 110,000 Leasehold improvements 117,000 117,000 ---------- ---------- 1,928,000 1,790,000 Accumulated depreciation and amortization (1,356,000) (1,255,000) ---------- ---------- $ 572,000 $ 535,000 ========== ==========
OTHER CURRENT LIABILITIES:
March 31, ----------------------------- 1996 1995 ------------- -------------- Accrued payroll and related expenses $ 498,000 $ 427,000 Deferred compensation 370,000 185,000 Deferred tax liability 34,000 - Other accrued expenses 446,000 492,000 ---------- ---------- $1,348,000 $1,104,000 ========== ==========
F-14 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) NOTE 6 - INCOME TAXES
The income tax provision consists of the following components: Years Ended March 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Federal- Current taxes $ 1,072,000 $ 414,000 $ 309,000 Deferred taxes 109,000 (36,000) - ----------- ----------- ----------- 1,181,000 378,000 309,000 ----------- ----------- ----------- State- Current taxes 305,000 101,000 40,000 Deferred taxes 42,000 (26,000) - ----------- ----------- ----------- 347,000 75,000 40,000 ----------- ----------- ----------- $ 1,528,000 $ 453,000 $ 349,000 =========== =========== ===========
The income tax provision differs from an amount computed at statutory rates as follows: Years Ended March 31, -------------------------------------- 1996 1995 1994 ----------- ----------- ------------ Federal income tax provision at statutory rate $ 1,299,000 $ 481,000 $ 426,000 Increases (decreases) resulting from: State income taxes 234,000 107,000 121,000 Change in valuation allowance - (86,000) (204,000) Other (5,000) (49,000) 6,000 ----------- ----------- ----------- $ 1,528,000 $ 453,000 $ 349,000 =========== =========== =========== The changes in valuation allowances in 1995 and 1994 are related to benefits arising from federal and state net operating loss carryforwards.
F-15 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued)
The net deferred tax benefits in the accompanying balance sheets include the following components: March 31, ---------------------- 1996 1995 --------- --------- Deferred tax assets - Short-term investments $ - $ 71,000 Accounts receivable 55,000 33,000 Inventories 30,000 27,000 Other current assets 46,000 - Accumulated depreciation 5,000 5,000 Investment, Clinitec International, Inc. 22,000 - Accrued vacation and sick leave 106,000 164,000 Accrued liability for deferred compensation 169,000 100,000 State income taxes 51,000 18,000 --------- --------- 484,000 418,000 --------- --------- Deferred tax liabilities - Short-term investments (3,000) - Inventories (17,000) (22,000) Accumulated depreciation (21,000) (24,000) Capitalized software (259,000) (217,000) Deferred revenue (302,000) (93,000) --------- --------- (602,000) (356,000) --------- --------- $(118,000) $ 62,000 ========= =========
The deferred tax assets and liabilities have been shown net in the accompanying balance sheets based on the long-term or short-term nature of the items which give rise to the deferred amount. NOTE 7 - EMPLOYEE BENEFIT PLANS The Company has a profit sharing and retirement plan (the "Retirement Plan") for the benefit of substantially all of its employees. The Retirement Plan was amended during the fiscal year ended March 31, 1994 to add 401(k) features. Participating employees may defer up to 15% of compensation per year. The Company's annual contribution is determined by the Company's Board of Directors and the Retirement Plan may be amended or discontinued at the discretion of the Board of Directors. Contributions of $20,000, $21,000 and $19,000 were made to the Retirement Plan for the fiscal years ended March 31, 1996, 1995 and 1994, respectively. F-16 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) During the fiscal year ended March 31, 1994, the Company initiated a deferred compensation plan (the "Deferral Plan") for the benefit of officers and key employees. Participating employees may defer all or a portion of their compensation for a Deferral Plan year. In addition, the Company may, but is not required to, make contributions into the Deferral Plan on behalf of participating employees. Each participating employee's deferred compensation and share of Company contributions has been invested in a life insurance policy which has death benefit and mutual fund features. Investment decisions are made by each participating employee from a family of mutual funds. The Company is the owner and beneficiary of the life insurance policies and has an obligation to pay the greater of the death benefit or the net cash surrender value upon each employee's death or termination. The net cash surrender value of the life insurance policies and the related Company obligation for deferred compensation was $370,000 and $185,000 at March 31, 1996 and 1995, respectively, which have been included in the accompanying balance sheets. The Company made contributions of $11,000, $10,000 and $8,000 to the Deferral Plan for the fiscal years ended March 31, 1996, 1995 and 1994, respectively. NOTE 8 - EMPLOYEE STOCK OPTION PLANS 1981 Stock option Plan - Under a shareholder approved incentive stock option plan (the "1981 Plan") for officers and employees, 365,384 shares of common stock were reserved for the issuance of options to purchase shares of common stock at the fair market value at the date of grant. On October 31, 1991, the 1981 incentive stock option plan expired, and no additional shares could be granted under the plan. As of March 31, 1995, all outstanding shares under this plan had been excercised. 1989 Stock Option Plan - During fiscal 1990, the Company's shareholders approved a stock option plan (the "1989 Plan") under which 1,000,000 shares of common stock have been reserved for the issuance of options. The 1989 Plan provides that salaried officers or key employees, and non-employee directors of the Company or its subsidiaries may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 85% of their fair market value on the option grant date. F-17 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) Upon an acquisition of the Company by merger or asset sale, each outstanding option will be subject to accelerated vesting under certain circumstances. The 1989 Plan will terminate on May 30, 1999, unless sooner terminated by the Board. At March 31, 1996, options for 21,625 shares were exercisable and 596,500 shares were available for future grant under the 1989 Plan.
A summary of option transactions under the 1981 Plan and 1989 Plan for the three years ended March 31, 1996 is as follows: Years Ended March 31, ---------------------------------- 1996 1995 1994 ------- ------- ------- Options - Outstanding at beginning of year 219,700 305,500 536,000 Granted 30,000 5,000 101,000 Exercised (117,600) (90,800) (258,500) Cancelled (2,000) - (73,000) ------- ------- ------- Outstanding at end of year 130,100 219,700 305,500 ======= ======= ======= Range of option exercise prices - Granted $4.88-$26.50 $3.75 $1.50 Exercised $1.38-$ 3.75 $1.50-$1.69 $1.06-$1.69 Cancelled $26.50 $ - $1.06-$1.81
F-18 QUALITY SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (continued) NOTE 9 - COMMITMENTS AND CONTINGENCIES The Company leases its facilities and offices under noncancelable operating lease agreements which contain lease renewal options through October 1996. The Company has rental commitments in fiscal 1997 of $211,000. Total rental expense for all operating leases was $385,000, $387,000 and $412,000 for the years ended March 31, 1996, 1995 and 1994, respectively. The Company is a party to various claims, legal actions and complaints arising in the ordinary course of business. The Company believes such matters are without merit, or involve such amounts that unfavorable disposition would not have a material adverse effect on the Company's financial statements. NOTE 10 - RELATED PARTY TRANSACTION During the year ended March 31, 1996, the Company sold a computer system for $335,000 to an entity whose founder and chief executive officer is also a QSI Director. In connection with this sale, the Company also entered into an agreement to pay a license fee based upon future revenues, if any, from certain software templates that may be developed by the entity in the future. NOTE 11 - SUBSEQUENT EVENT In April 1995, the Company entered into a strategic relationship with Clinitec International, Inc. ("Clinitec"), a developer of electronic medical records software systems. In May 1995 in connection with this strategic relationship, QSI acquired a 25% ownership interest in Clinitec for $1.0 million in cash. On May 16, 1996, QSI and Clinitec executed an Agreement and Plan of Merger, which was effected on May 17, 1996, whereby QSI acquired the remaining 75% of Clinitec that it did not already own for $4.9 million in cash and 309,846 shares of QSI Common Stock. For purposes of the acquisition, the shares were valued at $6.9 million, or $22.25 per share, for a total purchase price of $11.8 million for this remaining 75% ownership interest. On May 17, 1996, in accordance with the terms of the transaction, Clinitec was merged with and into a newly formed, wholly-owned subsidiary of the Company. For accounting purposes, the acquisition will be treated as a purchase transaction during the quarter ending June 30, 1996. In connection with this accounting treatment, the Company anticipates taking a net write off for purchased in-process research and development of approximately $8.3 million during the June 30, 1996 quarter. The exact amount of the write off is subject to change based upon the final determination of the purchase price allocation. F-19 EXHIBIT 10.4.3 -------------- SECOND AMENDMENT TO THE QUALITY SYSTEMS, INC. RETIREMENT SAVINGS PLAN The Quality Systems, Inc. Retirement Savings Plan is hereby amended, effective April 1, 1995, in the following particulars: 1. Article I, Paragraph O. (definition of "Eligible Employee") is amended by adding the following subparagraph 3.: "3. A Key Employee as defined in Paragraph AG. of this Article I. A Key Employee shall not be eligible to make Salary Deferral Contributions, and shall not be eligible to receive Employer Matching or Employer Supplemental contributions." 2. Effective April 1, 1995, all Accounts of each Participant in the Plan attributable to the former Quality Systems, Inc. Profit Sharing Plan on April 1, 1995 are fully vested and nonforfeitable. Article V, Paragraph A.2. is amended by adding the following paragraph to read as follows: "A Participant's Profit Sharing Plan Account(s) attributable to the old Quality Systems, Inc. Profit Sharing Plan shall be fully vested and nonforfeitable at all times, and shall not be subject to divestment for cause." 3. Except as amended above, the Quality Systems, Inc. Retirement Savings Plan is in full force and effect. Date 5/18/95 ------- QUALITY SYSTEMS, INC. By /s/ Janet M. Razin ADMINISTRATIVE COMMITTEE APPROVED AS TO FORM: BARTON, KLUGMAN & OETTING Attorneys for Quality Systems, Inc. F-20 EXHIBIT 10.4.3 (Continued) -------------- THIRD AMENDMENT TO THE QUALITY SYSTEMS, INC. RETIREMENT SAVINGS PLAN The Quality Systems, Inc. Retirement Savings Plan is hereby amended, effective February 12, 1996, in the following particulars: 1. The following sentence shall be added at the end of Article IV.1 of the Plan to read as follows: "No rollovers or transfers from other plans shall be permitted after February 12, 1996." 2. The following sentence shall be added at the end of Article VI.K of the Plan to read as follows: "5. A Participant may also direct the Committee to pay all or a portion of amounts allocated to the Participant's Rollover Account directly to an Eligible Retirement Plan if the amounts have been held in the Rollover Account for at least two years." DATED: February 12, 1996 ----------------- QUALITY SYSTEMS, INC. By /s/ Janet M. Razin ADMINISTRATIVE COMMITTEE APPROVED AS TO FORM: BARTON, KLUGMAN & OETTING Attorneys for Quality Systems, Inc. F-21 EXHIBIT 23.1 ------------ INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Number 2-82773 and 33-31949 on Form S-8 of our report dated May 31, 1996 appearing in this Annual Report on Form 10-KSB for Quality Systems, Inc. for the year ended March 31, 1996. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Costa Mesa, California June 21, 1996 F-22
 

5 YEAR YEAR MAR-31-1996 MAR-31-1995 MAR-31-1996 MAR-31-1995 27,872,000 6,085,000 1,072,000 1,237,000 4,751,000 2,997,000 126,000 77,000 853,000 783,000 135,000 273,000 1,928,000 1,790,000 (1,356,000) (1,255,000) 37,272,000 12,668,000 4,487,000 3,343,000 0 0 0 0 0 0 56,000 45,000 32,645,000 9,143,000 37,272,000 12,668,000 9,623,000 5,681,000 16,732,000 12,049,000 0 0 7,929,000 6,060,000 5,464,000 5,003,000 0 0 0 0 3,821,000 1,415,000 1,528,000 453,000 2,293,000 962,000 0 0 0 0 0 0 2,293,000 962,000 .48 .21 .48 .21