<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ ] SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13801
QUALITY SYSTEMS, INC.
(Exact name of registrant as specified 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 92780
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (714) 731-7171
NOT APPLICABLE
(Former name, former address and former
fiscal year, if changed, since last year)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
Yes XX No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
6,214,916 shares of Common Stock, $.01 par value, as of July 31, 1999
<PAGE> 2
PART I. CONSOLIDATED FINANCIAL INFORMATION.
------- -----------------------------------
Item 1. Financial Statements.
- ------- ---------------------
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, March 31,
1999 1999
---------- ----------
<S> <C> <C>
(Unaudited)
Current Assets:
Cash and cash equivalents $ 16,664 $ 14,196
Short-term investments 242 245
Accounts receivable, net 10,857 12,488
Inventories 760 772
Other current assets 1,157 1,019
---------- ----------
Total current assets 29,680 28,720
Equipment and Improvements, net 1,744 1,783
Capitalized Software Costs, net 2,138 2,144
Deferred Tax Asset 3,213 3,254
Excess of Cost Over Net Assets
of Acquired Business, net 2,368 2,452
Other Assets 1,895 1,865
---------- ----------
Total assets $ 41,038 $ 40,218
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,215 $ 1,813
Deferred service revenue 5,231 4,484
Other current liabilities 4,182 4,257
---------- ----------
Total liabilities 10,628 10,554
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.01 par value, 20,000 shares
authorized, 6,215 and 6,214 shares issued
and outstanding, respectively 62 62
Additional paid-in capital 35,572 35,568
Accumulated deficit (5,224) (5,966)
---------- ----------
Total shareholders' equity 30,410 29,664
---------- ----------
Total liabilities and
shareholders' equity $ 41,038 $ 40,218
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 3
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies $ 5,116 $ 3,930
Maintenance and other services 3,986 3,295
-------- --------
9,102 7,225
Cost of Products and Services 4,058 4,040
-------- --------
Gross Profit 5,044 3,185
Selling, General and
Administrative Expenses 3,040 3,328
Research and Development Costs 892 905
-------- --------
Income (Loss) from Operations 1,112 (1,048)
Investment Income 166 176
-------- --------
Income (Loss) before Provision
for (Benefit from) Income Taxes 1,278 (872)
Provision for
(Benefit from) Income Taxes 536 (269)
-------- --------
Net Income (Loss)
and Comprehensive Income (Loss) $ 742 $ (603)
======== ========
Net Income (Loss) per Share,
basic & diluted $ 0.12 $ (0.10)
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 742 $ (603)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 644 600
Loss on short-term investments 3 31
Deferred income taxes (77) (217)
Changes in:
Accounts receivable 1,631 315
Inventories 12 421
Other current assets (20) (78)
Other assets (114) (34)
Accounts payable (598) 188
Deferred service revenue 747 361
Income taxes payable and taxes
related to equity accounts (309) (683)
Other current liabilities 234 (59)
-------- --------
Net Cash Provided by
Operating Activities 2,895 242
-------- --------
Cash Flows from Investing Activities:
Net additions to
equipment and improvements (103) (167)
Additions to capitalized software costs (323) (333)
Purchase of net assets of MicroMed
Healthcare Information Systems, Inc. - (3,840)
Change in other assets (5) 8
-------- --------
Net Cash Used in Investing Activities (431) (4,332)
-------- --------
Cash Flows from Financing Activities:
Proceeds from
exercise of stock options 4 15
-------- --------
Net Cash Provided by
Financing Activities 4 15
-------- --------
Net Increase (Decrease)
in Cash and Cash Equivalents 2,468 (4,075)
Cash and Cash Equivalents,
beginning of period 14,196 16,107
-------- --------
Cash and Cash Equivalents, end of period $ 16,664 $ 12,032
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 5
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(in thousands)
Supplemental Information - During the three months ended June 30, 1999
and 1998, the Company made income tax payments, net of refunds received,
of $928 and $624, respectively.
<TABLE>
<CAPTION>
Detail of businesses acquired Three Months
in purchase transactions: Ended June 30,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Purchased In-Process
Research and Development $ - $ -
Fair Value of Assets Acquired - -
Liabilities Assumed - -
Common Stock Issued in the Acquisition - (1,836)
Retirement of Acquisition Obligation - 5,676
-------- --------
Cash Paid for the Acquisition,
net of cash acquired $ - $ 3,840
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 6
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- ------ ---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the requirements of Form 10-Q and, therefore,
do not include all information and footnotes which would be presented were
such financial statements prepared in accordance with generally accepted
accounting principles, and should be read in conjunction with the audited
financial statements presented in the Company's Annual Report for the
fiscal year ended March 31, 1999. In the opinion of management, the
accompanying financial statements reflect all adjustments which are
necessary for a fair presentation of the results of operations for the
interim periods presented. The results of operations for such interim
periods are not necessarily indicative of results of operations to be
expected for the full year.
NOTE 2 - ACQUISITION OF MICROMED HEALTHCARE INFORMATION SYSTEMS, INC.
- ------ ------------------------------------------------------------
On May 15, 1997, the Company acquired substantially all of the assets of
MicroMed Healthcare Information Systems, Inc. ("MicroMed"), a developer
and marketer of proprietary information systems utilizing a graphical user
interface client-server platform for medical group practices. The purchase
price consisted of an initial cash payment of $4.8 million paid at the
closing of the transaction and an additional payment, based upon certain
operating results of MicroMed for the twelve-month period ended March 31,
1998, of $5.7 million due no later than June 29, 1998. The additional
payment, paid on June 29, 1998, consisted of $3.8 million in cash and
245,454 shares of the Company's Common Stock valued at $1.8 million, or
$7.48 per share. The shares of Common Stock could not be sold or otherwise
transferred in any manner until June 1999.
NOTE 3 - STOCK REPURCHASE
- ------ ----------------
In February 1997, the Company's Board of Directors authorized the
repurchase on the open market of up to 10% of the shares of the Company's
outstanding Common Stock at various times through February 1998, subject
to compliance with applicable laws and regulations. On February 9, 1998,
the Company's Board of Directors extended this authorization through
February 9, 1999 and on February 9, 1999 further extended this
authorization through February 28, 2000. The timing and amount of any
repurchase is at the discretion of the Company's management. The Company's
management could, in the exercise of its judgment, repurchase fewer shares
than authorized. During the three months ended June 30, 1999, the Company
did not repurchase any shares. Since the inception of the repurchase
authorization through July 31, 1999, 92,500 shares have been repurchased at
a cost of $518,000.
<PAGE> 7
NOTE 4 - INCOME TAXES
- ------ ------------
The provision for (benefit from) income taxes for the three months ended
June 30, 1999 and 1998 differ from the expected combined statutory rates
primarily due to the impact of non-deductible amortization of certain
intangible assets acquired in the May 1996 acquisition of Clinitec
International, Inc. and the effect of varying state income tax rates.
NOTE 5 - NET INCOME (LOSS) PER SHARE
- ------ ---------------------------
The following table reconciles the weighted average shares outstanding for
basic and diluted net income per share for the period indicated.
<TABLE>
<CAPTION>
Three Months
Ended June 30, 1999
------------------------
(in thousands except
per share amounts)
<S> <C>
Net income $ 742
-----------
Basic net income per common share:
Weighted average of common shares outstanding 6,215
-----------
Basic net income per common share $ 0.12
===========
Diluted net income per share:
Weighted average of common shares outstanding 6,215
Weighted average of common shares equivalents--
Weighted average options outstanding 3
-----------
Weighted average number of common
and common equivalent shares 6,218
-----------
Diluted net income per common share $ 0.12
===========
</TABLE>
The net loss per share, basic and diluted, for the three months ended
June 30, 1998 was computed using the weighted average number of shares
actually outstanding during the period of 6,002,000 and any common share
equivalents were excluded because their impact would have been anti-
dilutive.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations.
--------------------------
Except for the historical information contained herein, the matters
discussed in this Quarterly Report on Form 10-Q, including discussions of
the Company's product development plans and business strategies and market
factors influencing the Company's results, are forward-looking statements
that involve certain risks and uncertainties. Actual results may differ
from those anticipated by the Company as a result of various factors, both
foreseen and unforeseen, including, but not limited to, the Company's
ability to continue to develop new products and increase systems sales in a
market characterized by rapid technological evolution, consolidation, and
competition from larger, better capitalized competitors. Many other
economic, competitive, governmental and technological factors could impact
the Company's ability to achieve its goals and interested persons are urged
to review the risks described below, as well as in the Company's other
public disclosures and filings with the Securities and Exchange Commission.
COMPANY OVERVIEW.
Quality Systems, Inc. ("QSI") and its wholly-owned subsidiaries, Clinitec
International, Inc. ("Clinitec") and MicroMed Healthcare Information
Systems, Inc. ("MicroMed"), (collectively, the "Company") develop and
market healthcare information systems that automate medical and dental
group practices, physician hospital organizations ("PHOs"), management
service organizations ("MSOs"), community health centers and dental
schools. In response to the growing need for more comprehensive, cost-
effective information solutions for physician and dental practices, the
Company's systems provide its clients with the ability to redesign patient
care and other workflow processes, improve productivity, reduce information
processing and administrative costs, and provide multi-site access to
patient information. The Company's proprietary software systems include
general patient information, electronic medical records, appointment
scheduling, billing, insurance claims submission and processing, managed
care plan implementation and referral management, treatment outcome
studies, treatment planning, drug formularies, dental charting, and letter
generation. In addition to providing fully integrated software information
solutions to its clients, the Company offers comprehensive hardware and
software installation services, maintenance and support services, system
training services, and electronic insurance claims submission services.
The Company currently has an installed base of more than 500 healthcare
information systems serving PHOs, MSOs, group practices, specialty
practices, dental schools and other healthcare organizations, each of which
consists of from one to 250 physicians or dentists. The Company believes
that as healthcare providers are increasingly required to reduce costs
while maintaining the quality of healthcare, the Company will be able to
capitalize on its strategy of providing fully integrated information
systems and superior client service.
QSI is a California Corporation formed in 1974 and was founded with an
early focus on providing information systems and services primarily for
dental group practices. QSI's initial "turnkey" systems were designed to
improve productivity while reducing information processing costs and
personnel requirements. In the mid-1980's, QSI capitalized on the
opportunity presented by the increasing pressure of cost containment on
<PAGE> 9
physicians and healthcare organizations and further expanded its
information processing systems into the broader medical market. Today, QSI
primarily develops and provides integrated character-based healthcare
information systems utilizing a UNIX* operating system for both the medical
and dental markets ("Legacy Product"). These expandable systems operate on
a stand-alone basis or in a networked environment.
Augmenting its medical practice management software system, QSI added
Clinitec's electronic medical records software, NextGen** EMR, to its
product line in 1995 and completed its acquisition of Clinitec in May 1996.
NextGen EMR allows healthcare providers to create and maintain medical
records using a series of user-definable clinical "templates." Data is
generally captured using a light pen or a mouse, and entries are then
turned into sentences and/or paragraphs to create documentation. NextGen
EMR also supports the scanning and annotation of paper documents,
photographs and X-rays, and contains many other advanced features. NextGen
EMR is marketed both in conjunction with the Company's practice management
software offerings as well as on a stand-alone basis where NextGen EMR may
interface with other practice management systems. With the addition of
NextGen EMR, the Company believes that it currently provides a
comprehensive information management solution for the medical marketplace.
During fiscal 1998, the Company released a new product, the Clinical
Product Suite ("CPS"), a comprehensive dental solution designed
specifically for the large dental group practice environment. CPS
integrates the dental Legacy Product with a computer-based clinical
information system that incorporates a wide range of clinical tools,
including electronic charting of dental procedures, treatment plans and
existing conditions; periodontal charting, via light-pen, voice-activation,
or keyboard entry, for full periodontal examinations and PSR scoring;
digital imaging of x-ray and intra-oral camera images; computer-based
patient education modules; full access to patient information, treatment
plans, and insurance plans; and document and image scanning for digital
storage and linkage to the electronic patient record. CPS incorporates a
Windows-based client-server technology consisting of one or more file
servers together with any combination of one or more desktop, laptop, or
pen-based PC workstations. The file server(s) used in connection with CPS
utilize a Windows NT*** operating system. Based on the server configuration
chosen, CPS is scalable from one to hundreds of workstations.
Further augmenting its medical practice management system product line, the
Company purchased MicroMed in May 1997. MicroMed develops and markets
proprietary medical practice management systems. MicroMed's practice
management system, NextGen EPM, has been developed with a client-server
architecture; a GUI design utilizing either Windows 95***, Windows 98*** or
Windows NT operating system platforms; and, a platform independent
relational database that is ANSI SQL-compliant. NextGen EPM is designed to
provide a flexible, enterprise-wide solution employing a master patient
index.
* UNIX is a registered trademark of AT&T Corporation.
** NextGen is a registered trademark of Clinitec International, Inc.
*** Microsoft Windows, Windows NT, Windows 95 and Windows 98 are
registered trademarks of Microsoft Corporation.
<PAGE> 10
RISK FACTORS.
COMPETITION.
The market for healthcare information systems is intensely competitive and
the Company faces significant competition from a number of different
sources. The electronic medical records market, in particular, is subject
to rapid changes in technology and the Company expects that competition in
this portion of the market will increase as new competitors enter the
marketplace. In addition, several of the Company's competitors have
significantly greater name recognition as well as substantially 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 either group
practice management or clinical systems. Furthermore, the Company also
competes indirectly and to varying degrees with other major healthcare
related 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 or new product
introductions will not have a material adverse effect on the Company's
business, results of operations and financial condition. Competitive
pressures and other factors, such as new product introductions by the
Company or its competitors, may result in price or market share erosion
that could have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, the Company believes that once a healthcare provider has
chosen a particular healthcare 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. Furthermore, if the healthcare
industry continues to undergo further consolidation as it has recently
experienced, each sale of the Company's systems will assume even greater
importance to the Company's business, results of operations and financial
condition. The Company's inability to make initial sales of its systems to
either newly formed groups and/or healthcare providers that are replacing
or substantially modifying their healthcare information systems could have
a material adverse effect on the Company's business, results of operations
and financial condition. If new systems sales do not materialize,
maintenance service revenues can be expected to decrease over time due to
the effect of failure to capture new maintenance revenues therefrom in
combination with attrition of existing maintenance revenues associated with
the Company's current clients whose systems become obsolete or are replaced
by competitors' products.
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 system components; the
<PAGE> 11
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 minimal 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.
Furthermore, the Company's systems can be relatively large and expensive
and individual systems sales can represent a significant portion of the
Company's revenues for a quarter such that the loss of even one such sale
can have a significant adverse impact on the Company's quarterly
profitability. Clients often defer systems purchases until the Company's
quarter end, so quarterly results generally cannot be predicted and
frequently are not known until the quarter has concluded. 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 healthcare 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/shipment and the installation cycle is
typically two to four months from contract execution/shipment 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.
Through March 31, 1998, the Company recognized revenue in accordance with
the provisions of the American Institute of Certified Public Accountants
("AICPA") Statement of Position No. 91-1, "Software Revenue Recognition"
("SOP 91-1"). The AICPA has recently adopted Statement of Position No. 97-
2, "Software Revenue Recognition" ("SOP 97-2"), that supersedes SOP 91-1
and became effective for the Company on April 1, 1998. There can be no
assurance that application and subsequent interpretations of this
pronouncement by the Company, its independent auditors or the Securities
and Exchange Commission will not further modify the Company's revenue
recognition policies, or that such modifications would not have a material
adverse effect on the operating results reported in any particular quarter.
There can be no assurance that the Company will not be required to adopt
changes in its licensing or services practices to conform to SOP 97-2, or
that such changes, if adopted, would not result in delays or cancellations
of potential sales of the Company's products.
Due to all of the foregoing factors, it is possible that in some 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.
<PAGE> 12
ACQUISITIONS.
During the past several years, the Company has made two significant
acquisitions of relatively new companies, each of which has products
utilizing newer technology than the Company's Legacy Product and each
company having a limited sales history. Acquisitions involve a number of
special risks, including possible adverse effects on the Company's
operating results, diversion of management's attention, failure to retain
key acquired personnel, amortization of acquired intangible assets, and
risks associated with unanticipated events or liabilities, some or all of
which could have a material adverse effect on the Company's business,
results of operations and financial condition. Customer dissatisfaction or
performance problems at a single acquired business can also have an adverse
effect on the reputation of the Company.
DEPENDENCE ON PRINCIPAL PRODUCT AND NEW PRODUCT DEVELOPMENT.
The Company currently derives substantially all of its net revenues from
sales of its healthcare 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 healthcare
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,
successful introduction and implementation 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 and implemented in a timely manner, meet the
requirements of healthcare providers, or achieve market acceptance. If new
products or product enhancements do not achieve market acceptance, the
Company's business, results of operations and financial condition could be
materially 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.
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. New product development depends upon significant research and
development expenditures which depend ultimately upon sales growth. Any
material weakness in revenues or research funding could impair the
Company's ability to respond to technological advances in the marketplace
and remain competitive. 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
<PAGE> 13
Company's business, results of operations and financial condition will be
materially adversely affected.
In response to increasing market demand, the Company is currently
developing new generations of certain of its software products designed for
the client-server and Internet/intranet environments. 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, Windows 95 and Windows 98, 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 and
Internet/intranet environments. Any such failure or delay could adversely
affect the Company's competitive position or could make the Company's
current products obsolete.
YEAR 2000 ISSUES.
The Company is aware of issues associated with the programming code in
existing computer systems as the millennium approaches. In particular,
software applications that use only two digits to identify a year in the
date field may fail or create errors in the year 2000 ("Year 2000 Issues").
Year 2000 Issues create risk for the Company from unforeseen problems in
computer systems that the Company sells to customers on a nationwide basis
which are used, among other things, to process their financial transactions
and schedule patients ("Company Products"), as well as systems that the
Company uses internally to provide certain services to its customers and to
process its own financial transactions ("Internal Use Systems"). The
potential costs and uncertainties associated with Year 2000 Issues will
depend upon a number of factors, including the Company's proprietary and
third party developed software, hardware (hardware and third party
developed software will hereinafter be referred to collectively as "Third
Party Products") and the nature of the industry in which the Company
operates.
The nature of the Company's business and its relationships with its
customers make it difficult to assess the magnitude of the Company's
potential exposure as a result of Year 2000 Issues. Company Products and
Third Party Products sold by the Company may fail to operate properly or as
expected due to Year 2000 Issues. Such failures could result in system
failures or miscalculations causing disruptions of customers' operations,
including among other things, an inability to process transactions, send
invoices, conduct communications, treat patients or engage in similar
normal business activities. In addition, Company Products and Third Party
Products are often used in conjunction with other vendors' products and
services and the Company must rely on these other vendors to complete the
material remediation efforts necessary with regards to Year 2000 Issues in
connection with such products and services. Should such vendors be unable
to complete such remediation efforts in a timely manner, the use of such
products and services on the same system as Company Products and Third
Party Products may result in system failures. As a result of one or more of
the above potential system failures, certain of the Company's customers may
assert breach of warranty or other claims against the Company relating to
Year 2000 functionality. The assertion of such claims may have a material
adverse impact upon the Company's business, results of operations and
financial condition. Furthermore, the efforts and resources devoted to Year
2000 Issues of current and potential customers of the Company could result
in the deferral, delay or cancellation by customers of current
installations of and plans to purchase systems from the Company.
<PAGE> 14
Internal Use Systems, including both information systems and non-
information systems, may not operate properly or as expected due to Year
2000 Issues. Year 2000 Issues could result in system failures or
miscalculations causing disruption of the Company's operations, including
among other things, an inability to process its own and certain of its
customers' financial transactions, send invoices, conduct communications,
or engage in similar normal business activities. The failure of one or more
Internal Use Systems as a result of Year 2000 Issues may have a material
adverse impact upon the Company's business, results of operations and
financial condition.
LITIGATION.
On April 22, 1997, a purported class action was filed in California
Superior Court on behalf of all persons who purchased the Company's Common
Stock between June 26, 1995 and July 3, 1996. The complaint alleges that
the Company and certain of its officers and directors, as well as other
defendants not affiliated with the Company, violated sections of the
California Corporations Code by issuing positive statements about the
Company that allegedly were knowingly false, in part, in order to assist
the Company and certain of its officers and directors in selling Common
Stock at an inflated price in the Company's March 5, 1996 public offering
and at other points during the period specified. On May 14, 1997, a second
purported class action was filed in the same court essentially repeating
the allegations of the April 22, 1997 suit. On July 1, 1997, a third
purported class action was filed in the United States District Court
repeating essentially the same factual allegations as the April 22, 1997
suit and purports to state claims under the Federal securities laws. The
Company and its named officers and directors deny all allegations of
wrongdoing made against them in these suits, consider the allegations
groundless and without merit, and intend to vigorously defend against these
actions.
On March 23, 1999, a purported class action and derivative complaint was
filed in the Superior Court of the State of California for the County of
Orange, on behalf of all non-director shareholders, and derivatively on
behalf of the Company, alleging that certain directors of the Company
breached their fiduciary duties by allegedly entrenching themselves in
their positions of control, failing to ensure that third-party offers
involving the Company were fully and fairly considered, and/or failing to
conduct a reasonable inquiry to assure the maximization of shareholder
value. The complaint seeks declaratory and injunctive relief, an accounting
of monetary damages allegedly suffered by plaintiff and the purported
class, and attorneys' fees. The named directors deny all allegations of
wrongdoing made against them in this suit, consider the allegations
groundless and without merit, and intend to vigorously defend against the
action.
The pending Federal and state securities actions and the derivative action
are in the early states of procedure. Consequently, at this time it is not
reasonably possible to estimate the damage, or the range of damages, if
any, that the Company might incur in connection with such actions. However,
the uncertainty associated with substantial unresolved litigation may be
expected to have an adverse impact on the Company's business. In
particular, such litigation could impair the Company's relationships with
existing customers and its ability to obtain new customers. Defending such
litigation will likely result in a diversion of management's time and
attention away from business operations, which could have a material
adverse effect on the Company's business, results of operations and
financial condition. Such litigation may also have the effect of
discouraging potential acquirors from bidding for the Company or reducing
the consideration such acquirors would otherwise be willing to pay in
connection with an acquisition.
<PAGE> 15
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 and are often not enforced as
vigorously as those in 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 arrangement with the party asserting the claim. As
competing healthcare 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, results of operations and financial condition. 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.
ABILITY TO MANAGE GROWTH.
The Company has experienced periods of growth and increased personnel,
which has placed, and may continue to place, a significant strain on the
Company's resources. The Company also 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 qualified individuals in such capacities within a reasonable
timeframe, 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 administrative and financial 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.
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.
The Company does not maintain key man life insurance on any of its
employees. 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
<PAGE> 16
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. Furthermore, the Company may need to grant additional
stock options to key employees and provide other forms of incentive
compensation to attract and retain such key personnel.
PRODUCT LIABILITY.
Certain of the Company's products provide applications that relate to
patient clinical 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, results of operations and financial condition. 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, results of
operations and financial condition.
UNCERTAINTY IN HEALTHCARE INDUSTRY; GOVERNMENT REGULATION.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement processes and
operation of healthcare facilities. During the past several years, the
healthcare industry has been subject to an increase in governmental
regulation of, among other things, reimbursement rates and certain capital
expenditures. In the past, various legislators have announced that they
intend to examine proposals to reform certain aspects of the U.S.
healthcare system including proposals which may increase governmental
involvement in healthcare, lower reimbursement rates and otherwise change
the operating environment for the Company's clients. Healthcare 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
healthcare 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 healthcare reforms might have on its business,
results of operations and financial condition.
The Company's software may be subject to regulation by the U.S. Food and
Drug Administration ("FDA") as a medical device. Such regulation could
require the registration of the applicable manufacturing facility and
software/hardware products, application of detailed record-keeping and
manufacturing standards, and FDA approval or clearance prior to marketing.
An approval or clearance could create delays in marketing, and the FDA
<PAGE> 17
could require supplemental filings or object to certain of these
applications, the result of which could have a material adverse effect on
the Company's business, results of operations and financial condition.
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 consolidated
statements of operations.
<TABLE>
<CAPTION>
Three Months
Ended
June 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Net Revenues:
Sales of computer systems, upgrades and supplies 56.2% 54.4%
Maintenance and other services 43.8 45.6
------ ------
100.0 100.0
Cost of Products and Services 44.6 55.9
------ ------
Gross Profit 55.4 44.1
Selling, General and Administrative Expenses 33.4 46.1
Research and Development Costs 9.8 12.5
------ ------
Income (Loss) from Operations 12.2 (14.5)
Investment Income 1.8 2.4
------ ------
Income (Loss) before Provision
for (Benefit from) Income Taxes 14.0 (12.1)
Provision for (Benefit from) Income Taxes 5.9 (3.7)
------ ------
Net Income (Loss) 8.1% (8.4)%
====== ======
</TABLE>
<PAGE> 18
FOR THE THREE-MONTH PERIODS ENDED JUNE 30, 1999 AND 1998.
The Company's net income for the three months ended June 30, 1999 was
$742,000, or $0.12 per share on a basic and diluted basis, as compared to a
net loss of $603,000, or $0.10 per share on a basic and diluted basis,
for the three months ended June 30, 1998.
Net Revenues. Net revenues for the three months ended June 30, 1999
increased 26.0% to $9.1 million from $7.2 million for the three months
ended June 30, 1998. Sales of computer systems, upgrades and supplies
increased 30.2% to $5.1 million from $3.9 million while net revenues from
maintenance and other services grew 21.0% to $4.0 million from $3.3 million
during the comparable periods. The increase in net revenues from sales of
computer systems, upgrades and supplies was principally the result of
increases in the sales of NextGen EPM and NextGen EMR systems offset in
part by a decrease in sales of the Legacy Product. The increase in
maintenance and other services net revenue resulted principally from an
increase in revenues from the Company's increased client base from which to
generate maintenance and other service revenue together with an increase in
revenues generated from the Company's electronic data interchange services.
Cost of Products and Services. Cost of products and services for the three
months ended June 30, 1999 and 1998 were relatively unchanged at $4.1
million while cost of products and services as a percentage of net revenues
decreased to 44.6% from 55.9% during the comparable periods. The cost of
products and services as a percentage of net revenues decreased while the
dollar amount remained unchanged as a result of the impact of increased
sales in the June 30, 1999 period together with a change in the relative
mix of hardware content in such sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1999 decreased
8.7% to $3.0 million as compared to $3.3 million for the three months ended
June 30, 1998. Selling, general and administrative expenses as a percentage
of net revenues decreased to 33.4% from 46.1%. The decrease in the amount
of such expenses resulted primarily from the cost savings effected with the
merger beginning in October 1998 of the NextGen EPM and NextGen EMR sales
forces and related marketing efforts. The decrease of such expenses as a
percentage of net revenues resulted from the increase in net revenues
between the comparable quarters together with the aforementioned cost
savings.
Research and Development Costs. Research and development costs for the
three months ended June 30, 1999 and 1998 were relatively unchanged at
approximately $900,000. Research and development costs as a percentage of
net revenues decreased to 9.8% as compared to 12.5% for the respective
periods primarily as a result of the effect of the increased sales in the
June 1999 quarter.
Investment Income. Investment income for the three months ended June 30,
1999 and 1998 remained relatively unchanged at approximately $170,000.
Provision for Income Taxes. The provision for income taxes for the three
months ended June 30, 1999 was $536,000 as compared to a benefit of
$269,000 for the three months ended June 30, 1998. The provision for and
benefit from income taxes for the three months ended June 30, 1999 and 1998
differ from the combined statutory rates primarily due to the impact of
non-deductible amortization of certain intangible assets acquired in the
May 1996 Clinitec acquisition and the effect of varying state income tax
rates.
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents increased $2.5 million for the three months ended
June 30, 1999 primarily as a result of cash provided by operating
activities. Cash and cash equivalents decreased $4.1 million for the three
months ended June 30, 1998 principally as a result of the payment of the
final cash portion of the purchase price for the MicroMed business.
Net cash provided by operating activities for the three months ended
June 30, 1999 was $2.9 million consisting primarily of the Company's
$742,000 in net income adjusted for the principal non-cash operating
expenses of depreciation and amortization plus an increase in deferred
service revenue and a decrease in accounts receivable offset in part by a
decrease in accounts payable. Net cash provided by operating activities for
the three months ended June 30, 1998 was $242,000 consisting primarily of
the Company's $603,000 net loss adjusted for the principal non-cash
operating expenses of depreciation and amortization plus increases in
accounts payable and deferred service revenue and decreases in accounts
receivable and inventory offset by decreases in deferred income taxes and
income taxes payable.
Net cash used in investing activities for the three months ended June 30,
1999 was $431,000 consisting principally of additions to equipment and
improvements and capitalized software. Net cash used in investing
activities for the three months ended June 30, 1998 was $4.3 million
consisting principally of $3.8 million used for the final cash payment in
connection with the MicroMed acquisition, plus additions to equipment and
improvements and capitalized software.
Net cash provided by financing activities for the three months ended June
30, 1999 and 1998 was $4,000 and $15,000, respectively, generated by the
exercise of stock options.
In February 1997, the Company's Board of Directors authorized the
repurchase on the open market of up to 10% of the Company's outstanding
Common Stock at various times through February 1998, subject to compliance
with applicable laws and regulations. On February 9, 1998, the Company's
Board of Directors extended this authorization through February 9, 1999 and
on February 9, 1999 further extended this authorization through February
28, 2000. The timing and amount of any repurchase is at the discretion of
the Company's management. The Company's management could, in the exercise
of its judgment, repurchase fewer shares than authorized. During the three
months ended June 30, 1999, the Company did not repurchase any shares.
Since the inception of the repurchase authorization through July 31, 1999,
92,500 shares have been repurchased at a cost of $518,000.
At June 30, 1999, the Company had cash and cash equivalents of $16.7
million and short-term investments of $242,000. Except for the Company's
intention to expend funds for the development of complementary products to
its existing product line and 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 products, the Company has no other significant capital
commitments and currently anticipates that additions to equipment and
improvements for fiscal 2000 will be comparable to fiscal 1999. The Company
believes that its cash and cash equivalents and short-term investments on
hand at June 30, 1999, together with cash flows from operations, if any,
will be sufficient to meet its working capital and capital expenditure
requirements for the next year.
<PAGE> 20
YEAR 2000 COMPLIANCE.
INTRODUCTION.
The Company is aware of issues associated with the programming code in
existing computer systems as the millennium approaches. In particular,
software applications that use only two digits to identify a year in the
date field may fail or create errors in the year 2000 ("Year 2000 Issues").
Year 2000 Issues create risk for the Company from unforeseen problems in
computer systems that the Company sells to customers on a nationwide basis
which are used, among other things, to process their financial transactions
and schedule patients ("Company Products"), as well as systems that the
Company uses internally to provide certain services to its customers and to
process its own financial transactions ("Internal Use Systems"). The
potential costs and uncertainties associated with Year 2000 Issues will
depend upon a number of factors, including the Company's proprietary and
third party developed software, hardware (hardware and third party
developed software will hereinafter be referred to collectively as "Third
Party Products") and the nature of the industry in which the Company
operates.
Company Products and Third Party Products sold by the Company may fail to
operate properly or as expected due to Year 2000 Issues. Such failures
could result in system failures or miscalculations causing disruptions of
customers' operations, including among other things, an inability to
process transactions, send invoices, conduct communications, schedule and
treat patients or engage in similar normal business activities. Further,
products and services used by the Company's customers, but not supplied by
the Company, could fail to operate properly or as expected due to Year 2000
Issues. Customers' efforts to plan for such events could result in the
deferral, delay or cancellation by customers of current installations of
and plans to purchase systems from the Company. Similarly, Internal Use
Systems, including both information systems and non-information systems,
may not operate properly or as expected due to Year 2000 Issues. Year 2000
Issues could result in system failures or miscalculations causing
disruption of the Company's operations, including among other things, an
inability to process its own and certain of its customers financial
transactions, send invoices, conduct communications, or engage in similar
normal business activities.
STATE OF READINESS.
The Company has undertaken various initiatives intended to address Year
2000 Issues. The Company has identified individuals and/or working groups
to (1) develop and implement the Company's definition of Year 2000
readiness; (2) assess Company Products, Third Party Products and Internal
Use Systems for possible Year 2000 Issues; (3) monitor development, testing
and remediation efforts with respect to Company Products, Third Party
Products and Internal Use Systems; (4) monitor and coordinate the Company's
deployment plans and results with respect to Year 2000 releases of Company
Products, Third Party Products and Internal Use Systems; and, (5) develop
contingency plans with respect to Company Products, Third Party Products
and Internal Use Systems. Although the Company's efforts to address Year
2000 Issues do not fall precisely into sequential phases, generally these
efforts are comprised of an assessment phase, a development phase (only
with respect to Company Products and certain proprietary Internal Use
Systems), a deployment or remediation phase, and a contingency planning
phase.
<PAGE> 21
Company Products. NextGen EPM, NextGen EMR and CPS are designed to be
Year 2000 compliant and contain no known Year 2000 Issues when configured
and used in accordance with the related documentation, and provided that
the underlying operating system of the host machine and any other software
used with or in the host machine are also Year 2000 compliant. However,
there can be no assurance that such products do not contain undetected
errors or defects associated with Year 2000 Issues.
The Company's Legacy Product has required significant development and
remediation efforts in connection with Year 2000 Issues with many of these
efforts commencing in 1997. In November 1998, the Company began general
deployment of Version 9 of its Legacy Product which version has been
designed to be Year 2000 compliant. The Company continues to test and
monitor performance of Version 9 in customer environments and expects to
deliver and deploy maintenance releases in the ordinary course of business
throughout the rest of calendar 1999. In addition, the Company continues to
progress through the development cycles with respect to certain ancillary
products associated with the Legacy Product with deployment of these
ancillary products expected to be completed by December 31, 1999.
The Company estimates that as of July 31, 1999, it has completed
approximately 95% of its development efforts in connection with Year 2000
Issues associated with the Legacy Product and certain associated ancillary
products. In addition at July 31, 1999, approximately 83% of Legacy
Product customers have contracted to install Version 9 of which
approximately 85% have been installed as of that date. The Company expects
to have substantially all of its Version 9 installations completed by
November 30, 1999. Based on the Company's assessment to date, the Company
believes continuing efforts will be required to assist customers in
deploying and testing Version 9 in many of the customers' unique
environments. The Company also expects an increase in service and support
effort levels as the year 2000 approaches and into the early months of the
year 2000.
Third Party Products Sold by the Company. The Company works closely with
vendors of significant Third Party Products sold by the Company and has
communicated with them to determine the extent to which their products and
services are, or will be, Year 2000 compliant. In addition, Company
Products have been tested, and the Company plans to continue testing
Company Products, with certain Third Party Products. Based upon its current
assessments, the Company believes that it has received adequate assurances
that significant Third Party Product vendors expect to successfully address
their significant identified Year 2000 Issues on a timely basis. Due to
uncertainties associated with Third Party Product vendors, the Company is
unable to predict whether a material adverse effect on the Company's
business, results of operations and financial condition may result from
Year 2000 Issues related to Third Party Products despite the Company's
current assessment to the contrary.
Internal Use Systems. Based upon the Company's assessment efforts to date,
the Company believes that certain Internal Use Systems will require
replacement or modification due to Year 2000 Issues. The Company's
assessment efforts are ongoing. As of March 31, 1999, the Company believes
that its has substantially completed its assessment review of many of its
major Internal Use Systems.
Certain of the Internal Use Systems are proprietary and were developed by
the Company. Company personnel have used similar techniques to identify
Year 2000 Issues with its Company Products and proprietary Internal Use
<PAGE> 22
Systems. The proprietary Internal Use Systems will either be modified by
Company personnel or replaced with third party developed systems which the
Company believes will not fail as a result of Year 2000 Issues. The Company
has communicated with developers and/or vendors of certain of its third
party developed Internal Use Systems to determine the extent to which those
products and services are, or will be, Year 2000 compliant. Based upon its
current assessments, the Company believes that it has received adequate
assurances that significant third party developed Internal Use Systems are,
or will be, Year 2000 compliant in a timely manner to enable the Company to
implement any required upgrades prior to Year 2000 Issues being encountered
in its Internal Use Systems.
As of July 31, 1999, the Company has replaced or completed modification of
some of its Internal Use Systems and plans to have all such systems
replaced or modifications completed by December 31, 1999.
Contingency Plans. The Company is currently engaged in, but has not
completed, contingency planning to address company-wide personnel,
resource, technical and communication matters in connection with
foreseeable scenarios that may develop from Year 2000 Issues despite the
Company's current and planned remediation efforts. The Company expects that
its development, remediation, testing, deployment and contingency planning
efforts with respect to Company Products, Third Party Products and Internal
Use Systems will continue up to and beyond December 31, 1999. The Company's
contingency planning includes possible (1) failure by the Company and its
vendors to complete efforts to avoid or minimize the impact of Year 2000
Issues on a timely basis; (2) failure of customers to be ready for, or
cooperate with, the deployment of Year 2000 compliant Company Products on a
timely basis; and, (3) delay, deferral or cancellation by customers of
current installations and prospective purchase decisions with respect to
Company Products. A reasonably likely "worst case" scenario has not yet
been identified, but it is anticipated that such scenario would include the
failure of significant communications and computing infrastructures by the
Company, its customers and its suppliers together with failures of
infrastructures encompassing utilities, transportation, banking and
government.
COSTS.
The total cost to address the Company's Year 2000 Issues are not expected
to be material to the Company's financial condition. The Company does not
separately track all of its internal personnel costs incurred in connection
with identifying and resolving Year 2000 Issues. Excluding internal costs,
the Company expects that total expenditures to address Year 2000 Issues
will approximate $150,000, of which approximately $30,000 has been incurred
as of July 31, 1999. To date, all of these expenditures have been funded
from operations and it is anticipated that all remaining expenditures will
also be funded from operations.
<PAGE> 23
PART II. OTHER INFORMATION.
-------- ------------------
Item 2. Changes in Securities and Use of Proceeds.
- ------- ------------------------------------------
On August 5, 1999, the Company's Board of Directors redeemed (the
"Redemption") all outstanding Common Stock Purchase Rights which were
issued by the Company to its shareholders of record at the close of
business on December 2, 1996 and subject to that certain Shareholder Rights
Agreement dated November 25, 1996. The Redemption eliminates all such
previously issued Rights to acquire shares of the Company's Common Stock
upon the occurrence of certain events set forth in the Shareholder Rights
Agreement.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
Exhibits:
- ---------
The Exhibits listed on the accompanying Index to Exhibits on page 25 are
filed as part of this report.
Reports on Form 8-K:
- --------------------
None.
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUALITY SYSTEMS, INC.
<TABLE>
<S> <C>
Date: August 9, 1999 By /s/ Sheldon Razin
----------------------------------
Sheldon Razin
President and Chairman
of the Board of Directors;
Principal Executive Officer
Date: August 9, 1999 By /s/ Robert G. McGraw
----------------------------------
Robert G. McGraw
Chief Financial Officer;
Principal Accounting Officer
</TABLE>
<PAGE> 25
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
------- ----------
10.1* Form of Incentive Stock Option Agreement
under the 1998 Stock Option Plan. 26
10.2* Form of Nonstatutory Stock Option Agreement
under the 1998 Stock Option Plan. 34
27.0 Financial Data Schedule, is filed herewith. 42
* This exhibit is a management contract or
a compensatory plan or arrangement.
<PAGE> 26
EXHIBIT 10.1
<PAGE> 27
Exhibit 10.1
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT, dated this day of ____________,
between QUALITY SYSTEMS, INC., a California Corporation (hereinafter
referred to as the "Company"), and _______________________________________,
an employee of the Company, its parent or one or more of its subsidiaries
(hereinafter referred to as the "Optionee"), is made with reference to the
following facts:
The Company desires, by affording the Optionee an opportunity to
purchase shares of Common Stock, $0.01 par value, in the Company
(hereinafter called "Common Stock"), as hereinafter provided, to carry out
the purpose of the Company's 1998 Stock Option Plan (the "Plan"). Terms
not otherwise defined herein shall have the meaning given them under the
Plan.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants hereinafter
set forth, and for other good and valuable consideration, the parties
hereto have agreed, and do hereby agree, as follows:
1. Grant of Option.
The Company hereby irrevocably grants to the Optionee the right and
option (hereinafter called the "Option") to purchase all or any part of an
aggregate of _____________ shares (such number being subject to adjustment
as provided in the Plan) on the terms and conditions herein set forth. The
Option granted herein is intended to be an "incentive option" within the
meaning of the Plan and Section 422A of the Internal Revenue Code of 1986,
as amended (the "Code").
2. Purchase Price.
The purchase price of the Common Stock covered by the Option shall be
$__________ per share, representing _______ percent (_____%) of the fair
market value of the shares as determined pursuant to Section 2(k) of the
Plan as of the date hereof. The purchase price of stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes
and regulations, either (i) in cash at the time the Option is exercised,
(ii) at the discretion of the Board or the Committee, either at the time of
the grant or exercise of the Option, by delivering to the Company other
shares of Common Stock of the Company (provided that the shares have been
held for the period required to avoid a charge to the Company's reported
earnings), (iii) at the discretion of the Board or the Committee, either at
the time of the grant or exercise of the Option, by delivering to the
Company all or any part of an Option granted under this Plan for a cashless
exercise (provided that such cashless exchange will not result in a charge
to the Company's reported earnings), or (iv) by tendering any other form of
legal consideration that may be acceptable to the Board.
<PAGE> 28
3. Term of Option.
The term of the Option shall commence on the date hereof and all
rights to purchase Shares hereunder shall cease at 11:59 P.M. on the day
before the _______ anniversary of the date hereof, subject to earlier
termination as provided herein. Except as may otherwise be provided in this
Agreement, options granted hereunder shall become exercisable in cumulative
installments as follows:
Date Installments First Percent of Option Shares
Become Exercisable Subject to Installment
_______________________ ________________________
_______________________ ________________________
_______________________ ________________________
_______________________ ________________________
Once an installment of the Option granted hereunder becomes
exercisable for the first time, the shares subject thereto will be
purchasable thereafter by the Optionee at any time in whole, or from time-
to-time in part, prior to the expiration or earlier termination of the
Option granted hereunder. Except as provided in Section 5 hereof, the
Option may not be exercised at any time unless the Optionee shall have been
continuously, from the date hereof to the date of the exercise of the
Option, an employee of the Company, its parent, if any, or of one or more
of its subsidiaries or a corporation or a parent or subsidiary of a
corporation issuing or assuming an option to which Section 425(a) of the
Code applies. The holder of the Option shall not have any of the rights of
a shareholder with respect to the shares covered by the Option as to any
shares of Common Stock not actually issued and delivered to such holder.
4. Non-Transferability.
The Option shall not be transferable otherwise than by will or the
laws of descent and distribution, and the Option may be exercised, during
the lifetime of the Optionee, only by the Optionee. More particularly (but
without limiting the generality of the foregoing), the Option may not be
assigned, transferred (except as provided in Section 5 hereof), pledged or
hypothecated in any way, shall not be assignable by operation of law and
shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition
of the Option contrary to the provisions hereof, and the levy of any
execution, attachment or similar process upon the Option, shall be null and
void and without effect.
5. Termination of Employment.
(a) Termination of Employment Other than by Disability or Death. In
the event that an Optionee's Continuous Status as an Employee is terminated
<PAGE> 29
either by the voluntary resignation by the Optionee or for cause by the
Company, all Options granted to the Optionee shall terminate immediately.
In the event an Optionee's Continuous Status as an Employee is terminated
without cause by the Company, the Optionee may exercise his or her Option
(to the extent that the Optionee was entitled to exercise it at the date of
termination) but only within such period of time ending on the earlier of
(i) the date thirty (30) days after the termination of the Optionee's
Continuous Status as an Employee, or (ii) the expiration of the term of the
Option as set forth herein. If, after termination, the Optionee does not
exercise his or her Option as set forth in this Section 5(a), the Option
shall terminate.
(b) Disability of Optionee. In the event an Optionee's Continuous
Status as an Employee terminates as a result of the Optionee's disability,
the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date three
hundred sixty-five (365) days following such termination, or (ii) the
expiration of the term of the Option as set forth herein. If, after
termination, the Optionee does not exercise his or her Option as set forth
in this Section 5(b), the Option shall terminate.
(c) Death of Optionee. In the event of the death of an Optionee
during, or within a period specified in the Option after the termination
of, the Optionee's Continuous Status as an Employee, the Option may be
exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired
the right to exercise the Option by bequest or inheritance, or by a person
designated to exercise the option upon the Optionee's death pursuant to the
Plan, but only within the period ending on the earlier of (i) the date
three hundred sixty-five (365) days following the date of death, or (ii)
the expiration of the term of such Option as set forth herein. If, after
death, the Option is not exercised as set forth in this Section 5(c), the
Option shall terminate.
6. Covenant Not to Compete.
To protect the Company's goodwill and its relationships with its
customers, so long as the Company continues to employ Optionee and for a
period of two (2) years following the termination of such employment,
however caused, Optionee shall not, directly or indirectly, either as
principal, agent, manager, employee, partner, shareholder, director,
officer, consultant or otherwise, become associated with or employed by any
sole proprietorship, partnership, corporation, or other business entity
that conducts a business that competes with the Company. "Competing" with
the Company shall mean engaging in the sale of the same or similar products
and/or services as sold by the Company. The Optionee further agrees that
during the term of employment, and for a period of two (2) years
thereafter, Optionee or any company which Optionee owns of record or owns
beneficially more than five percent or any other person, firm or
corporation controlled by or under common control with Optionee will not,
whether for Optionee's own account or for the account of any other person,
<PAGE> 30
firm, corporation, or other business organization, interfere with the
Company's relationship with or endeavor to entice away from, solicit, or
deal with any person, firm, corporation or other business organization who
or which at any time during the term of employment was an employee,
consultant, or agent of the Company. The Optionee further agrees not to
call upon or solicit for the purpose of competing with the Company either
directly or indirectly, for a period of two (2) years following the
termination of such employment, however caused, any customer of the
Company. The Optionee further agrees not to call upon or solicit for the
purpose of competing with the Company either directly or indirectly, for a
period of two (2) years following the termination of such employment,
however caused, any prospective customer of the Company whose identity has
become known to Optionee through his or her employment with the Company.
The restrictions contained in this Section 6 shall be effective (i)
throughout all of the states of the United States and the District of
Columbia, (ii) throughout the states in which the Company conducts
business, (iii) throughout every county in which the Company conducts
business, and (iv) within a two hundred (200) mile radius of any office
maintained by the Company. It is the desire and intent of the parties that
the provisions of this Section 6 shall be enforced to the fullest extent
permitted under the laws and public policies of each jurisdiction in which
enforcement is sought. The invalidity or unenforceability of all or any
portion of this Section 6 shall not affect the validity or enforceability
of any other provision or portion thereof contained in this Option. If any
court of competent jurisdiction determines that any provision of this
Section 6 is unenforceable because of the duration, geographic scope of
such provisions, or otherwise, such court shall have the power to reduce
the duration, scope, or other aspects of such provision, as the case may
be, to reflect the intent of the parties hereto, and, in its reduced or
altered form, such provision shall then be enforceable to the fullest
extent permitted by law.
7. Other Expirations.
In addition to any other event causing an expiration or termination of
this Option, this Option shall expire and all rights to purchase the Common
Stock shall cease (to the extent not theretofore terminated or expired as
herein provided) upon the effective date of (i) the dissolution or
liquidation of the Company, or (ii) a merger, consolidation, acquisition of
property or shares, separation or reorganization of the Company with one or
more entities, corporate or otherwise, as a result of which the Company is
not the surviving entity, or (iii) a "reverse merger" in which the Company
is a surviving entity but more than 50% of its voting shares are converted
into cash, property or the securities of another entity, or (iv) a sale of
substantially all of the property or shares of the Company to another
entity, corporate or otherwise; provided, however, that the Company may, in
its discretion, and immediately prior to any such transaction, cause a new
option to be substituted for this Option or cause this Option to be assumed
by an employer entity or a parent or subsidiary of such entity; and such
new option shall apply to all shares issued in addition to or substitution,
replacement or modification of the shares theretofore covered by such
option; provided that:
<PAGE> 31
(a) The excess of the aggregate fair market value of the shares
subject to the option immediately after the substitution or assumption over
the aggregate option price of such shares shall not be more than the excess
of the aggregate fair market value of all shares subject to the option
immediately before such substitution or assumption over the aggregate
option price of such shares; and
(b) The new option or the assumption of the existing option shall not
give the Optionee additional benefits which he or she did not have under
the old option prior to such assumption; and
(c) An appropriate adjustment of the original option price shall be
made among original shares subject to the option and any additional shares
or shares issued in substitution, replacement or modification thereof.
If no provision is made for the continuance of the Plan and the
assumption of this Option, or the substitution of new options for this
Option as hereinabove provided, then the Company shall cause written notice
to be given to the Optionee of the proposed transaction not less than
thirty (30) days prior to the anticipated effective date thereof, and at
the sole option and discretion of the Company's Board of Directors, this
Option, if not already fully exercisable, may thereupon become fully
exercisable, in which event the Optionee shall have the right to exercise
this Option at any time prior to the effective date of the proposed
transaction. The failure of the Company to give the written notice
specified hereinabove shall not affect the validity, nor shall it be a
basis for delaying or restraining the consummation, of any such
transaction.
8. Method of Exercising Option.
Subject to the terms and conditions of this Agreement, this Option may
be exercised by written notice to the Company, at its administrative office
in the State of California, which presently is located at 17822 East 17th
Street, Suite 210, Tustin, California 92780. Such notice shall state the
election to exercise the Option and the number of shares in respect of
which it is being exercised and shall be signed by the person so exercising
the Option. Such notice shall be accompanied by payment in cash, certified
check or bank draft in the amount of, or with the prior consent of the
Board of Directors or the Committee, certificates for shares of Common
Stock of the Company having an aggregate fair market value (determined in
the manner provided in Section 2(k) of the Plan) equal to, the full
purchase price of such shares, and the Company shall deliver a certificate
or certificates representing the shares subject to such exercise as soon as
practicable after the notice shall be received. The certificate or
certificates for the shares as to which the Option shall have been so
exercised shall be registered in the name of the person or persons so
exercising the Option and shall be delivered to or upon the written order
of the person or persons exercising the Option. In the event the Option
shall be exercised by any person or persons other than the Optionee in
accordance with the terms hereof, such notice shall be accompanied by
appropriate proof of the right of such person or persons to exercise the
<PAGE> 32
Option. All shares that shall be purchased upon the exercise of the Option
as provided herein shall be fully paid and non-assessable. The holder of
this Option shall not be entitled to the privileges of share ownership as
to any shares of Common Stock not actually issued and delivered to him.
9. General.
(a) The Company shall at all times during the term of the Option
reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of this Option Agreement, shall pay
all original issue and transfer taxes with respect to the issue and
transfer of shares pursuant hereto and all other fees and expenses
necessarily incurred by the Company in connection therewith, and will from
time to time use its best efforts to comply with all laws and regulations,
which, in the opinion of counsel for the Company, shall be applicable
thereto.
(b) The granting of the Option hereunder shall not impose any
obligation on the Company to continue the employment of the Optionee; nor
shall it impose any obligation on the Optionee to exercise this Option.
(c) This Agreement and the Plan contain the entire agreement of the
parties, and supersede any and all other prior or contemporaneous
agreements, whether written or oral, between the parties hereto, with
respect to the subject matter hereof. The Plan shall govern any Option
granted hereunder. In the event of any conflict between the terms of this
Agreement and the Plan, the terms of the Plan shall govern.
(d) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of California.
(e) The Company may require, as a condition precedent to the
Company's obligation to sell and issue, and the Optionee's right to
purchase, shares of Common Stock of the Company on exercise of this Option,
that the Optionee shall certify, in writing, that he or she is acquiring
such shares for investment and not with a view or the intent to sell or
redistribute such shares.
<PAGE> 33
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officers thereunto duly authorized, and the Optionee has
hereunto set his or her hand, all as of the day and year first above
written.
QUALITY SYSTEMS, INC.
By: ________________________________
Title: _____________________________
Address: ___________________________
"Company"
____________________________________
____________________________________
"Optionee"
<PAGE> 34
EXHIBIT 10.2
<PAGE> 35
Exhibit 10.2
NONSTATUTORY STOCK OPTION AGREEMENT
THIS NONSTATUTORY STOCK OPTION AGREEMENT, dated this __________ day of
__________________, between QUALITY SYSTEMS, INC., a California corporation
(hereinafter referred to as the "Company"), and ___________________________
_________________________________ , an employee, director or consultant of
the Company, its parent or one or more of its subsidiaries (hereinafter
referred to as the "Optionee"), is made with reference to the following
facts:
The Company desires, by affording the Optionee an opportunity to
purchase shares of Common Stock, $0.01 par value, in the Company
(hereinafter called "Common Stock"), as hereinafter provided, to carry out
the purpose of the Company's 1998 Stock Option Plan (the "Plan"). Terms
not otherwise defined herein shall have the meaning given them under the
Plan.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants hereinafter
set forth, and for other good and valuable consideration, the parties
hereto have agreed, and do hereby agree, as follows:
1. Grant of Option.
The Company hereby irrevocably grants to the Optionee the right and
option (hereinafter called the "Option") to purchase all or any part of an
aggregate of _______ shares (such number being subject to adjustment as
provided in the Plan) on the terms and conditions herein set forth.
2. Purchase Price.
The purchase price of the Common Stock covered by the Option shall be
$_________ per share, representing ________ percent (_______%) of the fair
market value of the shares as determined pursuant to Section 2(k) of the
Plan as of the date hereof. The purchase price of stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes
and regulations, either (i) in cash at the time the Option is exercised,
(ii) at the discretion of the Board or the Committee, either at the time of
the grant or exercise of the Option, by delivering to the Company other
shares of Common Stock of the Company (provided that the shares have been
held for the period required to avoid a charge to the Company's reported
earnings), (iii) at the discretion of the Board or the Committee, either at
the time of the grant or exercise of the Option, by delivering to the
Company all or any part of an Option granted under this Plan for a cashless
exercise (provided that such cashless exchange will not result in a charge
to the Company's reported earnings), or (iv) by tendering any other form of
legal consideration that may be acceptable to the Board.
<PAGE> 36
3. Term of Option.
The term of the Option shall commence on the date hereof and all
rights to purchase Shares hereunder shall cease at 11:59 P.M. on the day
before the _______ anniversary of the date hereof, subject to earlier
termination as provided herein. Except as may otherwise be provided in this
Agreement, options granted hereunder shall become exercisable in cumulative
installments as follows:
Date Installments First Percent of Option Shares
Become Exercisable Subject to Installment
_______________________ ________________________
_______________________ ________________________
_______________________ ________________________
_______________________ ________________________
Once an installment of the Option granted hereunder becomes
exercisable for the first time, the shares subject thereto will be
purchasable thereafter by the Optionee at any time in whole or from time-
to-time in part prior to the expiration or earlier termination of the
Option granted hereunder. Except as provided in Section 5 hereof, the
Option may not be exercised at any time unless the Optionee shall have been
continuously, from the date hereof to the date of the exercise of the
Option, an employee, director or consultant of the Company, its parent, if
any, or of one or more of its subsidiaries or a corporation or a parent or
subsidiary of a corporation issuing or assuming an option to which Section
425(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
applies. The holder of the Option shall not have any of the rights of a
shareholder with respect to the shares covered by the Option as to any
shares of Common Stock not actually issued and delivered to such holder.
4. Non-Transferability.
The Option shall not be transferable otherwise than by will or the
laws of descent and distribution, and the Option may be exercised, during
the lifetime of the Optionee, only by the Optionee. More particularly (but
without limiting the generality of the foregoing), the Option may not be
assigned, transferred (except as provided in Section 5 hereof), pledged or
hypothecated in any way, shall not be assignable by operation of law and
shall not be subject to execution, attachment or similar process.
Notwithstanding the foregoing, an Option granted to an Optionee who is not
subject to Section 16 of the Exchange Act on the date of the grant may not
be transferable except by will or by the laws of descent and distribution,
unless otherwise permitted by the Board, and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such
person or, subsequent to any permitted transfer, only by a permitted
transferee. Any attempted assignment, transfer, pledge, hypothecation or
other disposition of the Option contrary to the provisions hereof, and the
<PAGE> 37
levy of any execution, attachment or similar process upon the Option, shall
be null and void and without effect.
5. Termination of Employment or Relationship as a Director or Consultant.
(a) Termination of Employment or Relationship as a Director or
Consultant Other than by Disability or Death. In the event that an
Optionee's Continuous Status as an Employee, Director or Consultant is
terminated either by the voluntary resignation by the Optionee or for cause
by the Company, all Options granted to the Optionee shall terminate
immediately. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant is terminated without cause by the Company, the
Optionee may exercise his or her Option (to the extent that the Optionee
was entitled to exercise it at the date of termination) but only within
such period of time ending on the earlier of (i) the date thirty (30) days
after the termination of the Optionee's Continuous Status as an Employee,
Director or Consultant, or (ii) the expiration of the term of the Option as
set forth herein. If, after termination, the Optionee does not exercise his
or her Option as set forth in this Section 5(a), the Option shall
terminate.
(b) Disability of Optionee. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of
(i) the date three hundred sixty-five (365) days following such
termination, or (ii) the expiration of the term of the Option as set forth
herein. If, after termination, the Optionee does not exercise his or her
Option as set forth in this Section 5(b), the Option shall terminate.
(c) Death of Optionee. In the event of the death of an Optionee
during, or within a period specified in the Option after the termination
of, the Optionee's Continuous Status as an Employee, Director or
Consultant, the Option may be exercised (to the extent the Optionee was
entitled to exercise the Option at the date of death) by the Optionee's
estate, by a person who acquired the right to exercise the Option by
bequest or inheritance, or by a person designated to exercise the option
upon the Optionee's death pursuant to the Plan, but only within the period
ending on the earlier of (i) the date three hundred sixty-five (365) days
following the date of death, or (ii) the expiration of the term of such
Option as set forth herein. If, after death, the Option is not exercised as
set forth in this Section 5(c), the Option shall terminate.
6. Covenant Not To Compete. To protect the Company's goodwill and its
relationships with its customers, so long as the Company continues to
utilize the services of Optionee as an employee, director or consultant,
and for a period of two (2) years following the termination of such
services, however caused, Optionee shall not, directly or indirectly,
either as principal, agent, manager, employee, partner, shareholder,
director, officer, consultant or otherwise, become associated with or
employed by any sole proprietorship, partnership, corporation, or other
<PAGE> 38
business entity that conducts a business that competes with the Company.
"Competing" with the Company shall mean engaging in the sale of the same or
similar products and/or services as sold by the Company. The Optionee
further agrees that during the period that Optionee's services as an
employee, director or consultant are utilized by the Company, and for a
period of two (2) years thereafter, Optionee or any company which Optionee
owns of record or owns beneficially more than five percent or any other
person, firm or corporation controlled by or under common control with
Optionee will not, whether for Optionee's own account or for the account of
any other person, firm, corporation, or other business organization,
interfere with the Company's relationship with or endeavor to entice away
from, solicit, or deal with any person, firm, corporation or other business
organization who or which at any time during the period the Company
utilized Optionee's services was an employee, consultant, or agent of the
Company. The Optionee further agrees not to call upon or solicit for the
purpose of competing with the Company either directly or indirectly, for a
period of two (2) years following the termination of utilization of
Optionee's services by the Company, however caused, any customer of the
Company. The Optionee further agrees not to call upon or solicit for the
purpose of competing with the Company either directly or indirectly, for a
period of two (2) years following the termination of utilization of
Optionee's services by the Company, however caused, any prospective
customer of the Company whose identity has become known to Optionee through
his or her services to the Company. The restrictions contained in this
Section 6 shall be effective (i) throughout all of the states of the United
States and the District of Columbia, (ii) throughout the states in which
the Company conducts business, (iii) throughout every county in which the
Company conducts business, and (iv) within a two hundred (200) mile radius
of any office maintained by the Company. It is the desire and intent of the
parties that the provisions of this Section 6 shall be enforced to the
fullest extent permitted under the laws and public policies of each
jurisdiction in which enforcement is sought. The invalidity or
unenforceability of all or any portion of this Section 6 shall not affect
the validity or enforceability of any other provision or portion thereof
contained in this Option. If any court of competent jurisdiction determines
that any provision of this Section 6 is unenforceable because of the
duration, geographic scope of such provisions, or otherwise, such court
shall have the power to reduce the duration, scope, or other aspects of
such provision, as the case may be, to reflect the intent of the parties
hereto, and, in its reduced or altered form, such provision shall then be
enforceable to the fullest extent permitted by law.
7. Other Expirations.
In addition to any other event causing an expiration or termination of
this Option, this Option shall expire and all rights to purchase the Common
Stock shall cease (to the extent not theretofore terminated or expired as
herein provided) upon the effective date of (i) the dissolution or
liquidation of the Company, or (ii) a merger, consolidation, acquisition of
property or shares, separation or reorganization of the Company with one or
more entities, corporate or otherwise, as a result of which the Company is
not the surviving entity, or (iii) a "reverse merger" in which the Company
<PAGE> 39
is a surviving entity but more than 50% of its voting shares are converted
into cash, property or the securities of another entity, or (iv) a sale of
substantially all of the property or shares of the Company to another
entity, corporate or otherwise; provided, however, that the Company may, in
its discretion, and immediately prior to any such transaction, cause a new
option to be substituted for this Option or cause this Option to be assumed
by the acquiring entity or a parent or subsidiary of such entity; and such
new option shall apply to all shares issued in addition to or substitution,
replacement or modification of the shares theretofore covered by such
option; provided that:
(a) The excess of the aggregate fair market value of the shares
subject to the option immediately after the substitution or assumption over
the aggregate option price of such shares shall not be more than the excess
of the aggregate fair market value of all shares subject to the option
immediately before such substitution or assumption over the aggregate
option price of such shares; and
(b) The new option or the assumption of the existing option shall not
give the Optionee additional benefits which he or she did not have under
the old option prior to such assumption; and
(c) An appropriate adjustment of the original option price shall be
made among original shares subject to the option and any additional shares
or shares issued in substitution, replacement or modification thereof.
If no provision is made for the continuance of the Plan and the
assumption of this Option, or the substitution of new options for this
Option as hereinabove provided, then the Company shall cause written notice
to be given to the Optionee of the proposed transaction not less than
thirty (30) days prior to the anticipated effective date thereof, and at
the sole option and discretion of the Company's Board of Directors, this
Option, if not already fully exercisable, may thereupon become immediately
and fully exercisable, in which event the Optionee shall have the right to
exercise this Option at any time prior to the effective date of the
proposed transaction. The failure of the Company to give the written
notice specified hereinabove shall not affect the validity, nor shall it be
a basis for delaying or restraining the consummation, of any such
transaction.
8. Method of Exercising Option.
Subject to the terms and conditions of this Agreement, this Option may
be exercised by written notice to the Company, at its administrative office
in the State of California, which presently is located at 17822 East 17th
Street, Suite 210, Tustin, California 92780. Such notice shall state the
election to exercise the Option and the number of shares in respect of
which it is being exercised and shall be signed by the person so exercising
the Option. Such notice shall be accompanied by payment in cash, certified
check or bank draft in the amount of, or with the prior consent of the
Board of Directors or the Committee, certificates for shares of Common
Stock of the Company having an aggregate fair market value (determined in
<PAGE> 40
accordance with Section 2(k) of the Plan) equal to, the full purchase price
of such shares, and the Company shall deliver a certificate or certificates
representing the shares subject to such exercise as soon as practicable
after the notice shall be received. The certificate or certificates for
the shares as to which the Option shall have been so exercised shall be
registered in the name of the person or persons so exercising the Option
and shall be delivered to or upon the written order of the person or
persons exercising the Option. In the event the Option shall be exercised
by any person or persons other than the Optionee in accordance with the
terms hereof, such notice shall be accompanied by appropriate proof of the
right of such person or persons to exercise the Option. All shares that
shall be purchased upon the exercise of the Option as provided herein shall
be fully paid and non-assessable. The holder of this Option shall not be
entitled to the privileges of share ownership as to any shares of Common
Stock not actually issued and delivered to him or her.
9. General.
(a) The granting of the Option hereunder shall not impose any
obligation on the Company to continue utilizing the services of the
Optionee as an employee, director or consultant; nor shall it impose any
obligation on the Optionee to exercise this Option.
(b) This Agreement and the Plan embodies the entire agreement of the
parties, and supersedes any and all other prior or contemporaneous
agreements, whether written or oral, between the parties hereto, with
respect to the subject matter hereof. In the event of any conflict between
the terms of this Agreement and the Plan, the terms of the Plan shall
govern.
(c) This Agreement shall be governed by and construed in accordance
with the internal laws of the State of California.
(d) The Company may require, as a condition precedent to the
Company's obligation to sell and issue, and the Optionee's right to
purchase, shares of Common Stock of the Company on exercise of this Option,
that the Optionee shall certify, in writing, that he or she is acquiring
such shares for investment and not with a view or the intent to sell or
redistribute such shares.
<PAGE> 41
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its officers thereunto duly authorized, and the Optionee has
hereunto set his or her hand, all as of the day and year first above
written.
QUALITY SYSTEMS, INC.
By: ________________________________
Title: _____________________________
Address: ___________________________
"Company"
____________________________________
____________________________________
"Optionee"
<PAGE> 42
EXHIBIT 27.0
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 16,664,000
<SECURITIES> 242,000
<RECEIVABLES> 10,857,000
<ALLOWANCES> 0
<INVENTORY> 760,000
<CURRENT-ASSETS> 29,680,000
<PP&E> 1,744,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 41,038,000
<CURRENT-LIABILITIES> 10,628,000
<BONDS> 0
0
0
<COMMON> 62,000
<OTHER-SE> 30,348,000
<TOTAL-LIABILITY-AND-EQUITY> 41,038,000
<SALES> 5,116,000
<TOTAL-REVENUES> 9,102,000
<CGS> 0
<TOTAL-COSTS> 4,058,000
<OTHER-EXPENSES> 3,932,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,278,000
<INCOME-TAX> 536,000
<INCOME-CONTINUING> 742,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 742,000
<EPS-BASIC> 0.12
<EPS-DILUTED> 0.12
</TABLE>
