<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 September 30, 2000
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.
6,186,841 shares of Common Stock, $.01 par value, as of October 31, 2000
<PAGE> 2
PART I. CONSOLIDATED FINANCIAL INFORMATION.
------- -----------------------------------
Item 1. Financial Statements.
------- ---------------------
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
September 30, March 31,
2000 2000
---------- ----------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 16,605 $ 15,926
Short-term investments 248 243
Accounts receivable, net 15,107 13,710
Inventories 967 1,010
Other current assets 1,322 2,496
---------- ----------
Total current assets 34,249 33,385
Equipment and Improvements, net 2,026 1,797
Capitalized Software Costs, net 1,894 1,984
Deferred Tax Asset 2,936 3,042
Excess of Cost Over Net Assets
of Acquired Business, net 1,942 2,112
Other Assets 1,655 1,816
---------- ----------
Total assets $ 44,702 $ 44,136
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,617 $ 1,246
Deferred service revenue 5,712 5,691
Other current liabilities 3,871 5,116
---------- ----------
Total liabilities 11,200 12,053
---------- ----------
Commitments and Contingencies
Shareholders' Equity:
Common stock, $0.01 par value, 20,000 shares
authorized, 6,208 and 6,201 shares issued
and outstanding, respectively 62 62
Additional paid-in capital 35,533 35,483
Accumulated deficit (2,093) (3,462)
---------- ----------
Total shareholders' equity 33,502 32,083
---------- ----------
Total liabilities and
shareholders' equity $ 44,702 $ 44,136
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 3
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies $ 4,794 $5,633 $9,189 $ 10,749
Maintenance, EDI, and other 4,869 4,076 9,736 8,062
-------- -------- -------- --------
9,663 9,709 18,925 18,811
Cost of Products and Services 4,363 4,466 8,395 8,524
-------- -------- -------- --------
Gross Profit 5,300 5,243 10,530 10,287
Selling, General and
Administrative Expenses 3,264 3,138 6,609 6,178
Research and Development Costs 974 965 1,979 1,857
-------- -------- -------- --------
Income from Operations 1,082 1,140 1,942 2,252
Investment Income 251 182 497 348
-------- -------- -------- --------
Income before Provision for
Income Taxes 1,333 1,322 2,439 2,600
Provision for Income Taxes 589 584 1,070 1,120
-------- -------- -------- --------
Net Income and
Comprehensive Income $ 744 $ 738 $ 1,369 $ 1,480
======== ======== ======== ========
Net Income per Share,
basic & diluted $ 0.12 $ 0.12 $ 0.22 $ 0.24
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 4
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,369 $ 1,480
Adjustments to reconcile net
income to net cash
provided by operating activities:
Depreciation and amortization 1,342 1,308
Loss(Gain) on short-term investments (5) 10
Deferred income taxes 1,364 (26)
Changes in:
Accounts receivable (1,397) 259
Inventories 43 (435)
Other current assets (84) (88)
Other assets (6) (75)
Accounts payable 371 463
Deferred service revenue 21 446
Income taxes payable and taxes
related to equity accounts (1,287) (522)
Other current liabilities 42 59
------------ ------------
Net Cash Provided by Operating Activities 1,773 2,879
------------ ------------
Cash Flows from Investing Activities:
Net additions to
equipment and improvements (572) (196)
Additions to capitalized software costs (559) (593)
Purchase of short-term investment - (50)
Proceeds from sale of
short-term investment - 29
Change in other assets (13) (45)
------------ ------------
Net Cash Used in Investing Activities (1,144) (855)
------------ ------------
Cash Flows from Financing Activities:
Purchases of Common Stock (35) -
Proceeds from exercise of stock options 85 6
------------ ------------
Net Cash Provided by Financing
Activities 50 6
------------ ------------
Net Increase in Cash and
Cash Equivalents 679 2,030
Cash and Cash Equivalents,
beginning of period 15,926 14,196
------------ ------------
Cash and Cash Equivalents, end of period $ 16,605 $ 16,226
============ ============
</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 six months ended September 30, 2000
and 1999, the Company made income tax payments, net of refunds received,
of $831 and $1,670, respectively.
<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 accounting principles
generally accepted in the United States of America, 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, 2000. 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 - 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, subject to compliance with applicable laws and
regulations. This stock authorization has been renewed annually and
currently expires on June 7, 2001. The timing and amount of any repurchase
is at the discretion of the Company's Board of Directors. The Company's
Board of Directors could, in the exercise of its judgment, repurchase fewer
shares than authorized. During the three months ended September 30, 2000,
the Company repurchased 5,000 shares at a cost of approximately $35,000.
Since the inception of the repurchase authorization through October 31,
2000, 137,800 shares have been repurchased at a cost of approximately
$829,000.
NOTE 3 - INCOME TAXES
------ ------------
The provision for income taxes for the three months ended
September 30, 2000 and 1999 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.
<PAGE> 7
NOTE 4 - 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 Six Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Net income $ 744 $ 738 $ 1,369 $ 1,480
-------- -------- -------- --------
Basic net income per share:
Weighted average number of
common shares outstanding 6,209 6,215 6,209 6,215
-------- -------- -------- --------
Basic net income per share $ 0.12 $ 0.12 $ 0.22 $ 0.24
======== ======== ======== ========
Diluted net income
per share:
Weighted average number of
common shares outstanding 6,209 6,215 6,209 6,215
Weighted average number of
common shares equivalents-
Weighted average
options outstanding 64 26 86 14
-------- -------- -------- --------
Weighted average number of common
and common equivalent shares 6,273 6,241 6,286 6,229
-------- -------- -------- --------
Diluted net income
per share $ 0.12 $ 0.12 $ 0.22 $ 0.24
======== ======== ======== ========
</TABLE>
NOTE 5 - NEW ACCOUNTING STANDARD
------ -----------------------
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin #101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB
101 is effective for the third quarter of fiscal year 2001. The Company is
currently evaluating the impact SAB 101 will have on its financial
statements, but does not believe the impact will be significant.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation." FIN 44 is an
interpretation of Accounting Principal Board's Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25). Among other matters, FIN 44
clarifies the application of APB 25 regarding the definition of employee for
purposes of applying APB 25, the criteria for determining whether a plan
qualifies as noncompensatory and the accounting consequences of
modifications to the terms of a previously issued stock options or similiar
awards. The Company adopted the provisions of FIN 44 in the third quarter
of 2000. The adoption of FIN 44 did not have a material impact on the
Company's financial condition or results of operations.
<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. Several of the Company's proprietary software systems may be
operated remotely using thin client connectivity or a standard web browser.
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 600 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.
<PAGE> 9
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
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 for both the medical and dental markets. These
expandable systems operate on a stand-alone basis or in a networked
environment.
QSI's wholly owned subsidiaries, Clinitec and Micromed, develop and sell
both proprietary electronic medical records software and practice
management systems under the product name of NextGen*. Major product
categories of the NextGen suite of applications include Electronic Medical
Records (NextGenemr), Enterprise Practice Management (NextGenepm), Enterprise
Appointment Scheduling (NextGeneas), Enterprise Master Patient Index
(NextGenepi), Managed Care, Electronic Data Interchange, System Interfaces,
Internet Operability (NextGen web), and a Patient-centric and Provider-
centric Web Portal Solution (NextMD).
NextGenemr 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. NextGenemr
also supports the scanning and annotation of paper documents, photographs
and X-rays, and contains many other advanced features. NextGenemr is
marketed both in conjunction with the Company's practice management
software offerings as well as on a stand-alone basis where NextGenemr may
interface with other practice management systems. The Company believes that
it currently provides a comprehensive information management solution for
the medical marketplace.
NextGenepm has been developed with a client/server architecture; a GUI
design utilizing Windows 95, Windows 98, Windows 2000, or Windows NT
operating system platforms; and, a platform independent relational database
that is ANSI SQL-compliant. NextGenepm is designed to provide a flexible,
enterprise-wide solution employing a master patient index.
* NextGen is a registered trademark of Clinitec International, Inc.
<PAGE> 10
Recognizing the need and benefits to be obtained by using its software in
conjunction with the capabilities of the Internet, the Company enhanced its
enterprise practice management and electronic medical software packages in
fiscal 2000 to enable them to be run via Private Intranet or the Internet
in an Application Services Provider (ASP) environment.
Additionally, in April 2000, the Company announced the launch of an
Internet-based consumer health portal, NextMD.com. NextMD.com will be a
vertical portal for the healthcare industry, linking patients with their
physicians, insurers, laboratories, and online pharmacies, while providing
a centralized source of health-oriented information for both consumers and
medical professionals. Patients whose physicians are linked to the portal
will be able to request appointments, send appointment changes or
cancellations, receive test results online, request prescription refills,
view and/or pay their statements, and communicate with their physicians,
all in a secure, online environment. The Company's NextGen suite of
information systems will be linked to NextMD.com, integrating a number of
these features with physicians' existing systems.
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.
<PAGE> 11
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
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.
<PAGE> 12
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 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.
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.
<PAGE> 13
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 to 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
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, Windows 98 and Windows 2000, 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.
LITIGATION.
On April 22, 1997, a purported class action entitled JOHN P. CAVENY v.
QUALITY SYSTEMS, INC., ET AL. was filed in the Superior Court of the State
of California for the County of Orange, in which Mr. Caveny, on behalf of
himself and all others who purchased the Company's Common Stock between
June 26, 1995 and July 3, 1996, alleges that the Company, and Sheldon
Razin, Robert J. Beck, Gregory S. Flynn, Abe C. LaLande, Donn Neufeld, Irma
G. Carmona, John A. Bowers, Graeme H. Frehner, and Gordon L. Setran (all of
the foregoing individuals were either officers, directors or both during
the period from June 26, 1995 through July 3, 1996), as well as other
defendants not affiliated with the Company, violated California
Corporations Code Sections 25400 and 25500, California Civil Code Sections
1709 and 1710, and California Business and Professions Code Sections 17200
et. seq., by issuing positive statements about the Company that allegedly
were knowingly false, in part, in order to assist the Company and the
individual defendants in selling Common Stock at an inflated price in the
Company's March 5, 1996 public offering and at other points during the
class period. The complaint seeks compensatory and punitive damages in
unspecified amounts, disgorgement, declaratory and injunctive relief, and
attorneys' fees.
The Company and the other named defendants successfully demurred to the
plaintiffs' claim under California Civil Code Sections 1709 and 1710, and
that claim, which served as the only basis for plaintiffs' request for
punitive damages, has been dismissed from both actions.
<PAGE> 14
On January 25, 1999, the court denied plaintiffs' motion to certify the
class representative and class legal counsel. Plaintiffs have appealed that
decision. On February 25, 2000, the Fourth District Court of Appeals
affirmed the order disqualifying the class legal counsel. On May 9, 2000,
the Court of Appeals issued its Remittur certifying its decision as final.
In June 2000, plaintiffs moved for approval of a second firm as class legal
counsel. Defendants opposed the motion. On August 17, 2000, the court
denied the motion for approval of plaintiffs' second proposed class legal
counsel. The court has ordered plaintiffs to retain new proposed class
counsel by December 1, 2000. However, the named defendants will again
have the opportunity to oppose class certification. The Company and its
named officers and directors deny all remaining 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 May 14, 1997, a second purported class action entitled WENDY WOO v.
QUALITY SYSTEMS, INC., ET AL. was filed in the same court. This complaint,
which has been consolidated with the Caveny lawsuit, essentially repeats
the allegations in the Caveny lawsuit and seeks identical relief. The
Company and the other named defendants successfully demurred to the
plaintiffs' claim under California Civil Code Sections 1709 and 1710, and
that claim, which served as the only basis for plaintiffs' request for
punitive damages, has been dismissed from both actions.
On July 1, 1997, a third purported class action entitled WADE CHENEY v.
QUALITY SYSTEMS, INC., ET AL. was filed in the United States District Court
of the Central District of California, Southern Division. The complaint
makes essentially the same factual allegations as in the Caveny and Woo
complaints, and purports to state claims under Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and under
Section 20(a) of said Act. By Court order dated August 13, 1997, this
action was stayed temporarily and the Court reserved jurisdiction to lift
the stay after all matters are final in the Caveny and Woo actions or if
otherwise appropriate, and on August 15, 1997 the case was removed from the
Court's active caseload. The Company denies all allegations of wrongdoing
made in this suit, considers the allegations groundless and without merit,
and if the stay is ever lifted, the Company intends to vigorously defend
against this action.
On March 23, 1999, a purported class action and derivative complaint
entitled IRVING ROSENZWEIG v. SHELDON RAZIN, ET AL. was filed in the
Superior Court of the State of California for the County of Orange, in
which Mr. Rosenzweig, on behalf of himself and all non-director
shareholders, and derivatively on behalf of the Company, alleges that
Sheldon Razin, John Bowers, William Bowers, Patrick Cline, Janet Razin and
Gordon Setran (all of the foregoing individuals are 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. Defendants demurred to each of the
causes of action alleged in the complaint and the court sustained those
demurrers with leave to amend in December 1999. Rather than file an
amended complaint, plaintiff filed a motion for attorney's fees.
Defendants, in turn, filed a motion to dismiss the action for failure to
<PAGE> 15
file an amended pleading within the time limit specified by the court.
The parties agreed to a settlement of action and stipulated to a final
judgement and order which was entered by the court on May 15, 2000 at which
time the action was dismissed. The final judgement and order provided for
a dismissal of the action with prejudice, releases given to each of the
defendants, and payment of the nominal sum of $100,000 (paid by the
Company's Directors and Officers Liability Insurance Company) in full
settlement of plaintiff's motion for attorney's fees.
The settlement further expressly provided that it did not constitute an
admission of any liability of defendants, which defendants continue to
vigorously deny.
The Company is a party to various other legal proceedings incidental to its
business, none of which are considered by the Company to be material.
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 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
<PAGE> 16
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
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. In addition, a court or government agency may take the position
that our delivery of health information directly, including through
licensed physicians, or delivery of information by a third party-site that
a consumer accesses through the Company's web sites, exposes the Company to
malpractice or other personal injury liability for wrongful delivery of
healthcare services or erroneous health information. 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.
Certain physicians or other healthcare professionals who use the Company's
Internet based products will directly enter health information about their
patients including information that constitutes a record under applicable
law, that the Company will store on the Company's computer systems.
Numerous federal and state laws and regulations, the common law, and
contractual obligations govern collection, dissemination, use and
confidentiality of patient-identifiable health information, including:
- State privacy and confidentiality laws;
<PAGE> 17
- The Company's contracts with customers and partners;
- State laws regulating healthcare professionals, such as physicians,
pharmacists and nurse practitioners;
- Medicaid laws;
- The Heath Insurance Portability and Accountability Act of 1996 and
related rules proposed by the Heath Care Financing Administration; and
Health Care Financing Administration standards for Internet
transmission of health data.
The U.S. Congress has been considering proposed legislation that would
establish a new federal standard for protection and use of health
information. Any failure by us or by our personnel or partners to comply
with any of these legal and other requirements would result in material
liability.
Although the company has systems in place for safeguarding patient health
information from unauthorized disclosure, these systems may not preclude
successful claims against the Company for violation of applicable law or
other requirements. Other third-party sites or links that consumers access
through the Company's web sites also may not maintain systems to safeguard
this health information, or may circumvent systems the Company put in place
to protect the information from disclosure. In addition, future laws or
changes in current laws may necessitate costly adaptations to the Company's
systems.
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.
<PAGE> 18
In the year 2001, the Department of Health and Human Services expects to
finalize proposed regulations at the federal level authorized under the
Health Insurance Portability and Accountability Act of 1996.
These proposed regulations will establish new federal standards for privacy
of health information. The Company anticipates that these regulations will
directly affect the Company's products and services, but the Company cannot
accurately predict the impact at this time. Achieving compliance with these
regulations could be costly and distract management's attention and other
resources from the Company's historical business, and any noncompliance by
the Company could result in civil and criminal penalties. In addition,
development of related federal and state regulations and policies on
confidentiality of health information could negatively affect the Company's
business.
The Company's software may be subject to regulation by the 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 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.
YEAR 2000
The Company is aware of issues associated with the programming code in
existing computer systems related to the millennium. 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. 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.
<PAGE> 19
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.
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. The Company cannot be sure
that Year 2000 Issues will not affect its business. Thus far, the Company
has incurred no materially adverse problems related to Year 2000 Issues
associated with the computer systems, software, other property and
equipment it uses. However, the Company cannot guarantee that Year 2000
Issues will not adversely affect its business, operating results or
financial condition at some point in the future.
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 Six Months
Ended Ended
September 30, September 30,
---------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Revenues:
Sales of computer systems,
upgrades and supplies 49.6% 58.0% 48.6% 57.1%
Maintenance and other services 50.4 42.0 51.4 42.9
------ ------ ------ ------
100.0 100.0 100.0 100.0
Cost of Products and Services 45.2 46.0 44.4 45.3
------ ------ ------ ------
Gross Profit 54.8 54.0 55.6 54.7
Selling, General and
Administrative Expenses 33.6 32.3 34.9 32.8
Research and Development Costs 10.1 9.9 10.5 9.9
------ ------ ------ ------
Income from Operations 11.1 11.8 10.2 12.0
Investment Income 2.6 1.8 2.6 1.8
------ ------ ------ ------
Income before Provision for
Income Taxes 13.7 13.6 12.8 13.8
Provision for Income Taxes 6.1 6.0 5.7 5.9
------ ------ ------ ------
Net Income 7.6% 7.6% 7.1% 7.9%
====== ====== ====== ======
</TABLE>
<PAGE> 20
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999.
The Company's net income for the three months ended September 30, 2000 was
$744,000, or $0.12 per share on a basic and diluted basis, as compared to a
net income of $738,000, or $0.12 per share on a basic and diluted basis,
for the three months ended September 30, 1999.
Net Revenues. Net revenues for the three months ended September 30, 2000
at $9.7 million were unchanged compared to the three months ended September
30, 1999. Sales of computer systems, upgrades and supplies declined 14.9%
to $4.8 million from $5.6 million while net revenues from maintenance and
other services grew 19.5% to $4.9 million from $4.1 million during the
comparable periods. The decline in net revenues from sales of computer
systems, upgrades and supplies was principally the result of a decrease in
sales of the Legacy product and a modest decline in Nextgen systems sales.
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 September 30, 2000 and 1999 declined 2.3% at $4.4 million and
$4.5 million, respectively, while cost of products and services as a
percentage of net revenues decreased to 45% from 46% during the comparable
periods. The cost of products and services as a percentage of net revenues
decreased while the dollar amount declined primarily as a result of a
change in the relative mix of hardware content included in system sales in
the respective periods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000
increased 4.0% to $3.3 million as compared to $3.1 million for the three
months ended September 30, 1999. Selling, general and administrative
expenses as a percentage of net revenues increased to 33.6% from 32.3%. The
increase in the amount of such expenses resulted primarily from increased
expenses related to marketing the Nextgen product line, sales personnel and
administrative infrastructure, and costs associated with the Company's
internet portal Nextmd.com. The increase of such expenses as a percentage
of net revenues resulted from the increase in the aforementioned expenses
combined with relatively unchanged revenue.
Research and Development Costs. Research and development costs for the
three months September 30, 2000 were relatively unchanged at $1.0 million
compared to approximately $1.0 million in the three months ended September
30, 1999. Research and development costs as a percentage of net revenues
were relatively unchanged at 10.1% as compared to 9.9% for the respective
periods.
Investment Income. Investment income for the three months ended September
30, 2000 was up 38% at approximately $251,000 compared to $182,000 in the
three months ended September 30, 1999. The increase in investment income is
largely due to a rise in interest income from the Company's money market
accounts resulting from an increase in interest rates, and higher cash
balances.
Provision for Income Taxes. The provision for income taxes for the three
months ended September 30, 2000 was approximately $589,000 as compared to
approximately $584,000 for the three months ended September 30, 1999.
<PAGE> 21
The provision for income taxes for the three months ended September 30,
2000 and 1999 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.
FOR THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999.
The Company's net income for the six months ended September 30, 2000 was
$1.4 million, or $0.22 per share on a basic and diluted basis, as compared
to $1.5 million, or $0.24 per share for the six months ended September 30,
1999.
Net Revenues. Net revenues for the six months ended September 30, 2000
increased 0.6% to $18.9 million from $18.8 million for the six months
ended September 30, 1999. Sales of computer systems, upgrades and supplies
decreased 14.5% to $9.2 million from $10.7 million while net revenues from
maintenance and other services grew 20.8% to $9.7 million from $8.1 million
during the comparable periods. The decrease in net revenues from sales of
computer systems, upgrades and supplies was principally the result of
decreases in the sales of the Legacy, NextGen EPM and NextGen EMR
systems. 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 services
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 six
months ended September 30, 2000 decreased 1.5% to $8.4 million from $8.5
million for the six months ended September 30, 1999 while cost of products
and services as a percentage of net revenues decreased to 44.4% from 45.3%
during the comparable periods. The decrease in the cost of products and
services resulted from the impact of a change in the relative mix of
hardware content systems sales revenue. The cost of products and services
as a percentage of net revenues decreased as a result of the impact of a
change in the relative mix of hardware content of systems sales also.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended September 30, 2000
increased 7.0% to $6.6 million as compared to $6.2 million for the six
months ended September 30, 1999. Selling, general and administrative
expenses as a percentage of net revenues increased to 34.9% from 32.8%. The
increase in the amount of such expenses resulted primarily from increased
marketing expenses of the NextGen EPM and EMR along with additions to sales
personnel and administrative infrastructure, and added costs associated
with maintenance of the Company's internet portal Nextmd.com. The increase
of such expenses as a percentage of net revenues resulted from the increase
in expenses combined with the relatively unchanged revenue.
Research and Development Costs. Research and development costs for the
six months ended September 30, 2000 and 1999 increased 6.6% at
approximately $2.0 million and 1.9 million respectively. Research and
development costs as a percentage of net revenues increased to 10.5% as
compared to 9.9% for the respective periods primarily as a result of the
effect of the increase in research and development costs for the September
2000 period.
<PAGE> 22
Investment Income. Investment income for the six months ended September 30,
2000 and 1999 was up 43% at $497,000 and $348,000, respectively. The
increase in investment income is largely due to a rise in interest income
from the Company's money market accounts resulting from an increase in
interest rates, and higher cash balances.
Provision for Income Taxes. The provision for income taxes for the six
months ended September 30, 2000 was $1.1 million as compared to $1.1
million for the six months ended September 30, 1999. The provision for and
benefit from income taxes for the six months ended September 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.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and cash equivalents increased approximately $679,000 for the six
months ended September 30, 2000 primarily as a result of income from
operations, offset by increases in accounts receivable. Cash and cash
equivalents increased $2.0 million for the six months ended September 30,
1999 principally as a result of cash provided by operating activities also.
Net cash generated by operating activities for the six months ended
September 30, 2000 was approximately $1,773,000 consisting primarily of the
Company's $1,369,000 in net income adjusted for the principal non-cash
operating expenses of depreciation and amortization, an increase in
accounts payable less an increase in accounts receivable. Net cash provided
by operating activities for the six months ended September 30, 1999 was
$2.9 million consisting primarily of the Company's $1.5 million in net
income adjusted for the principal non-cash operating expenses of
depreciation and amortization.
Net cash used in investing activities for the six months ended September
30, 2000 was $1.1 million consisting principally of additions to equipment
and improvements and capitalized software. Net cash used in investing
activities for the six months ended September 30, 1999 was $0.9 million
consisting of additions to equipment and improvements and capitalized
software.
Net cash provided by financing activities for the six months ended
September 30, 2000 and 1999 was $50,000 and $6,000, respectively, generated
by the exercise of stock options. Cash provided by financing activities in
the six months ended September 30, 2000 was offset by the repurchase of
5,000 shares of stock at a cost of approximately $35,000.
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, subject to compliance with applicable laws and
regulations. This stock authorization has been renewed annually and
currently expires on June 7, 2001. 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 six months ended September 30, 2000, the Company
purchased 5,000 shares at a cost of approximately $35,000.
<PAGE> 23
At September 30, 2000, the Company had cash and cash equivalents of $16.6
million and short-term investments of $248,000. 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.
The Company believes that its cash and cash equivalents and short-term
investments on hand at September 30, 2000, together with cash flows from
operations, if any, will be sufficient to meet its working capital and
capital expenditure requirements for the next year.
PART II. OTHER INFORMATION.
Item 1. Litigation
-------- ----------
On April 22, 1997, a purported class action entitled JOHN P. CAVENY v.
QUALITY SYSTEMS, INC., ET AL. was filed in the Superior Court of the State
of California for the County of Orange, in which Mr. Caveny, on behalf of
himself and all others who purchased the Company's Common Stock between
June 26, 1995 and July 3, 1996, alleges that the Company, and Sheldon
Razin, Robert J. Beck, Gregory S. Flynn, Abe C. LaLande, Donn Neufeld, Irma
G. Carmona, John A. Bowers, Graeme H. Frehner, and Gordon L. Setran (all of
the foregoing individuals were either officers, directors or both during
the period from June 26, 1995 through July 3, 1996), as well as other
defendants not affiliated with the Company, violated California
Corporations Code Sections 25400 and 25500, California Civil Code Sections
1709 and 1710, and California Business and Professions Code Sections 17200
et. seq., by issuing positive statements about the Company that allegedly
were knowingly false, in part, in order to assist the Company and the
individual defendants in selling Common Stock at an inflated price in the
Company's March 5, 1996 public offering and at other points during the
class period. The complaint seeks compensatory and punitive damages in
unspecified amounts, disgorgement, declaratory and injunctive relief, and
attorneys' fees.
The Company and the other named defendants successfully demurred to the
plaintiffs' claim under California Civil Code Sections 1709 and 1710, and
that claim, which served as the only basis for plaintiffs' request for
punitive damages, has been dismissed from both actions.
On January 25, 1999, the court denied plaintiffs' motion to certify the
class representative and class legal counsel. Plaintiffs have appealed that
decision. On February 25, 2000, the Fourth District Court of Appeals
affirmed the order disqualifying the class legal counsel. On May 9, 2000,
the Court of Appeals issued its Remittur certifying its decision as final.
In June 2000, plaintiffs moved for approval of a second firm as class legal
counsel. Defendants opposed the motion. On August 17, 2000, the court
denied the motion for approval of plaintiffs' second proposed class legal
counsel. The court has ordered plaintiffs to retain new proposed class
counsel by December 1, 2000. However, the named defendants will again
have the opportunity to oppose class certification. The Company and its
named officers and directors deny all remaining allegations of wrongdoing
made against them in these suits, consider the allegations groundless and
without merit, and intend to vigorously defend against these actions.
<PAGE> 24
On May 14, 1997, a second purported class action entitled WENDY WOO v.
QUALITY SYSTEMS, INC., ET AL. was filed in the same court. This complaint,
which has been consolidated with the Caveny lawsuit, essentially repeats
the allegations in the Caveny lawsuit and seeks identical relief.
On July 1, 1997, a third purported class action entitled WADE CHENEY v.
QUALITY SYSTEMS, INC., ET AL. was filed in the United States District Court
of the Central District of California, Southern Division. The complaint
makes essentially the same factual allegations as in the Caveny and Woo
complaints, and purports to state claims under Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and under
Section 20(a) of said Act.
By Court order dated August 13, 1997, this action was stayed temporarily
and the Court reserved jurisdiction to lift the stay after all matters are
final in the Caveny and Woo actions or if otherwise appropriate, and on
August 15, 1997 the case was removed from the Court's active caseload. The
Company denies all allegations of wrongdoing made in this suit, considers
the allegations groundless and without merit, and if the stay is ever
lifted, the Company intends to vigorously defend against this action.
On March 23, 1999, a purported class action and derivative complaint
entitled IRVING ROSENZWEIG v. SHELDON RAZIN, ET AL. was filed in the
Superior Court of the State of California for the County of Orange, in
which Mr. Rosenzweig, on behalf of himself and all non-director
shareholders, and derivatively on behalf of the Company, alleges that
Sheldon Razin, John Bowers, William Bowers, Patrick Cline, Janet Razin and
Gordon Setran (all of the foregoing individuals are 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. Defendants demurred to each of the
causes of action alleged in the complaint and the court sustained those
demurrers with leave to amend in December 1999. Rather than file an
amended complaint, plaintiff filed a motion for attorney's fees.
Defendants, in turn, filed a motion to dismiss the action for failure to
file an amended pleading within the time limit specified by the court.
The parties agreed to a settlement of action and stipulated to a final
judgement and order which was entered by the court on May 15, 2000 at which
time the action was dismissed. The final judgement and order provided for
a dismissal of the action with prejudice, releases given to each of the
defendants, and payment of the nominal sum of $100,000 (paid by the
Company's Directors and Officers Liability Insurance Company) in full
settlement of plaintiff's motion for attorney's fees.
The settlement further expressly provided that it did not constitute an
admission of any liability of defendants, which defendants continue to
vigorously deny.
The Company is a party to various other legal proceedings incidental to its
business, none of which are considered by the Company to be material.
<PAGE> 25
Item 2. Changes in Securities and Use of Proceeds.
------- ------------------------------------------
None
Item 3. Defaults Upon Senior Securities
------- -------------------------------
None
Item 4. Submissions of Matters to a Vote of Securities Holders
------- -------------------------------------------------------
On September 14, 2000, the Company held its Annual Meeting of Shareholders.
At the meeting, the shareholders elected as directors Sheldon Razin (with
4,482,670 affirmative votes and 6,150 votes withheld), Ahmed Hussein (with
4,410,431 affirmative votes and 78,389 votes withheld), Mohammed-Tawfick
El-Bardai (with 4,411,431 affirmative votes and 77,389 votes withheld),
Dale Hanson (with 4,484,570 affirmative votes and 4,250 votes withheld),
Frank Meyer (with 4,484,670 affirmative votes and 4,150 votes withheld),
William Small (with 4,484,670 affirmative votes and 4,150 votes withheld),
and Emad Zikry (with 4,411,431 affirmative votes and 77,389 votes
withheld)
The shareholders also ratified the appointment of Deloitee & Touche LLP as
the independent public accountants for the Company for the fiscal year
ending March 31, 2001 (with 4,488,080 affirmative votes, 40 against, and
700 abstaining.)
Item 5. Other Information
------- -----------------
None
Item 6. Exhibits and Reports on Form 8-K.
------- ---------------------------------
Exhibits:
---------
None
Reports on Form 8-K:
--------------------
None.
<PAGE> 26
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: November 02, 2000 By /s/ Lou Silverman
----------------------------------
Lou Silverman
Chief Executive Officer
Principal Executive Officer
Date: November 02, 2000 By /s/ Paul Holt
----------------------------------
Paul Holt
Chief Financial Officer;
Principal Accounting Officer
</TABLE>
<PAGE> 27
INDEX TO EXHIBITS
Sequential
Page
Exhibit No.
------- ----------
10.18* Employment Agreement dated July 20, 2000 between 28
Quality Systems, Inc. and Lou Silverman
27.0 Financial Data Schedule, is filed herewith. 40
*This exhibit is a management contract or a compensatory
plan or arrangement.
<PAGE> 28
EXHIBIT 10.18
<PAGE> 29
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated as of July 20, 2000, ("Effective Date") is
between Quality Systems Inc. ("Company"), and Lou Silverman ("Executive")
(collectively, the "Parties").
RECITALS
Company desires to obtain the services of Executive, and Executive
desires to secure employment from Company upon the following terms and
conditions.
ACCORDINGLY, THE PARTIES AGREE AS FOLLOWS:
1. Period of Employment.
The Company hereby employs Executive to render services to
Company in the position and with the duties and responsibilities
described in Section 2 for the period commencing on a date no
later than August 24, 2000 and ending as hereinafter provided in
Section 5, below (the "Period of Employment").
2. Position, Duties, Place of Employment, Other Activities.
(a) Position. Executive hereby accepts employment with Company
as President and Chief Executive Officer.
(b) Duties. Executive shall always, during the Period of
Employment, be the Company's Chief Executive Officer.
Executive's responsibilities and authority shall include
those activities that are customarily associated with such
position, but shall exclude those duties and decisions which
are reserved to the Board.
(c) Other Activities. Executive agrees to devote his full
business time during regular business hours to working for
the Company and performing the aforesaid duties and such
other duties as shall from time to time be assigned to him
by the Board of Directors of the Company consistent with his
position as the Chief Executive Officer of the Company.
During the Term of his employment hereunder, Executive shall
have no interest in, or perform any services during regular
business hours for any other company, whether or not such
company is competitive with the Company, except that this
prohibition shall not be deemed to apply to passive
investments in businesses not competitive with the business
of the Company or to investments of 5% or less of the
outstanding stock of public companies whose stock is traded
on a national securities exchange or in the over-the-counter
market. For purposes of this paragraph, a "passive
investment" shall be deemed to mean investment in a business
that does not require or result in the participation of
Executive in the management or operations of such business
except during times other than regular business hours and
<PAGE> 30
which does not interfere with his duties and
responsibilities to the Company. Nothing contained herein
shall limit the right of Executive to make speeches, write
articles or participate in public debate and discussions in
and by means of any medium of communication or serve as a
director or trustee of any non-competing Company or
organization, provided that such activities are not
inconsistent with Executive's obligations hereunder.
3. Compensation, Benefits, Expenses.
(a) Base Compensation. In consideration of the services to be
rendered hereunder, Executive shall be paid the annual
salary described in Schedule A to this Agreement in equal
regular installments and pursuant to the procedures
regularly established, and as they may be amended, by
Company during the course of this Agreement. This rate
shall be reviewed by the Board at the end of each calendar
year, and may be increased by the Board in its sole
discretion to reflect executive performance, company
performance, increases in the cost of living and such other
increases as may be awarded in accordance with Company's
regular practice for giving salary increases to similarly
situated executives.
(b) Benefits. Executive shall be entitled to the benefits
described in Schedule A to this Agreement. In addition,
Company shall provide Executive with the right to
participate in and to receive benefits from all present and
future life, accident, disability, medical, dental,
retirement, pension, savings, bonus and incentive plans and
all benefits and perquisites made available to any executive
of Company.
(c) Expenses. The Company shall reimburse Executive for
reasonable travel and other business expenses incurred by
Executive in the performance of his duties hereunder in
accordance with Company's general policies, as they may be
amended from time to time during the course of this
Agreement.
4. At-Will Employment. Executive's employment shall be "at-will,"
and may be terminated for any reason by either the Company or
Executive upon 60 days' written notice to the other party,
subject only to the provisions of Section 6 of this Agreement.
5. Termination of Employment.
(a) By Death. The Period of Employment shall terminate
automatically upon the death of Executive.
(b) By Disability. If, in the sole opinion of the Board,
Executive shall be prevented from properly performing his
<PAGE> 31
duties hereunder by reason of any physical or mental
incapacity for a period of more than twelve (12) consecutive
weeks or for a cumulative period of ninety (90) business
days in any eighteen -month period, then, to the extent
permitted by law, Company shall have the right to terminate
this Agreement.
(c) By Company For Cause. If Company believes that an event
constituting Cause has occurred, Company may give Executive
written notice of its intention to terminate this Agreement
for Cause (as defined below). The preceding sentence
notwithstanding, Executive's employment shall not be deemed
to have been terminated for Cause in the case of (b) below
unless (i) Company has given or delivered to Executive
reasonable notice setting forth the reasons for Company's
intention to terminate Executive's employment for Cause and
has afforded Executive a reasonable period of time not less
than ten (10) business days following actual receipt of such
notice in which to cure; (ii) Executive has been provided a
reasonable opportunity at any time during the 30-day period
after Executive's receipt of such notice, for Executive,
together with Executive's counsel, to be heard before the
Board; and (iii) if such a Board hearing occurs, Executive
receives a second written notice from Company stating that,
in the good faith opinion of not less than a majority of the
entire membership of the Board, Executive was guilty of the
conduct giving rise to termination for Cause and the Cause
has not been cured. If this Agreement is terminated for
Cause, the termination shall be effective as of the date
Company's notice is given pursuant to clause (i) above, or
such later date that may be specified in such notice as the
termination date. "Cause" shall mean Executive (a) engaged
in any criminal conduct constituting a felony (or that
involved dishonesty, breach of trust or moral turpitude) and
criminal charges are brought against Executive by a
governmental authority or Executive enters a plea of nolo
contender (or similar plea) to such charge or (b) knowingly
and willfully engaged in activities that would constitute a
material breach of any term of this Agreement resulting in a
material injury to the business condition, financial or
otherwise, results of operation or prospects of the Company,
as determined in good faith by the Board of Directors of the
Company.
(d) By Executive For Good Reason. If Executive has not received
written notice from Company that it intends to terminate
Executive's employment for Cause, Executive may terminate
the Period of Employment for Good Reason (as defined below)
upon ten (10) days' advance written notice to Company. Any
written notice pursuant to this section shall set forth the
reasons for the termination. Good Reason shall exist if
without Executive's prior written consent and in the absence
of written notice of Cause, one or more of the following
events occurs: (i) there is an assignment to Executive of
any duties materially inconsistent with or which constitute
a material change in Executive's position, duties,
responsibilities, or status with Company, or a material
change in Executive's reporting responsibilities, title, or
offices;
<PAGE> 32
or removal of Executive from or failure to re-elect
Executive to any of such positions, except in connection
with the termination of the Period of Employment pursuant to
subparagraphs (a) through (c), above; (ii) there is a
reduction by Company in Executive's annual salary then in
effect or a material diminishment in the position, duties,
authority or status of Executive; (iii) Company acts in any
way that would adversely affect Executive's participation in
or materially reduce Executive's benefit under any benefit
plan of Company in which Executive is participating or
deprive Executive of any material fringe benefit enjoyed by
Executive, except in so far that such action or inaction by
the Company (1) is also taken or not taken as the case may
be, in respect of all employees generally, (2) is required
by the terms of any benefit plan as in effect immediately
before such action or inaction, or (3) is necessary to
comply with applicable law or to preserve the qualification
of any benefit plan under section 401 (a) of the Internal
Revenue Code; (iv) Company fails to comply with any
provisions of this Agreement, which failure is not remedied
by Company promptly, and in no event later than ten (10)
business days, after Company's receipt of written notice
thereof from Executive; or (v) there is a material change
in the nature or direction of the Business or Executive's
place of employment.
(e) Upon a Change in Control. Termination Upon a Change in
Control shall be deemed to occur upon (1) the termination
of Executive without Cause within 120 days prior to or 90
days after the event constituting the Change in Control or
(2) the election of Executive, within 90 days of the event
constituting the Change in Control, not to continue with the
successor or surviving Corporation. A "Change in Control"
occurs for purposes of this Agreement upon the earliest
occurrence of any of the following events:
(1) The direct or indirect sale, lease, exchange or other
transfer of all, substantially all, or a material
percentage (35% or more) of the assets of the Company
to any person or entity or group of persons or entities
acting in concert as a partnership or other group (a
"Group of Persons").The terms "Persons" and "Group of
Persons" are as defined in Rule 13d 3 of the Exchange
Act;
(2) The merger, consolidation or other business combination
of the Company with or into another Company with the
effect that the shareholders of the Company immediately
prior to the merger, consolidation or other business
combination, hold less than 51% of the combined voting
power of the then outstanding securities of the
surviving Company of such merger, consolidation or
other business combination ordinarily (and apart from
rights accruing under special circumstances) having the
right to vote in the election of directors;
<PAGE> 33
(3) The replacement of a majority of the Company's Board in
any given year as compared to the directors who
constituted the Company's Board at the beginning of
such year, and such replacement shall have not been
approved by the Company's Board of Directors as
constituted at the beginning of such year; and
(4) A person or Group of Persons shall, as a result of a
tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise (other than
as a result of the purchase by Ahmed Hussein or his
affiliates of the Company's securities beneficially
owned by Sheldon Razin or his affiliates or vice
versa), have become the beneficial owner (within the
meaning of Rule 13D-3 under the Securities Exchange Act
of 1934, as amended (the Exchange Act) of securities of
the Company representing 25% or more of the combined
voting power of the then outstanding securities of such
Company ordinarily (and apart from rights accruing
under special circumstances) having the right to vote
in the election of directors.
6. Compensation Upon Termination or Change in Control.
(a) Upon termination due to death or Disability, Executive or
Executive's legal representatives, as the case may be, shall
be entitled to: (i) unpaid Base Compensation earned or
accrued through Executive's date of termination, accrued and
unused vacation pay, unreimbursed expenses and the
disability benefit available under and only to the extent of
the insurance maintained as provided in Schedule A; (ii)
any performance or other bonus earned but not yet paid;
(iii) any other compensation and benefits to which Executive
or Executive's legal representatives may be entitled under
applicable plans, programs and agreements of Company to the
extent permitted under the terms thereof, including, without
limitation, life insurance as provided in Schedule A to this
Agreement; and (iv) any vested stock options in accordance
with the terms of the stock option agreement governing such
stock option.
(b) Upon termination by Company for Cause, Executive shall be
entitled to receive his Base Compensation earned to date of
termination, any accrued but unused vacation pay, and any
unreimbursed expenses, and all other rights shall terminate.
(c) Upon Company's breach of the Agreement prior to the Period
of Employment, Executive shall be entitled to (i) a lump sum
payment equal to six (6) months' of Executive's then current
Base Compensation; and (ii) immediate vesting of an
additional 25% of all granted, but unvested stock options.
<PAGE> 34
(d) Upon a Change in Control, regardless of whether Executive's
employment terminates, Executive shall be entitled to
immediate vesting of all granted, but unvested stock
options.
(e) Upon Termination Upon a Change in Control, Executive shall
be entitled to (i) unpaid Base Compensation and vacation
earned and accrued through Executive's date of termination
plus a lump sum payment equal to six (6) months' of
Executive's then current Base Compensation; (ii) any other
performance bonus earned but not yet paid; (iii)
reimbursement of expenses incurred but not yet reimbursed by
Company; and (iv) immediate vesting of all granted, but
unvested stock options.
(f) Upon Termination by Company without Cause or by Executive
With Good Reason, Executive shall be entitled to (i) unpaid
Base Compensation and vacation earned and accrued through
Executive's date of termination plus a lump sum payment
equal to six (6) months' of Executive's then current Base
Compensation; (ii) any other performance bonus earned but
not yet paid; (iii) reimbursement of expenses incurred but
not yet reimbursed by Company; and (iv) immediate vesting of
an additional 25% of all granted, but unvested stock
options.
(g) Upon termination of the Period of Employment, Executive
shall be deemed to have resigned from all offices and
directorships then held with Company.
7. Damages and Set Off. Executive shall not be required to seek
other employment or otherwise mitigate damages incurred as a
result of termination of Executive's employment by Company.
Company shall not be entitled to set off against the amounts
payable to Executive any amounts earned by Executive in other
employment or any amounts which might have been earned by
Executive in other employment had Executive sought such other
employment. The amounts payable to Executive in the event of
termination shall not be treated as damages but as severance
compensation to which Executive is entitled by reason of such
termination.
<PAGE> 35
8. Confidential Information. Executive acknowledges that, because
of his duties and his position of trust under this Agreement,
he will become familiar with trade secrets and other
confidential information (including but not limited to
operating methods and procedures, customers, employees, and
plans for future developments) which are valuable assets and
property rights of the Company and not publicly known and
Executive acknowledges that public disclosure of such trade
secrets and other confidential information will have an adverse
effect on the Company and its business. Except in connection
with the performance of his duties for the Company, Executive
agrees that he will not, during or at any time after the Period
of Employment, either directly or indirectly, disclose to any
person, entity, firm or Company such trade secrets or other
confidential information, including, but not limited to, any
facts concerning the systems, methods, procedures or plans
developed or used by the Company, and not to release, use or
disclose the same except with the prior written consent of the
Company. Executive agrees to retain all such trade secrets and
other confidential information in a fiduciary capacity for the
sole benefit of the Company, its successors and assigns. All
records, files, memoranda, reports, price lists, customer
lists, documents, equipment, systems, methods, procedures and
plans, and the like, relating to the business of the Company,
which Executive shall use or prepare or come in contact with
shall remain the sole property of the Company. Upon termination
of his employment by the Company or at any time the Company may
so request, Executive will surrender to the Company all non-
public papers, notes, reports, plans and other documents (and
all copies thereof) relating to the business of the Company
which he may then possess or have under his control.
9. Non Solicitation; Non Interference. Executive acknowledges that
(i) the services to be performed by him under this Agreement
are of a special, unique, extraordinary and intellectual
character; (ii) Executive possesses substantial technical and
managerial expertise and skill with respect to the Company's
business; (iii) the Company's business is national in scope and
its products and services are marketed throughout the nation;
(iv) the Company competes with other businesses that are or
could be located in any part of the nation; (v) the covenants
and obligations of Executive under this Paragraph 9 are
material inducement and condition to the Company's entering
into this Agreement and performing its obligations hereunder,
and (vi) the provisions of this Paragraph 9 are reasonable and
necessary to protect the Company's business.
In consideration of the acknowledgements by Executive, and in
consideration of the compensation and benefits to be paid or
provided to Executive by the Company, Executive covenants that
he will not, for a period of two (2) years following the
expiration or earlier termination of this Agreement, without
<PAGE> 36
the prior written consent of the Company, directly or
indirectly either for himself or any other person, (i) solicit
or induce, or attempt to solicit or induce any employee of, or
agent or independent contractor providing services to the
Company to leave the employ of or to cease to provide services,
in whole or in part to, the Company, or to terminate or fail or
refuse to renew or renegotiate, any contract for services with
the Company, whether such control is written or oral, (ii) in
any way interfere with the relationship between the Company and
employee of or agent or independent contractor of the Company,
(iii) employ or otherwise engage as an employee, sales, or
independent contractor, consultant or otherwise, and employee,
agent or independent contractor of the Company (this subsection
(iii) shall not apply to any person after two (2) years have
elapsed subsequent to the date on which such person's
employment by or association with the Company has terminated),
and for a period of one (1) year following the expiration or
earlier termination of this agreement induce or attempt to
induce any customer, supplier, licensee, or business relation
of the Company to cease doing business with the Company, or in
any way interfere with the relationship between any customer,
supplier, licensee, or business relation of the Company,
10. Assignment; Successors and Assigns. Executive agrees that he
will not assign, sell, transfer, delegate or otherwise dispose
of, whether voluntarily or involuntarily, or by operation of
law, any rights or obligations under this Agreement, nor shall
Executive's rights be subject to encumbrance or the claims of
creditors. Any purported assignment, transfer, or delegation
shall be null and void. Nothing in this Agreement shall
prevent the consolidation of Company with, or its merger into,
any other corporation, or the sale by Company of all or
substantially all of its properties or assets, or the
assignment by Company of this Agreement and the performance of
its obligations hereunder to any successor in interest or any
Affiliated Company. Subject to the foregoing, this Agreement
shall be binding upon and shall inure to the benefit of the
Parties and their respective heirs, legal representatives,
successors, and permitted assigns, and shall not benefit any
person or entity other than those enumerated above.
11. Notices. All notices or other communications required or
permitted hereunder shall be made in writing and shall be
deemed to have been duly given if delivered by hand or mailed,
postage prepaid, by certified or registered mail, return
receipt requested, and addressed to Company at:
___________________________
___________________________
___________________________
Attn: ______________________
<PAGE> 37
or to Executive at:
___________________________
___________________________
___________________________
Notice of change of address shall be effective only when done in
accordance with this Section.
12. Entire Agreement. The terms of this Agreement are intended by
the Parties to be the final expression of their agreement with
respect to the employment of Executive by Company and may not be
contradicted by evidence of any prior or contemporaneous
agreement. The Parties further intend that this Agreement shall
constitute the complete and exclusive statement of its terms and
that no extrinsic evidence whatsoever may be introduced in any
judicial, administrative, or other legal proceeding involving
this Agreement.
13. Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, signed
by Executive and by a duly authorized representative of Company
other than Executive. By an instrument in writing similarly
executed, either party may waive compliance by the other party
with any provision of this Agreement that such other party was or
is obligated to comply with or perform, provided, however, that
such waiver shall not operate as a waiver of, or estoppel with
respect to, any other or subsequent failure. No failure to
exercise and no delay in exercising any right, remedy, or power
hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any right, remedy, or power hereunder
preclude any other or further exercise thereof or the exercise of
any other right, remedy, or power provided herein or by law or in
equity.
14. Severability; Enforcement. If any provision of this Agreement,
or the application thereof to any person, place, or circumstance,
shall be held by a court of competent jurisdiction to be invalid,
unenforceable, or void, the remainder of this Agreement and such
provisions as applied to other persons, places, and circumstances
shall remain in full force and effect.
15. Interpretation; Governing Law. This Agreement shall be deemed to
be the result of arms-length negotiation between the Parties and
shall not be deemed to have been drafted by either Party. Titles
and headings are for convenience of reference only and are not
interpretive of text. The validity, interpretation,
enforceability, and performance of this Agreement shall be
governed by and construed in accordance with the law of the State
of California.
16. Executive Acknowledgment. Executive acknowledges (i) that he has
consulted with or has had the opportunity to consult with
<PAGE> 38
independent counsel of his own choice concerning this Agreement
and has been advised to do so by Company, and (ii) that he has
read and understands the Agreement, is fully aware of its legal
effect, and has entered into it freely based on his own judgment.
17. Execution. This Agreement may be executed in counterparts, and
if so executed and delivered, all of the counterparts together
shall constitute one and the same Agreement. A facsimile
signature may be treated as an original, and each party agrees to
deliver to the other party an original executed Agreement within
seven days of execution.
The Parties have duly executed this Agreement as of the date first
written above.
Lou Silverman
____/s/ Lou Silverman____________________
Quality Systems Inc.
By: _/s Ahmed Hussein_________________
Its: Co-Chairman Board of Directors___
<PAGE> 39
Schedule A
Base Salary: Executive will be paid base salary at the annualized rate of
$250,000.00
Cash Bonus: Executive will earn a cash bonus of up to 50% of annual Base
Compensation, based upon performance on goals established jointly between
Executive and the Board, which goals shall be established within a
reasonable period of time, but no later than 90 days after the Period of
Employment commences, and which shall be reviewed not less than annually.
Any Cash Bonus will be paid no later than 90 days after the end of the
period in which such bonus was earned.
Stock Options: Effective upon execution of this Agreement, Executive shall
be granted an option to purchase One Hundred Twenty-Four Thousand Two
Hundred Sixty (124,260) shares of QSI common stock. The exercise price of
such option shall equal the bid price at the close of trading on the Nasdaq
National Market on the Effective Date.
Additionally, Executive will be granted stock options in the amount of not
less than 1% of the issued and outstanding shares of QSI stock at the one
year anniversary of the Effective Date, if the Executive remains an
Employee of the Company at that time. The exercise price of such option
shall be the closing price of the stock on the Nasdaq National Market on
the one year anniversary of the Effective Date, or if the anniversary
date falls on a non-business day, the business day immediately following
the anniversary date.
Benefits: Executive will be eligible to earn and participate in all other
benefit programs offered by the company with the same eligibility
requirements as would apply to any other executive of the company. However,
all waiting periods for health benefits and 401k benefits will be waived
for Executive.
<PAGE> 40
EXHIBIT 27.0
