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<SEC-DOCUMENT>0001169232-05-003136.txt : 20050614
<SEC-HEADER>0001169232-05-003136.hdr.sgml : 20050613
<ACCEPTANCE-DATETIME>20050613213011
ACCESSION NUMBER: 0001169232-05-003136
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 20050331
FILED AS OF DATE: 20050614
DATE AS OF CHANGE: 20050613
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: QUALITY SYSTEMS INC
CENTRAL INDEX KEY: 0000708818
STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373]
IRS NUMBER: 952888568
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-12537
FILM NUMBER: 05893569
BUSINESS ADDRESS:
STREET 1: 18191 VON KARMAN AVENUE
CITY: IRVINE
STATE: CA
ZIP: 92612
BUSINESS PHONE: 7147317171
MAIL ADDRESS:
STREET 1: 18191 VON KARMAN AVENUE
STREET 2: SUITE 450
CITY: IRVINE
STATE: CA
ZIP: 92612
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<TYPE>10-K
<SEQUENCE>1
<FILENAME>d64225_10k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2005
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 Identification No.)
incorporation or organization)
18191 Von Karman Avenue, Irvine, California 92603
(Address of principal executive offices, including zip code)
(949) 255-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per Share
(Title of class)
Indicate by check mark whether the Registrant (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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of September 30, 2004: 200,543,000 (based on the closing sales
price of the Registrant's Common Stock as reported in the NASDAQ National Market
System on that date, $50.51 per share).*
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of June 3, 2005: $415,011,000 (based on the closing sales
price of the Registrant's Common Stock as reported in the NASDAQ National Market
System on that date, $51.30 per share).*
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock, as of the latest practicable date.
Common Stock, $.01 par value 13,115,360
- -------------------------------------- ----------------------------------------
(Class) (Outstanding at June 8, 2005)
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III, Items 10, 11, 12, 13 and 14, of the
Form 10-K is incorporated by reference from Registrant's Definitive Proxy
Statement for its 2005 annual meeting which is to be filed with the Commission
within 120 days of its fiscal year ended on March 31, 2005.
* For purposes of this report, in addition to those shareholders which
fall within the definition of "affiliates" under Rule 405 of the Securities Act
of 1933, as amended, holders of ten percent or more of the Registrant's Common
Stock are deemed to be affiliates for purposes of this Report.
================================================================================
<PAGE>
CAUTIONARY STATEMENT
Statements made in this report, the Annual Report to Shareholders in which this
report is made a part, other reports and proxy statements filed with the
Securities and Exchange Commission, communications to shareholders, press
releases and oral statements made by our representatives that are not historical
in nature, or that state our or management's intentions, hopes, beliefs,
expectations or predictions of the future, may constitute "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"). Forward-looking statements can often
be identified by the use of forward-looking terminology, such as "could,"
"should," "will," "will be," "will lead," "will assist," "intended," "continue,"
"believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," or
"estimate" or variations thereof or similar expressions. Forward-looking
statements are not guarantees of future performance or results. They involve
risks, uncertainties and assumptions. It is important to note that any such
performance and actual results, financial condition or business, could differ
materially from those expressed in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below as well as those discussed elsewhere in reports filed with
the Securities and Exchange Commission. Other unforeseen factors not identified
herein could also have such an effect. We undertake no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in future operating results, financial
condition or business over time.
PART I
ITEM 1. BUSINESS
General
Except for the historical information contained herein, the matters discussed in
this Annual Report on Form 10-K, including discussions of the Registrant's
product development plans, business strategies and market factors influencing
the Registrant's results, are forward-looking statements that involve certain
risks and uncertainties. Actual results may differ from those anticipated by the
Registrant as a result of various factors, both foreseen and unforeseen,
including, but not limited to, the Registrant's ability to continue to develop
new products and increase systems sales in markets characterized by rapid
technological evolution, consolidation within the Registrant's target
marketplace and among the Registrant's competitors, and competition from larger,
better capitalized competitors. Many other economic, competitive, governmental
and technological factors could impact the Registrant's ability to achieve our
goals. Interested persons are urged to review the risks described under "Item 1.
Business. Risk Factors" and in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as in the Registrant's
other public disclosures and filings with the Securities and Exchange
Commission.
3
<PAGE>
Company Overview
Quality Systems Inc., comprised of the QSI Division (QSI Division) and a wholly
owned subsidiary, NextGen Healthcare Information Systems, Inc. (NextGen
Division) (collectively, the Company, we, our, or us) develops and markets
healthcare information systems that automate certain aspects of medical and
dental practices, networks of practices such as physician hospital organizations
(PHO's) and management service organizations (MSO's), ambulatory care centers,
community health centers, and medical and dental schools.
The Company, a California corporation formed in 1974, was founded with an early
focus on providing information systems to dental group practices. In the
mid-1980's, we capitalized on the increasing focus on medical cost containment
and further expanded our information processing systems to serve the medical
market. In the mid 1990's we made two acquisitions that accelerated our
penetration of the medical market. These two acquisitions formed the basis for
the NextGen Division. Today, we serve the medical and dental markets through our
two divisions.
The two Divisions operate largely as stand-alone operations, with each Division
maintaining its own distinct product lines, product platforms, development,
implementation and support teams, sales staffing, and branding. The two
Divisions share the resources of our "corporate office" which includes a variety
of accounting and other administrative functions. Additionally, there are a
small number of clients who are simultaneously utilizing software from each of
our two Divisions.
The QSI Division, co-located with our Corporate Headquarters in Irvine,
California, currently focuses on developing, marketing and supporting software
suites sold to dental and certain niche medical practices. In addition, the
Division supports a number of medical clients that utilize the Division's
UNIX(1) based medical practice management software product.
The NextGen Division, with headquarters in Horsham, Pennsylvania, and a second
significant location in Atlanta, Georgia, focuses principally on developing and
marketing products and services for medical practices.
Both Divisions develop and market practice management software which is designed
to automate and streamline a number of the administrative functions required for
operating a medical or dental practice. Examples of practice management software
functions include scheduling and billing capabilities. It is important to note
that in both the medical and dental environments, practice management software
systems have already been implemented by the vast majority of practices.
Therefore, we actively compete for the replacement market.
In addition, both Divisions develop and market software that automates the
patient record and enhances patient-provider interactions. Adoption of this
software, commonly referred to as clinical software, is in its relatively early
stages. Therefore, we are typically competing to replace paper-based patient
record alternatives as opposed to replacing previously purchased systems.
Electronic Data Interchange (EDI)/connectivity products are intended to automate
a number of manual, often paper-based or telephony intensive communications
between patients and/or providers and/or payors. Two of the more common EDI
services are forwarding insurance claims electronically from providers to payors
and assisting practices with issuing statements to patients. Most practices
utilize at least some of these services from us or one of our competitors. Other
EDI/connectivity services are used
______________________________
(1) UNIX is a registered trademark of the AT&T Corporation.
4
<PAGE>
more sporadically by client practices. We typically compete to displace
incumbent vendors for claims and statements accounts, and attempt to increase
usage of other elements in our EDI/connectivity product line. In general, EDI
services are only sold to those accounts utilizing software from one of our
Divisions.
The QSI Division's practice management software suite utilizes a UNIX operating
system. Its Clinical Product Suite (CPS) utilizes a Windows NT(2) operating
system and can be fully integrated with the practice management software from
each Division. CPS incorporates a wide range of clinical tools including, but
not limited to, periodontal charting and digital imaging of X-ray and inter-oral
camera images as part of the electronic patient record. The Division develops,
markets, and manages our EDI/connectivity applications. The QSInet Application
Service Provider (ASP/Internet) offering is also developed and marketed by the
Division.
Our NextGen Division develops and sells proprietary electronic medical records
software and practice management systems under the NextGen(R)(3) product name.
Major product categories of the NextGen suite include Electronic Medical Records
(NextGen(emr)), Enterprise Practice Management (NextGen(epm)), Enterprise
Appointment Scheduling (NextGen(eas)), Enterprise Master Patient Index
(NextGen(epi)), NextGen Image Control System (NextGen(ics)), Managed Care Server
(NextGen(mcs)), Electronic Data Interchange, System Interfaces, Internet
Operability (NextGen(web)), a Patient-centric and Provider-centric Web Portal
solution (NextMD(4).com), and a handheld product (NextGen(pda)). During the year
ended March 31, 2005, the NextGen Division introduced NextGen Express, a version
of NextGen(emr) designed for small practices. NextGen products utilize Microsoft
Windows technology and can operate in a client-server environment as well as via
private intranet, the Internet, or in an ASP environment.
We continue to pursue product enhancement initiatives within each Division. The
majority of such expenditures are currently targeted to the NextGen Division
product line and client base.
Inclusive of divisional EDI revenue, the NextGen Division accounted for
approximately 82.7% of our revenue for fiscal 2005 compared to 76.8% in fiscal
2004. Inclusive of divisional EDI revenue ,the QSI Division accounted for 17.3%
and 23.2% of revenue in fiscal 2005 and 2004, respectively. The NextGen
Division's year over year revenue grew at 35.2% and 45.8% in fiscal 2005 and
2004, respectively, while the QSI Division's year over year revenue declined by
6.8% and 5.3% in fiscal 2005 and 2004, respectively.
In addition to the aforementioned software solutions which we offer through our
two divisions, each division offers comprehensive hardware and software
installation services, maintenance and support services, and system training
services.
Industry Background
To compete in the continually changing healthcare environment, providers are
increasingly using technology to help maximize the efficiency of their business
practices, to assist in enhancing patient care, and to maintain the privacy of
patient information.
As the reimbursement environment continues to evolve, more healthcare providers
enter into contracts, often with multiple entities, which define the terms under
which care is administered and paid for. The diversity of payor organizations,
as well as additional government regulation and changes in
______________________________
(2) Microsoft Windows, Windows NT, Windows 95, Windows 98, Windows XP, and
Windows 2000 are registered trademarks of the Microsoft Corporation.
(3) NextGen is a registered trademark of NextGen Healthcare Information
Systems, Inc.
(4) NextMD is a registered trademark of NextGen Healthcare Information
Systems, Inc.
5
<PAGE>
reimbursement models, have greatly increased the complexity of pricing, billing,
reimbursement, and records management for medical and dental practices. To
operate effectively, healthcare provider organizations must efficiently manage
patient care and other information and workflow processes which increasingly
extend across multiple locations and business entities.
In response, healthcare provider organizations have placed increasing demands on
their information systems. Initially, these information systems automated
financial and administrative functions. As it became necessary to manage patient
flow processes, the need arose to integrate "back-office" data with such
clinical information as patient test results and office visits. The Company
believes information systems must facilitate management of patient information
incorporating administrative, financial and clinical information from multiple
entities. In addition, large healthcare organizations increasingly require
information systems that can deliver high performance in environments with
multiple concurrent computer users.
Many existing healthcare information systems were designed for limited
administrative tasks such as billing and scheduling and can neither accommodate
multiple computing environments nor operate effectively across multiple
locations and entities. We believe that practices that leverage technology to
more efficiently handle patient clinical data as well as administrative,
financial and other practice management data, will be best able to enhance
patient flow, pursue cost efficiencies, and improve quality of care. As
healthcare organizations transition to new computer platforms and newer
technologies, we believe such organizations will be migrating toward the
implementation of enterprise-wide, patient-centric computing systems embedded
with automated clinical patient records.
Company Strategy
The Company's strategy is, at present, to focus on it's core software business.
Among the key elements central to this strategy are:
o Continued development and enhancement of select software solutions
in target markets;
o Continued investments in our infrastructure including but not
limited to product development, sales, marketing, implementation,
and support;
o Continued efforts to make infrastructure investments within an
overall context of maintaining reasonable expense discipline; and
o Addition of new customers through maintaining and expanding sales,
marketing and product development activities.
While these are the key elements of our current strategy, there can be no
guarantees that our strategy will not change, or that we will succeed in
achieving these goals individually or collectively.
Products
In response to the growing need for more comprehensive, cost-effective
healthcare information solutions for physician and dental practices, our systems
provide our clients with the ability to redesign patient care and other workflow
processes while improving productivity through facilitation of managed access to
patient information. Utilizing our proprietary software in combination with
third party hardware and software solutions, our products enable the integration
of a variety of administrative and clinical information operations. Leveraging
more than 30 years of experience in the healthcare information services
industry, we believe that we continue to add value by providing our clients with
sophisticated, full-featured software systems along with comprehensive systems
implementation, maintenance and support services. Any single transaction may or
may not include software, hardware or services.
Practice Management Systems. Our products consist primarily of proprietary
healthcare software applications together with third party hardware and other
non-industry specific software. The systems range in capacity from one to
thousands of users, allowing us to address the needs of both small and large
6
<PAGE>
organizations. The systems are modular in design and may be expanded to
accommodate changing client requirements.
The QSI Division's character-based practice management system is available in
both dental and medical versions and primarily uses the IBM RS6000(5) central
processing unit and IBM'S AIX(6) version of the UNIX operating system as a
platform for our application software enabling a wide range of flexible and
functional systems. The hardware components, as well as the requisite operating
system licenses, are purchased from manufacturers or distributors of those
components. We configure and test the hardware components and incorporate our
software and other third party packages into completed systems tailored to
accommodate particular client requirements. We continually evaluate third party
hardware components with a view toward utilizing hardware that is functional,
reliable and cost-effective.
NextGen(epm) is the NextGen division's practice management offering.
NextGen(epm) has been developed using a graphical user interface (GUI)
client-server platform for compatibility with Windows 2000, Windows NT and
Windows XP operating systems and relational databases that are ANSI
SQL-compliant. NextGen(epm) is scalable and includes a master patient index,
enterprise-wide appointment scheduling with referral tracking, clinical support,
and centralized or decentralized patient financial management based on either a
managed care or fee-for-service model. The system's three-tiered architecture
allows work to be performed on the database server, the application server and
the client workstation.
We also offer practice management solutions for both dental and medical
practices through the Internet. These products are marketed under the QSINet and
NextGen(web) trade names, respectively.
Clinical Systems. Our dental charting software system, the Clinical
Product Suite (CPS), is a comprehensive solution designed specifically for the
dental group practice environment. CPS integrates the dental practice management
product with a computer-based clinical information system that incorporates a
wide range of clinical tools, including:
o Electronic charting of dental procedures, treatment plans and
existing conditions;
o Periodontal charting via light-pen, voice-activation, or keyboard
entry for full periodontal examinations and PSR scoring;
o Digital imaging of X-ray and intra-oral camera images;
o Computer-based patient education modules, viewable chair-side to
enhance case presentation;
o Full access to patient information, treatment plans, and insurance
plans via a fully integrated interface with our dental practice
management product; and
o Document and image scanning for digital storage and linkage to the
electronic patient record.
The result is a comprehensive clinical information management system that helps
practices save time, reduce costs, improve case presentation, and enhance the
delivery of dental services and quality of care. Clinical information is managed
and maintained electronically thus forming an electronic patient record that
allows for the implementation of the "chartless" office.
CPS incorporates Windows-based client-server technology consisting of one or
more file servers together with any combination of one or more desktop, laptop,
or pen-based PC workstations. The file server(s) used in connection with CPS
utilize(s) a Windows NT or Windows 2000 or Windows XP operating system and the
hardware is typically a Pentium(7)-based single or multi-processor platform.
Based on the
______________________________
(5) RS6000 is a registered trademark of International Business Machines
Corporation.
(6) AIX is a registered trademark of International Business Machines
Corporation.
(7) Pentium is a registered trademark of Intel Corporation.
7
<PAGE>
server configuration chosen, CPS is scalable from one to hundreds of
workstations. A typical configuration may also include redundant disk storage,
magnetic tape units, intra- and extra-oral cameras, digital X-ray components,
digital scanners, conventional and flat screen displays, and printers. The
hardware components, including the requisite operating system licenses, are
purchased from third party manufacturers or distributors either directly by the
customer or by us for resale to the customer.
NextGen provides clinical software applications that are complementary to, and
are integrated with, our medical practice management offerings and interface
with many of the other leading practice management software systems on the
market. The applications incorporated into our practice management solutions and
others such as scheduling, eligibility, billing and claims processing are
augmented by clinical information captured by NextGen(emr), including services
rendered and diagnoses used for billing purposes. We believe that we currently
provide a comprehensive information management solution for the medical
marketplace.
NextGen(emr) was developed with client-server architecture and a GUI and
utilizes Microsoft Windows 2000, Windows NT or Windows XP on each workstation
and either Windows 2000, Windows NT, Windows XP or UNIX on the database server.
NextGen(emr) maintains data using industry standard relational database engines
such as Microsoft SQL Server(8) or Oracle(9). The system is scalable from one to
hundreds of workstations.
NextGen(emr) stores and maintains clinical data including:
o Data captured using user-customized input "templates";
o Scanned or electronically acquired images, including X-rays and
photographs;
o Data electronically acquired through interfaces with clinical
instruments or external systems;
o Other records, documents or notes, including electronically captured
handwriting and annotations; and
o Digital voice recordings.
NextGen(emr) also offers a workflow module, prescription management, automatic
document and letter generation, patient education, referral tracking, interfaces
to billing and lab systems, physician alerts and reminders, and powerful
reporting and data analysis tools.
NextGen(pda), the Pocket-PC-based suite of solutions, allows mobile health
professionals to utilize many of NextGen's functions using a palm-sized device.
Connectivity Services. The Company makes available electronic data
interchange ("EDI") capabilities and connectivity services to our customers. The
EDI/connectivity capabilities encompass direct interfaces between our products
and external third party systems, as well as transaction-based services.
Services include:
o Electronic claims submission through our relationships with a number
of payors and national claims clearinghouses;
o Electronic patient statement processing, appointment reminder cards
and calls, recall cards, patient letters, and other correspondence;
o Electronic insurance eligibility verification; and
o Electronic posting of remittances from insurance carriers into the
accounts receivable application.
_______________________________
(8) Microsoft and SQL Server is a registered trademark of Microsoft
Corporation.
(9) Oracle is a registered trademark of Oracle Corporation.
8
<PAGE>
Internet Applications. Our NextGen Division maintains an Internet-based
consumer health portal, NextMD.com. NextMD.com is 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 are able to request
appointments, send appointment changes or cancellations, receive test results
on-line, request prescription refills, view and/or pay their statements, and
communicate with their physicians, all in a secure, on-line environment. Our
NextGen suite of information systems are or can be linked to NextMD.com,
integrating a number of these features with physicians' existing systems.
Our QSI Division also provides a web-based application called QSINet which
allows clients to access information from their practice management system via
the Internet. This application also enables providers to offer their patients
convenient services such as on-line appointment scheduling and electronic bill
payment through the client's website, and posts this data directly to the
client's existing practice management system.
Sales and Marketing
We sell and market our products nationwide primarily through a direct sales
force. The efforts of the direct sales force are augmented by a small number of
reseller relationships established by us. Software license sales to resellers
represented less than 10% of total revenue for the years ended March 31, 2005
and 2004.
Our direct sales force typically makes presentations to potential clients by
demonstrating the system and our capabilities on the prospective client's
premises. Sales efforts aimed at smaller practices are primarily performed
remotely via telephone or internet based presentations. Our sales and marketing
employees identify prospective clients through a variety of means, including
referrals from existing clients, industry consultants, contacts at professional
society meetings, trade shows and seminars, trade journal advertising, direct
mail advertising, and telemarketing.
Our sales cycle can vary significantly and typically ranges from three to twelve
months from initial contact to contract execution. Software licenses are
normally delivered to a customer almost immediately upon receipt of an order.
Implementation and training services are normally rendered based on a mutually
agreed upon timetable. As part of the fees paid by our clients, we receive
up-front licensing fees. Clients have the option to purchase maintenance
services which, if purchased, are invoiced on a monthly or quarterly basis.
Several clients have purchased our practice management software and, in turn,
are providing either time-share or billing services to single and group practice
practitioners. Under the time-share or billing service agreements, the client
provides the use of our software for a fee to one or more practitioners.
Although we typically do not receive a fee directly from the distributor's
customers, implementation of such arrangements has, from time to time, resulted
in the purchase of additional software capacity by the distributor, as well as
new software purchases made by the distributor's customers should such customers
decide to perform the practice management functions in-house.
We continue to concentrate our direct sales and marketing efforts on medical and
dental practices, networks of such practices including MSO's and PHO's,
professional schools, community health centers and other ambulatory care
settings.
MSO's, PHO's and similar networks to which we have sold systems provide use of
our software to those group and single physician practices associated with the
organization or hospital on either a service basis or by directing us to
contract with those practices for the sale of stand-alone systems.
We have also entered into marketing assistance agreements with certain of our
clients pursuant to which the clients allow us to demonstrate to potential
clients the use of systems on the existing clients' premises.
9
<PAGE>
From time to time we assist prospective clients in identifying third party
sources for financing the purchase of our systems. The financing is typically
obtained by the client directly from institutional lenders and typically takes
the form of a loan from the institution secured by the system to be purchased or
a leasing arrangement. We do not guarantee the financing nor retain any
continuing interest in the transaction.
We have numerous clients and do not believe that the loss of any single client
would have a material adverse effect on us. No client accounted for ten percent
or more of net revenue during the fiscal years ended March 31, 2005, 2004, or
2003.
Customer Service and Support
We believe our success is attributable in part to our customer service and
support departments. We offer support to our clients seven days a week, 24 hours
a day.
Our client support staff is comprised of specialists who are knowledgeable in
the areas of software and hardware as well as in the day-to-day operations of a
practice. System support activities range from correcting minor procedural
problems in the client's system to performing complex database reconstructions
or software updates.
We utilize automated online support systems which assist clients in resolving
minor problems and facilitate automated electronic retrieval of problems and
symptoms following a client's call to the automated support system.
Additionally, our online support systems maintain call records, available at
both the client's facility and our offices.
We offer our clients support services for most system components, including
hardware and software, for a fixed monthly or quarterly fee. Customers also
receive access to future unspecified versions of the software, on a when-and-if
available basis, as part of support services. We also subcontract, in certain
instances, with third party vendors to perform specific hardware maintenance
tasks.
Implementation and Training
We offer full service implementation and training services. When a client signs
a contract for the purchase of a system that includes implementation and
training services, a client manager/implementation specialist trained in medical
and/or dental group practice procedures is assigned to assist the client in the
installation of the system and the training of appropriate practice staff.
Implementation services include loading the software, training customer
personnel, data conversion, running test data, and assisting in the development
and documentation of procedures. Implementation and training services are
provided by our employees as well as certified third parties and certain
resellers.
Training may include a combination of computer assisted instruction (CAI) for
certain of our products, remote training techniques and training classes
conducted at the client's or our office(s). CAI consists of workbooks, computer
interaction and self-paced instruction. CAI is also offered to clients, for an
additional charge, after the initial training program is completed for the
purpose of training new and additional employees. Remote training allows a
trainer at our offices to train one or more people at a client site via
telephone and computer connection, thus allowing an interactive and
client-specific mode of training without the expense and time required for
travel. In addition, our on-line "help" and other documentation features
facilitate client training as well as ongoing support.
10
<PAGE>
Competition
The markets for healthcare information systems are intensely competitive. The
industry is highly fragmented and includes numerous competitors, none of which
we believe dominates these markets. The electronic patient records and
connectivity markets, in particular, are subject to rapid changes in technology,
and we expect that competition in these market segments will increase as new
competitors enter the market. We believe our principal competitive advantages
are the features and capabilities of our products and services, our high level
of customer support, and our extensive experience in the industry.
Production Enhancement and Development
The healthcare information management and computer software and hardware
industries are characterized by rapid technological change requiring us to
engage in continuing investments to update, enhance, and improve our systems.
During fiscal years 2005, 2004, and 2003, we expended approximately $9.6
million, $8.7 million, and $6.7 million, respectively, on research and
development activities, including capitalized software amounts of $2.7 million,
$2.6 million, and $1.7 million, respectively. In addition, a portion of our
product enhancements have resulted from software development work performed
under contracts with our clients.
Employees
As of May 27, 2005, we employed 418 persons, of which 409 were full-time
employees. We believe that our future success depends in part upon recruiting
and retaining qualified sales, marketing and technical personnel as well as
other employees.
Risks Relating to our Business
The more prominent risks and uncertainties inherent in our business are
described below. However, additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations will likely suffer. Any of these or
other factors could harm our business and future results of operations and may
cause you to lose all or part of your investment.
We face significant competition. The markets for healthcare information systems
are intensely competitive and we face significant competition from a number of
different sources. Several of our competitors have significantly greater name
recognition as well as substantially greater financial, technical, product
development and marketing resources than we do.
We compete in all of our markets with other major healthcare related companies,
information management companies, systems integrators, and other software
developers. Competitive pressures and other factors, such as new product
introductions by ourselves or our competitors, may result in price or market
share erosion that could have a material adverse effect on our business, results
of operations and financial condition. Also, there can be no assurance that our
applications will achieve broad market acceptance or will successfully compete
with other available software products.
Our inability to make initial sales of our systems to newly formed groups and/or
healthcare providers that are replacing or substantially modifying their
healthcare information systems could have a material adverse effect on our
business, results of operations and financial condition. If new systems sales do
not materialize, our near term and longer term revenue will be negatively
affected.
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Our quarterly operating results have historically fluctuated and may do so in
the future. Our revenue has fluctuated in the past, and may fluctuate in the
future from quarter to quarter and period to period, as a result of a number of
factors including, without limitation:
o the size and timing of orders from clients;
o the specific mix of software, hardware, and services in client orders;
o the length of sales cycles and installation processes;
o the ability of our clients to obtain financing for the purchase of our
products;
o changes in pricing policies or price reductions by us or our competitors;
o the timing of new product announcements and product introductions by us or
our competitors;
o changes in revenue recognition or other accounting guidelines employed by
us and/or established by the Financial Accounting Standards Board or other
rule-making bodies;
o the availability and cost of system components;
o the financial stability of clients;
o market acceptance of new products, applications and product enhancements;
o our ability to develop, introduce and market new products, applications
and product enhancements;
o our success in expanding our sales and marketing programs;
o deferrals of client orders in anticipation of new products, applications,
product enhancements, or public/private sector initiatives;
o execution of or changes to our strategy;
o personnel changes; and
o general market/economic factors.
Our software products are generally shipped as orders are received and
accordingly, we have historically operated with a minimal backlog of license
fees. As a result, revenue in any quarter is dependent on orders booked and
shipped in that quarter and is not predictable with any degree of certainty.
Furthermore, our systems can be relatively large and expensive and individual
systems sales can represent a significant portion of our revenue and profits for
a quarter such that the loss or deferral of even one such sale can have a
significant adverse impact on our quarterly revenue and profitability.
Clients often defer systems purchases until our quarter end, so quarterly
results generally cannot be predicted and frequently are not known until the
quarter has concluded.
Our sales are dependent upon clients' initial decisions to replace or
substantially modify their existing information systems, and subsequently a
decision as to which products and services to purchase. These are major
decisions for healthcare providers, and accordingly, the sales cycle for our
systems can vary significantly and typically ranges from three to twelve months
from initial contact to contract execution/shipment.
Because a significant percentage of our expenses are relatively fixed, a
variation in the timing of systems sales, implementations, and installations can
cause significant variations in operating results from quarter to quarter. As a
result, we believe that interim period-to-period comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. Further, our historical operating results are
not necessarily indicative of future performance for any particular period.
We currently recognize revenue pursuant to SOP 97-2, as modified by SOP 98-9 and
SAB 104. SAB 104 summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements.
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There can be no assurance that application and subsequent interpretations of
these pronouncements will not further modify our revenue recognition policies,
or that such modifications would not have a material adverse effect on the
operating results reported in any particular quarter or year.
Due to all of the foregoing factors, it is possible that our operating results
may be below the expectations of public market analysts and investors. In such
event, the price of our common stock would likely be materially adversely
affected.
The price of our shares and the trading volume of our shares have been volatile
historically and may continue to be volatile. Volatility may be caused by a
number of factors including but not limited to:
o actual or anticipated quarterly variations in operating results;
o rumors about our performance, software solutions, or merger and
acquisition activity;
o changes in expectations of future financial performance or changes in
estimates of securities analysts;
o governmental regulatory action;
o health care reform measures;
o client relationship developments;
o purchases or sales of company stock;
o changes occurring in the markets in general; and
o other factors, many of which are beyond our control.
Furthermore, the stock market in general, and the market for software,
healthcare and high technology companies in particular, has experienced extreme
volatility that often has been unrelated to the operating performance of
particular companies. These broad market and industry fluctuations may adversely
affect the trading price of our common stock, regardless of actual operating
performance.
Two of our directors are significant shareholders, which makes it possible for
them to have significant influence over the outcome of all matters submitted to
our shareholders for approval and which influence may be alleged to conflict
with our interests and the interests of our other shareholders. Two of our
directors and principal shareholders beneficially owned an aggregate of
approximately 38% of the outstanding shares of our common stock at March 31,
2005. The Company's Bylaws permit its shareholders to cumulate their votes, the
effect of which is to provide shareholders with sufficiently large
concentrations of Company shares the opportunity to assure themselves one or
more seats on the Company's Board. The amounts required to assure a Board
position can vary based upon the number of shares outstanding, the number of
shares voting, the number of directors to be elected and the number of shares
held by the shareholder exercising cumulative voting rights. In the event that
cumulative voting is invoked, it is likely that the two of our directors holding
an aggregate of approximately 38% of the outstanding shares of our common stock
at March 31, 2005 will each have sufficient votes to assure themselves of one or
more seats on our Board. With or without cumulative voting, these shareholders
will have significant influence over the outcome of all matters submitted to our
shareholders for approval, including the election of our directors and other
corporate actions. In addition, such influence by one or both of these
affiliates could have the effect of discouraging others from attempting to
purchase us, take us over, and/or reducing the market price offered for our
common stock in such an event.
We are dependent on our principal products and our new product development. We
currently derive substantially all of our net revenue from sales of our
healthcare information systems and related services. We believe that a primary
factor in the market acceptance of our systems has been our ability to meet the
needs of users of healthcare information systems. Our future financial
performance will depend in large part on our ability to continue to meet the
increasingly sophisticated needs of our clients through the timely development
and successful introduction and implementation of new and enhanced versions of
our systems and other complementary products. We have historically expended a
significant percentage of
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our net revenue on product development and believe that significant continuing
product development efforts will be required to sustain our growth. Continued
investment in our sales staff and our client implementation and support staffs
will also be required to support future growth.
There can be no assurance that we will be successful in our product development
efforts, that the market will continue to accept our existing products, or that
new 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, our business, results of operations and financial condition could be
materially adversely affected. At certain times in the past, we have also
experienced delays in purchases of our products by clients anticipating our
launch of new products. There can be no assurance that material order deferrals
in anticipation of new product introductions from ourselves or other entities
will not occur.
If the emerging technologies and platforms of Microsoft and others upon which we
build our products do not gain broad market acceptance, or if we fail to develop
and introduce in a timely manner new products and services compatible with such
emerging technologies, we may not be able to compete effectively and our ability
to generate revenue will suffer. Our software products are built and depend upon
several underlying and evolving relational database management system platforms
such as those developed by Microsoft. To date, the standards and technologies
upon which we have chosen to develop our products have proven to have gained
industry acceptance. However, the market for our software products is subject to
ongoing rapid technological developments, quickly evolving industry standards
and rapid changes in customer requirements, and there may be existing or future
technologies and platforms that achieve industry standard status, which are not
compatible with our products.
We face the possibility of subscription pricing. We currently derive
substantially all of our revenue from traditional software license, maintenance
and service fees, as well as the resale of computer hardware. Today, customers
pay an initial license fee for the use of our products, in addition to a
periodic maintenance fee. If the marketplace demands subscription pricing, we
may be forced to adjust our sales, marketing and pricing strategies accordingly,
by offering a higher percentage of our products and services through these
means. Shifting to a significantly greater degree of subscription pricing could
materially adversely impact our financial condition, cash flows and quarterly
and annual revenue and results of operations, as our revenue would initially
decrease substantially. There can be no assurance that the marketplace will not
increasingly embrace subscription pricing.
The industry in which we operate is subject to significant 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 our existing products
obsolete and unmarketable. There can be no assurance that we 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 revenue or research funding could impair our ability to
respond to technological advances or opportunities in the marketplace and to
remain competitive. If we are 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, our business, results of operations
and financial condition may be materially adversely affected.
In response to increasing market demand, we are currently developing new
generations of certain of our software products. There can be no assurance that
we will successfully develop these new software products or that these products
will operate successfully, or that any such development, even if successful,
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will be completed concurrently with or prior to introduction of competing
products. Any such failure or delay could adversely affect our competitive
position or could make our current products obsolete.
We face the possibility of claims based upon our web site. We could be subject
to third party claims based on the nature and content of information supplied on
our Web site by us or third parties, including content providers or users. We
could also be subject to liability for content that may be accessible through
our Web site or third party Web sites linked from our Web site or through
content and information that may be posted by users in chat rooms, bulletin
boards or on Web sites created by professionals using our applications. Even if
these claims do not result in liability to us, investigating and defending
against these claims could be expensive and time consuming and could divert
management's attention away from our operations.
We face the possibility of claims from activities of strategic partners. We rely
on third parties to provide services that impact our business. For example, we
use national clearinghouses in the processing of some insurance claims and we
outsource some of our hardware maintenance services and the printing and
delivery of patient statements for our customers. We also have relationships
with certain third parties where these third parties serve as sales channels
through which we generate a portion of our revenue. Due to these third-party
relationships, we could be subject to claims as a result of the activities,
products, or services of these third-party service providers even though we were
not directly involved in the circumstances leading to those claims. Even if
these claims do not result in liability to us, defending and investigating these
claims could be expensive and time-consuming, divert personnel and other
resources from our business and result in adverse publicity that could harm our
business.
We may engage in future acquisitions, which may be expensive and time consuming
and from which we may not realize anticipated benefits. We may acquire
additional businesses, technologies and products if we determine that these
additional businesses, technologies and products are likely to serve our
strategic goals. We currently have no commitments or agreements with respect to
any acquisitions. The specific risks we may encounter in these types of
transactions include but are not limited to the following:
o potentially dilutive issuances of our securities, the incurrence of debt
and contingent liabilities and amortization expenses related to intangible
assets, which could adversely affect our results of operations and
financial conditions;
o use of cash as acquisition currency may adversely impact interest or
investment income , thereby potentially negatively affecting our earnings
and /or earnings per share
o difficulty in effectively integrating any acquired technologies or
software products into our current products and technologies;
o difficulty in predicting and responding to issues related to product
transition such as development, distribution and customer support;
o the possible adverse impact of such acquisitions on existing relationships
with third party partners and suppliers of technologies and services;
o the possibility that staff or customers of the acquired company might not
accept new ownership and may transition to different technologies or
attempt to renegotiate contract terms or relationships, including
maintenance or support agreements;
o the possibility that the due diligence process in any such acquisition may
not completely identify material issues associated with product quality,
product architecture, product development, intellectual property issues,
key personnel issues or legal and financial contingencies; and
o difficulty in integrating acquired operations due to geographical
distance, and language and cultural differences;
o The possibility that acquired assets become impaired, requiring the
Company to take a charge to earnings which could be significant.
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A failure to successfully integrate acquired businesses or technology for any of
these reasons could have a material adverse effect on the Company's results of
operations.
We face the risks and uncertainties that are associated with litigation against
us. We face the risks associated with litigation concerning the operation of our
business. The uncertainty associated with substantial unresolved litigation may
have an adverse impact on our business. In particular, such litigation could
impair our relationships with existing customers and our ability to obtain new
customers. Defending such litigation may result in a diversion of management's
time and attention away from business operations, which could have a material
adverse effect on our business, results of operations and financial condition.
Such litigation may also have the effect of discouraging potential acquirers
from bidding for us or reducing the consideration such acquirers would otherwise
be willing to pay in connection with an acquisition.
There can be no assurance that such litigation will not result in liability in
excess of our insurance coverage, that our insurance will cover such claims or
that appropriate insurance will continue to be available to us in the future at
commercially reasonable rates.
We rely heavily on our proprietary technology. We are heavily dependent on the
maintenance and protection of our intellectual property and we rely largely on
license agreements, confidentiality procedures, and employee nondisclosure
agreements to protect our intellectual property. Our software is not patented
and existing copyright laws offer only limited practical protection.
There can be no assurance that the legal protections and precautions we take
will be adequate to prevent misappropriation of our technology or that
competitors will not independently develop technologies equivalent or superior
to ours. Further, the laws of some foreign countries do not protect our
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.
We do not believe that our 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 us with respect to our
current or future products or that any such assertion will not require us to
enter into a license agreement or royalty arrangement or other financial
arrangement with the party asserting the claim. Responding to and defending any
such claims may distract the attention of Company management and have a material
adverse effect on our business, results of operations and financial condition.
In addition, claims may be brought against third parties from which we purchase
software, and such claims could adversely affect our ability to access third
party software for our systems.
We are dependent on our license rights from third parties. We depend upon
licenses for some of the technology used in our products from third-party
vendors. Most of these licenses can be renewed only by mutual consent and may be
terminated if we breach the terms of the license and fail to cure the breach
within a specified period of time. We may not be able to continue using the
technology made available to us under these licenses on commercially reasonable
terms or at all. As a result, we may have to discontinue, delay or reduce
product shipments until we can obtain equivalent technology. Most of our
third-party licenses are non-exclusive. Our competitors may obtain the right to
use any of the technology covered by these licenses and use the technology to
compete directly with us. In addition, if our vendors choose to discontinue
support of the licensed technology in the future or are unsuccessful in their
continued research and development efforts, we may not be able to modify or
adapt our own products.
We face the possibility of damages resulting from internal and external security
breaches, and viruses. In the course of our business operations, we compile and
transmit confidential information, including
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patient health information, in our processing centers and other facilities. A
breach of security in any of these facilities could damage our reputation and
result in damages being assessed against us. In addition, the other systems with
which we may interface, such as the Internet and related systems may be
vulnerable to security breaches, viruses, programming errors, or similar
disruptive problems. The effect of these security breaches and related issues
could disrupt our ability to perform certain key business functions and could
potentially reduce demand for our services. Accordingly, we have expended
significant resources toward establishing and enhancing the security of our
related infrastructures, although no assurance can be given that they will be
entirely free from potential breach. Maintaining and enhancing our
infrastructure security may require us to expend significant capital in the
future.
The success of our strategy to offer our EDI services and Internet solutions
depends on the confidence of our customers in our ability to securely transmit
confidential information. Our EDI services and Internet solutions rely on
encryption, authentication and other security technology licensed from third
parties to achieve secure transmission of confidential information. We may not
be able to stop unauthorized attempts to gain access to or disrupt the
transmission of communications by our customers. Anyone who is able to
circumvent our security measures could misappropriate confidential user
information or interrupt us, or our customers', operations. In addition, our EDI
and Internet solutions may be vulnerable to viruses, physical or electronic
break-ins, and similar disruptions.
Any failure to provide secure infrastructure and/or electronic communication
services could result in a lack of trust by our customers causing them to seek
out other vendors, and/or, damage our reputation in the market making it
difficult to obtain new customers.
We are subject to the development and maintenance of the Internet infrastructure
which is not within our control. We deliver Internet-based services and,
accordingly, we are dependent on the maintenance of the Internet by third
parties. The Internet infrastructure may be unable to support the demands placed
on it and our performance may decrease if the Internet continues to experience
it's historic trend of expanding usage. As a result of damage to portions of its
infrastructure, the Internet has experienced a variety of performance problems
which may continue into the foreseeable future. Such Internet related problems
may diminish Internet usage and availability of the Internet to us for
transmittal of our Internet-based services. In addition, difficulties, outages,
and delays by Internet service providers, online service providers and other web
site operators may obstruct or diminish access to our Web site by our customers
resulting in a loss of potential or existing users of our services.
Our failure to manage growth could harm us. We have in the past experienced
periods of growth which have placed, and may continue to place, a significant
strain on our non-cash resources. We also anticipate expanding our overall
software development, marketing, sales, client management and training capacity.
In the event we are 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 us. In addition, our ability to manage future
increases, if any, in the scope of our operations or personnel will depend on
significant expansion of our research and development, marketing and sales,
management, and administrative and financial capabilities. The failure of our
management to effectively manage expansion in our business could have a material
adverse effect on our business, results of operations and financial condition.
Our operations are dependent upon our key personnel. If such personnel were to
leave unexpectedly, we may not be able to execute our business plan. Our future
performance depends in significant part upon the continued service of our key
technical and senior management personnel, many of whom have been with us for a
significant period of time. These personnel have acquired specialized knowledge
and skills with respect to our business. We maintain key man life insurance on
only one of our employees. Because we have a relatively small number of
employees when compared to other leading companies in
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our industry, our dependence on maintaining our relationships with key employees
is particularly significant. We are also dependent on our ability to attract
high quality personnel, particularly in the areas of sales and applications
development.
The industry in which we operate is characterized by a high level of employee
mobility and aggressive recruiting of skilled personnel. There can be no
assurance that our current employees will continue to work for us. Loss of
services of key employees could have a material adverse effect on our business,
results of operations and financial condition. Furthermore, we may need to grant
additional equity incentives to key employees and provide other forms of
incentive compensation to attract and retain such key personnel. Failure to
provide such types of incentive compensation could jeopardize our recruitment
and retention capabilities.
Our products may be subject to product liability legal claims. Certain of our
products provide applications that relate to patient clinical information. Any
failure by our products to provide accurate and timely information could result
in claims against us. In addition, a court or government agency may take the
position that our delivery of health information directly, including through
licensed practitioners, or delivery of information by a third party site that a
consumer accesses through our web sites, exposes us to assertions of
malpractice, other personal injury liability, or other liability for wrongful
delivery/handling of healthcare services or erroneous health information. We
maintain insurance to protect against claims associated with the use of our
products as well as liability limitation language in our end-user license
agreements, but there can be no assurance that our insurance coverage or
contractual language would adequately cover any claim asserted against us. A
successful claim brought against us in excess of or outside of our insurance
coverage could have a material adverse effect on our business, results of
operations and financial condition. Even unsuccessful claims could result in our
expenditure of funds for litigation and management time and resources.
Certain healthcare professionals who use our Internet-based products will
directly enter health information about their patients including information
that constitutes a record under applicable law that we may store on our 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:
o state and federal privacy and confidentiality laws;
o our contracts with customers and partners;
o state laws regulating healthcare professionals;
o Medicaid laws;
o the Health Insurance Portability and Accountability Act of 1996 (HIPAA)
and related rules proposed by the Health Care Financing Administration;
and
o Health Care Financing Administration standards for Internet transmission
of health data.
The U.S. Congress has finalized the Health Insurance Portability and
Accountability Act of 1996 that established elements including, but not limited
to, new federal privacy and security standards for the use and protection of
Protected Health Information. Any failure by us or by our personnel or partners
to comply with applicable requirements may result in a material liability to us.
Although we have systems and policies in place for safeguarding Protected Health
Information from unauthorized disclosure, these systems and policies may not
preclude claims against us for alleged violations of applicable requirements.
Also, third party sites and/or links that consumers may access through our web
sites may not maintain adequate systems to safeguard this information, or may
circumvent systems and policies we have put in place. In addition, future laws
or changes in current laws may necessitate costly adaptations to our policies,
procedures, or systems.
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There can be no assurance that we will not be subject to product liability
claims, that such claims will not result in liability in excess of our insurance
coverage, that our insurance will cover such claims or that appropriate
insurance will continue to be available to us in the future at commercially
reasonable rates. Such product liability claims could have a material adverse
affect on our business, results of operations and financial condition.
We are subject to the effect of payor and provider conduct which we cannot
control. We offer certain electronic claims submission products and services as
part of our product line. While we have implemented certain product features
designed to maximize the accuracy and completeness of claims submissions, these
features may not be sufficient to prevent inaccurate claims data from being
submitted to payors. Should inaccurate claims data be submitted to payors, we
may be subject to liability claims.
Electronic data transmission services are offered by certain payors to
healthcare providers that establish a direct link between the provider and
payor. This process reduces revenue to third party EDI service providers such as
us. Accordingly, we are unable to insure that we will continue to generate
revenue at or in excess of prior levels for such services. A significant
increase in the utilization of direct links between healthcare providers and
payers could have a material adverse effect on our transaction volume and
financial results. In addition, we cannot provide assurance that we will be able
to maintain our exiting links to payors or develop new connections on terms that
are economically satisfactory to us, if at all.
There is significant uncertainty in the healthcare industry in which we operate
and we are subject to the possibility of changing 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 change governmental involvement in healthcare and
reimbursement rates, and otherwise alter the operating environment for us and
our clients. Healthcare providers may react to these proposals, and the
uncertainty surrounding such proposals, by curtailing or deferring investments,
including those for our systems and related services. Cost-containment measures
instituted by healthcare providers as a result of regulatory reform or otherwise
could result in a reduction in the allocation of capital funds. Such a reduction
could have an adverse effect on our ability to sell our systems and related
services. On the other hand, changes in the regulatory environment have
increased and may continue to increase the needs of healthcare organizations for
cost-effective data management and thereby enhance the overall market for
healthcare management information systems. We cannot predict what impact, if
any, such proposals or healthcare reforms might have on our business, financial
condition and results of operations.
The HIPAA regulations, as adopted by the Department of Health and Human
Services, established, among other things:
o a national standard for electronic transactions and code sets to be used
in those transactions involving certain common health care transactions;
o privacy regulations to protect the privacy of plan participants and
patients' medical records; and
o security regulations designed to establish security controls and measures
to protect the privacy and confidentiality of personal identifiable health
information when it is electronically stored, maintained or transmitted
(even if only internally transmitted within a medical practice).
As these regulations mature and become better defined, we anticipate that these
regulations will continue to directly affect certain of our products and
services, but we cannot fully predict the impact at this time.
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We have taken steps to modify our products, services and internal practices as
necessary to facilitate our and our client's compliance with the final
regulations, but there can be no assurance that we will be able to do so in a
timely or complete manner. Achieving compliance with these regulations could be
costly and distract management's attention and other resources, and any
noncompliance by us could result in civil and criminal penalties.
In addition, development of related federal and state regulations and policies
regarding the confidentiality of health information or other matters may or may
not supercede HIPAA and have the potential to positively or negatively affect
our business.
In addition, our software may potentially be subject to regulation by the U.S.
Food and Drug Administration (the FDA) as a medical device. Such regulation
could require the registration of the applicable manufacturing facility and
software and hardware products, application of detailed record-keeping and
manufacturing standards, and FDA approval or clearance prior to marketing. An
approval or clearance requirement 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 our business,
financial condition and results of operations.
We may be subject to other e-commerce regulations. We may be subject to
additional federal and state statutes and regulations in connection with
offering services and products via the Internet. On an increasingly frequent
basis, federal and state legislators are proposing laws and regulations that
apply to Internet commerce and communications. Areas being affected by these
regulations include user privacy, pricing, content, taxation, copyright
protection, distribution, and quality of products and services. To the extent
that our products and services are subject to these laws and regulations, the
sale of our products and services could be harmed.
We are subject to changes in and interpretations of financial accounting matters
that govern the measurement of our performance. Based on our reading and
interpretations of relevant guidance, principles or concepts issued by, among
other authorities, the American Institute of Certified Public Accountants, the
Financial Accounting Standards Board, and the United States Securities and
Exchange Commission, Management believes our current sales and licensing
contract terms and business arrangements have been properly reported. However,
there continue to be issued interpretations and guidance for applying the
relevant standards to a wide range of sales and licensing contract terms and
business arrangements that are prevalent in the software industry. Future
interpretations or changes by the regulators of existing accounting standards or
changes in our business practices could result in future changes in our revenue
recognition and/or other accounting policies and practices that could have a
material adverse effect on our business, financial condition, cash flows,
revenue and results of operations.
Our per share price may be adversely effected if weaknesses in our internal
controls are identified by ourselves or our independent auditors. Any weaknesses
identified in our internal controls as part of the evaluation being undertaken
by us and our independent public accountants pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 could have an adverse effect on the price at which
our stock trades. In the process of evaluating and documenting our controls
pursuant to Section 404 of the Sarbanes-Oxley Act. we have identified various
deficiencies which we are in the course of remediating. Management does not
believe that any of these identified deficiencies constitute a material weakness
in our internal controls.
No evaluation process can provide complete assurance that our internal controls
will detect and correct all failures within the Company to disclose material
information otherwise required to be reported. The effectiveness of our controls
and procedures could also be limited by simple errors or faulty judgments. In
addition, if we continue to expand, the challenges involved in implementing
appropriate controls will increase and may require that we evolve some or all of
our internal control processes.
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It is also possible that the overall scope of Section 404 of the Sarbanes Oxley
Act of 2002 may be revised in the future, thereby causing our auditors and
ourselves to review, revise or reevaluate our internal control processes which
may result in the expenditure of additional human and financial resources.
Our earnings will be affected beginning fiscal year 2007 when we begin
recognizing employee stock option expense, pursuant to recently issued
accounting standards. Stock options have from time to time been an important
component of the compensation packages for many of our mid- and senior-level
employees. We currently do not deduct the expense of employee stock option
grants from our income. However, beginning with the quarter ended June 30, 2006
and beyond, we will begin recognizing employee stock option expense for
remaining unvested stock options and any future stock option grants, resulting
in additional pre-tax compensation expense. Option expensing could have a
negative impact upon the price of our stock.
Continuing worldwide political and economic uncertainties may adversely impact
our revenue and profitability. In the last three years, worldwide economic
conditions have experienced a downturn due to numerous factors including but not
limited to concerns about inflation and deflation, decreased consumer
confidence, the lingering effects of international conflicts, and terrorist and
military activities. These conditions make it extremely difficult for our
customers, our vendors and ourselves to accurately forecast and plan future
business activities, and they could cause constrained spending on our products
and services, and/or delay and lengthen sales cycles.
Our future policy concerning the payment of dividends is uncertain. While we
paid a one-time cash dividend in March 2005, we have not historically paid
dividends, cash or otherwise, and there can be no assurance that we will pay
another dividend in the future. Unfulfilled expectation to the contrary could
have a material negative impact upon the price of our stock.
ITEM 2. PROPERTIES
Our principal administrative, accounting and QSI Division operations are located
in Irvine, California, under a lease that commenced May 15, 2002, and expired in
April 30, 2005. In April 2005, we renewed our lease through May 31, 2008. We
lease approximately 12,000 square feet of space at this location. In August
2002, we executed a new lease for the principal office of our NextGen Division.
This lease includes approximately 32,000 square feet of space in Horsham,
Pennsylvania, and expires on January 31, 2010. In the year ended March 31, 2005,
we added approximately 14,000 of additional space in Horsham, Pennsylvania under
new lease which expires on January 31, 2010. In addition, we lease approximately
6,000 square feet of space in Santa Ana, California, to house our assembly and
warehouse operations. We have approximately 12,000 square feet of space in
Atlanta, Georgia under a lease which expires in February, 2006. We also have an
aggregate of approximately 4,000 square feet of space in Massachusetts,
Minnesota, New Jersey, Texas, Utah, Wisconsin, and Washington to house
additional sales, training, development and service operations. These leases,
excluding options, have expiration dates ranging from month-to-month to March
2010. The Company's growth will require it to lease additional space. We believe
that suitable additional or substitute space is available, if needed, at
commercially reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are involved in various claims and legal
proceedings. While the ultimate resolution of these matters, has yet to be
determined, we do not believe that their outcome will have a material adverse
effect on our financial position, results of operations or liquidity.
21
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of fiscal year 2005.
Executive Officers of the Company
Our executive officers as of May 31, 2005 were as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- -----------------------------------------------------------
<S> <C> <C>
Louis E. Silverman............... 46 President, Chief Executive Officer
Patrick B. Cline................. 44 President, NextGen Healthcare Information Systems Division
Greg Flynn....................... 47 Executive Vice President and General Manger of QSI Division
Paul A. Holt..................... 39 Secretary, Chief Financial Officer
</TABLE>
Our executive officers are elected by, and serve at the discretion of, the Board
of Directors. Additional information regarding our executive officers is set
forth below.
Louis E. Silverman was appointed President and Chief Executive Officer of the
company on July 31, 2000. Mr. Silverman was previously Chief Operations Officer
of CorVel Corp., a publicly traded national managed care services and technology
firm with headquarters in Irvine, California. Mr. Silverman holds a Master of
Business Administration degree from Harvard Graduate School of Business
Administration and a Bachelor of Arts degree from Amherst College.
Patrick B. Cline currently serves as President of our NextGen Healthcare
Information Systems Division. He served as our interim Chief Executive Officer
for the April - July 2000 period. Mr. Cline was a co-founder of Clinitec and has
served as its President since its inception in January 1994 and throughout its
transition to NextGen Healthcare Information Systems. Prior to co-founding
Clinitec, Mr. Cline served, from July 1987 to January 1994, as Vice President of
Sales and Marketing with Script Systems, a subsidiary of InfoMed, a healthcare
information systems company. From January 1994 to May 1994, after the founding
of Clinitec, Mr. Cline continued to serve, on a part time basis, as Script
Systems' Vice President of Sales and Marketing. Mr. Cline has held senior
positions in the healthcare information systems industry since 1981.
Greg Flynn has served as the QSI Division's General Manager since April 2000 and
as Executive Vice President since August 1998 after serving as Vice President of
Sales and Marketing from January 1996 to August 1998. Between June 1992 and
January 1996, Mr. Flynn served as Vice President Administration. In these
capacities, Mr. Flynn has been responsible for numerous functions related to our
ongoing management and sales. Previously, Mr. Flynn served as our Vice
President, Corporate Communications. Mr. Flynn joined us in January 1982. He
holds a B.A. degree in English from the University of California, Santa Barbara.
Paul A. Holt was appointed Chief Financial Officer in November 2000. Mr. Holt
has served as our Controller from January 2000 to May 2000 and was appointed
interim Chief Financial Officer in May 2000. Prior to joining us, Mr. Holt was
the Controller of Sierra Alloys Co., Inc., a titanium metal manufacturing
company from August 1999 to December 1999. From May 1997 to July 1999, he was
Controller of Refrigeration Supplies Distributor, a wholesale distributor and
manufacturer of refrigeration supplies and heating controls. From March 1995 to
April 1997 he was Assistant Controller of Refrigeration Supplies Distributor.
Mr. Holt is a Certified Public Accountant and holds an M.B.A. from the
University of Southern California and a B.A. in Economics from the University of
California, Irvin
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is traded on the NASDAQ National Market under the symbol
"QSII". The following table sets forth for the quarters indicated the high and
low sales prices as reported by NASDAQ. The quotations reflect inter-dealer
prices, without retail markup, markdown, or commissions, and may not necessarily
represent actual transactions.
Quarter Ended High Low
------------- ------- -------
June 30, 2003 ......................... $ 18.23 $ 11.25
September 30, 2003 .................... 23.43 12.58
December 31, 2003 ..................... 24.88 19.91
March 31, 2004 ........................ 30.80 19.50
June 30, 2004 ......................... 25.75 19.75
September 30, 2004 .................... 27.75 20.77
December 31, 2004 ..................... 32.49 24.05
March 31, 2005 ........................ $ 48.90 $ 27.90
At May 31, 2005, there were approximately 130 holders of record of our Common
Stock. We estimate the number of beneficial holders of our Common Stock to be in
excess of 6,000.
On February 2, 2005, the Company announced that its Board of Directors had
declared a 2-for-1 stock split with respect to our outstanding shares of common
stock for shareholders of record on March 4, 2005. The stock began trading post
split on March 28, 2005. All share prices in the foregoing table have been
retroactively adjusted to reflect such stock split.
On March 16, 2005, we paid a one time dividend on shares of our Common Stock
equal to $1.50 per share. ($3.00 pre-split) The record date for the dividend was
February 24, 2005. Payment of future dividends, if any, will be at the
discretion of our Board of Directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
We did not make any unregistered sales of our common stock during the fourth
quarter of 2005.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data with respect to our Consolidated
Statements of Income data for each of the five years in the period ended March
31 and the Consolidated Balance Sheet data as of the end of each such fiscal
year are derived from our audited financial statements. The following
information should be read in conjunction with our Consolidated Financial
Statements and the related notes thereto and "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations." included
elsewhere herein.
Consolidated Financial Data
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) Year Ended March 31,
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenue...................................... $ 88,961 $ 70,934 $ 54,769 $ 44,422 $ 39,936
Cost of revenue.............................. 32,669 28,673 23,755 19,253 17,283
-------- -------- -------- -------- --------
Gross profit................................. 56,292 42,261 31,014 25,169 22,653
Selling, general and administrative expenses. 24,776 19,482 15,293 13,068 13,585
Research and development costs............... 6,903 6,139 5,062 4,243 4,081
-------- -------- -------- -------- --------
Income from operations....................... 24,613 16,640 10,659 7,858 4,987
Investment income............................ 876 386 434 643 1,032
-------- -------- -------- -------- --------
Income before provision for income taxes..... 25,489 17,026 11,093 8,501 6,019
Provision for income taxes................... 9,380 6,626 4,058 3,233 2,510
-------- -------- -------- -------- --------
Net income................................... $ 16,109 $ 10,400 $ 7,035 $ 5,268 $ 3,509
======== ======== ======== ======== ========
Basic net income per share................... $ 1.25 $ 0.84 $ 0.57 $ 0.44 $ 0.29
Diluted net income per share................. $ 1.22 $ 0.80 $ 0.55 $ 0.42 $ 0.28
Basic weighted average shares outstanding.... 12,872 12,436 12,254 12,050 12,260
Diluted weighted average shares outstanding.. 13,203 12,966 12,778 12,480 12,406
Balance Sheet Data (at end of period):
Cash and cash equivalents and short-term
investments.................................. $ 51,157 $ 51,395 $ 36,443 $ 25,698 $ 18,729
Working capital.............................. 55,111 53,415 38,717 30,799 24,196
Total assets................................. 99,442 86,678 67,602 52,143 44,883
Total liabilities............................ 36,711 25,673 20,069 12,093 10,996
Total shareholders' equity................... $ 62,731 $ 61,005 $ 47,533 $ 40,050 $ 33,887
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Except for the historical information contained herein, the matters discussed in
this Annual Report on Form 10-K, including discussions of our product
development plans, business strategies and market factors influencing our
results, may include forward-looking statements that involve certain risks and
uncertainties. Actual results may differ from those anticipated by us as a
result of various factors, both foreseen and unforeseen, including, but not
limited to, our ability to continue to develop new products and increase systems
sales in markets characterized by rapid technological evolution, consolidation,
and competition from larger, better capitalized competitors. Many other
economic, competitive, governmental and technological factors could impact our
ability to achieve our goals, and interested persons are urged to review the
risks described in "Item 1. Business. Risk Factors" as set forth above, as well
as in our other public disclosures and filings with the Securities and Exchange
Commission.
The following discussion should be read in conjunction with, and is qualified in
our entirety by, the Consolidated Financial Statements and related notes thereto
included elsewhere in this Report. Historical results of operations, percentage
margin fluctuations and any trends that may be inferred from the discussion
below are not necessarily indicative of the operating results for any future
period.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosures of contingent assets and
liabilities. On an on-going basis, we evaluate estimates, including those
related to revenue recognition, uncollectible accounts receivable, and
intangible assets, for reasonableness. We base our estimates on historical
experience and on various other assumptions that management believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe revenue recognition, the allowance for doubtful accounts, goodwill
impairment, capitalized software costs and research and development tax credits
are among the most critical accounting policies that impact our consolidated
financial statements. We believe that significant accounting policies, as
described in Note 2 of our Consolidated Financial Statements, "Summary of
Significant Accounting Policies", should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Revenue Recognition. Our revenue is primarily generated from the sale of
software licenses, services, hardware, maintenance fees, and EDI services. We
currently recognize revenue pursuant to Statement of Position No. 97-2,
"Software Revenue Recognition" (SOP 97-2), as modified by Statement of Position
No. 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect
of Certain Transactions" (SOP 98-9), Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101) and Staff Accounting Bulletin No.
104, "Revenue Recognition" (SAB 104). SAB 101 summarizes the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. SAB 104 modifies certain guidance provided in SAB 101.
Inherent in the revenue recognition process are significant management estimates
and judgments, which influence the timing and amount of revenue recognition.
25
<PAGE>
In accordance with the governing revenue recognition guidelines, if the
arrangement between vendor and purchaser does not require significant
production, modification, or customization of software, revenue should be
recognized when all of the following criteria are met:
o persuasive evidence of an arrangement exists;
o delivery has occurred;
o the vendor's fee is fixed or determinable; and
o collectibility is probable.
In accordance with generally accepted accounting principles in the United States
of America, the recognition of software license revenue is based on our
assessment that the above criteria have been met. In general, the first two
criteria are met with a signed contract and evidence that we have shipped our
software to the customer. We determine that our fee is fixed and determinable
based on the contract terms, which specify payment terms tied to specific dates
and not to any future deliverables. Probability of collection is based on a
credit review of customers. The timing or amount of revenue recognition may
differ if different assessments of the above listed criteria had been made at
the time transactions were recorded in revenue.
SOP 97-2, as amended, generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. Our determination of the fair value of
each element in multi-element arrangements is based on vendor-specific objective
evidence (VSOE). We limit our assessment of VSOE for each element to either the
price charged when the same element is sold separately or the price established
by management having the relevant authority to do so, for an element not yet
sold separately. Management determines the price of individual elements sold
separately using a rolling average of stand alone transactions. VSOE
calculations are reviewed on a quarterly basis.
If evidence of fair value of all undelivered elements exists but evidence of
fair value does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred at VSOE and the remaining portion of the
arrangement fee is recognized as revenue, net of all discounts.
Contract accounting is applied where services include significant software
modification, development or customization. In such instances, the arrangement
fee is accounted for in accordance with Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1), whereby the revenue is recognized, generally using the
percentage-of-completion method measured on labor input hours. The complexity of
the estimation process and judgment related to the assumptions, risks and
uncertainties inherent with the application of the percentage-of-completion
method of accounting affect the amounts of revenue reported in its consolidated
financial statements.
Valuation Allowances. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
We perform ongoing credit evaluations of our customers and maintain reserves for
estimated credit losses. Reserves for potential credit losses are determined by
establishing both specific and general reserves. Specific reserves are based on
management's estimate of the probability of collection for certain troubled
accounts. General reserves are established based on our historical experience of
bad debt expense and the aging of our accounts receivable balances net of
deferred revenue and specifically reserved accounts. If the financial condition
of our customers were to deteriorate resulting in an impairment of their ability
to make payments, additional allowances would be required.
Goodwill Impairment. Our long-lived assets include goodwill of $1.8 million as
of March 31, 2005 and 2004, respectively. We follow Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" (SFAS 142).
The statement applies to the amortization of goodwill and other
26
<PAGE>
intangible assets. We no longer amortize amounts related to goodwill. The
balance of goodwill is related to our NextGen Division. Under SFAS 142, we are
required to perform an annual assessment of the implied fair value of goodwill
and intangible assets with indefinite lives for impairment. We have compared the
fair value of the NextGen Division with the carrying amount of assets associated
with the Division and determined that none of the goodwill recorded as of June
30, 2004 (the date of our last annual impairment test) was impaired. The fair
value of the NextGen Division was determined using a reasonable estimate of
future cash flows of the Division and a risk adjusted discount rate to compute a
net present value of future cash flows. There have been no changes that would
lead us to believe there is any impairment of the goodwill since the date of the
last annual impairment test through March 31, 2005.
The process of evaluating goodwill for impairment involves the determination of
the fair value of our business segments. Inherent in such fair value
determinations are certain judgments and estimates, including the interpretation
of current economic indicators and market valuations, and assumptions about our
strategic plans with regard to operations. To the extent additional information
arises or our strategies change, it is possible that our conclusion regarding
goodwill impairment could change and result in a material effect on our
financial position or results of operations.
Software Development Costs. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
development costs are capitalized in accordance with the Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" (SFAS 86). Such capitalized costs are
amortized on a straight line basis over the estimated economic life of the
related product, of three years. We perform an annual review of the
recoverability of such capitalized software costs. At the time a determination
is made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, any remaining capitalized
amounts are written off.
Research and Development Tax Credits. During the year ended March 31, 2003, the
Company filed amended federal and state tax returns for the fiscal years ended
March 31, 1998 through 2001, to take advantage of tax credits related to our
research and development activities. In addition, the Company claimed research
and development credit on its tax returns for the years ended March 31, 2004,
2003 and 2002. The provision for income taxes for the year ended March 31, 2004
and 2003 accounted for a portion of the aggregate tax credits accumulated
through the end of each period due to the uncertainly concerning the ultimate
amount of tax to be credited. As of March 31, 2004, the Company had a balance of
$0.5 million in credits which had not been recognized. In the quarter ended
March 31, 2005, the state of California completed an audit of the Company's tax
returns and did not materially change credits related to research and
development. Based on the results of that audit as well the expiration of the
statue of limitations on certain amended returns, the provision for income taxes
for the year ended March 31, 2005 was reduced by the $0.5 million in tax credits
which had not been recognized as of March 31 2004.
Management's treatment of research and development tax credits represented a
significant estimate which affected the effective income tax rates for the
Company in the years ending March 31, 2005 and 2004. Research and development
credits taken by the Company involve certain assumptions and judgments regarding
qualification of expenses under the relevant tax codes. While the Company has
received all of federal refunds claimed, none of the credits have been audited
by the Internal Revenue Service.
27
<PAGE>
Overview of Company results
o We have experienced significant growth in our total revenue as a result of
revenue growth in our NextGen Healthcare Information Services Division.
Our total Company revenue grew 25.4% on a consolidated basis during the
twelve months ended March 31, 2005 versus 2004 and 29.5% in the twelve
months ended March 31, 2004 versus 2003.
o Consolidated income from operations grew 47.9% in the twelve months ended
March 31, 2005 versus 2004 and 56.1% in the twelve months ended March 31,
2004 versus 2003. This performance was driven in large part by the results
in our NextGen Division.
o We have benefited and hope to continue to benefit from the increased
demands on healthcare providers for greater efficiency and lower costs, as
well as increased adoption rates of technology in the healthcare arena.
NextGen Division
o Our NextGen Division has experienced significant growth in revenue and
operating income. Divisional revenue grew 35.2% in the twelve months ended
March 31, 2005 versus 2004 and 45.8% in the twelve months ended March 31,
2004 versus 2003 while divisional operating income (excluding unallocated
corporate expenses) grew 64.1% in the twelve months end March 31, 2005 and
77.4% in the twelve months ended March 31, 2004.
o During the twelve months ended March 31, 2005, we added staffing resources
to departments including sales, marketing, support, implementation,
software development, and administration and intend to continue to do so
in fiscal year 2006.
o Our goals include continuing to further enhance our existing products,
developing new products for targeted markets, continuing to add new
customers, selling additional software and services to existing customers
and expanding penetration of connectivity services to new and existing
customers.
QSI Division
o Our QSI Division experienced a revenue decline of 6.8% in the twelve
months ended March 31, 2005 versus 2004 and 5.3% in the twelve months
ended March 31, 2004 versus 2003. The Division experienced a 14.7%
decrease in operating income (excluding unallocated corporate expenses) in
the twelve months ended March 31, 2005 versus 2004.
o Our goals for the QSI Division include maximizing revenue and profit
performance given the constraints present in this Division's target
market.
28
<PAGE>
The following table sets forth for the periods indicated the percentage of net
revenue represented by each item in our Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Year Ended March 31,
2005 2004 2003
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
System sales............................................ 54.5% 55.7% 53.3%
Maintenance, EDI, and other services.................... 45.5 44.3 46.7
--------- --------- ---------
Total revenue........................................... 100.0 100.0 100.0
Cost of revenue......................................... 36.7 40.4 43.4
--------- --------- ---------
Gross profit............................................ 63.3 59.6 56.6
Selling, general and administrative expenses............ 27.9 27.4 27.9
Research and development costs.......................... 7.8 8.7 9.2
--------- --------- ---------
Income from operations.................................. 27.7 23.5 19.5
Investment income....................................... 1.0 0.5 0.8
--------- --------- ---------
Income before provision for income taxes................ 28.7 24.0 20.3
Provision for income taxes.............................. 10.5 9.3 7.5
--------- --------- ---------
Net income.............................................. 18.1% 14.7% 12.8%
</TABLE>
Comparison of the Years Ended March 31, 2005 and March 31, 2004
For the year ended March 31, 2005, our net income was $16.1 million or $1.25 per
share on a basic and $1.22 per share on a fully diluted basis. In comparison, we
earned $10.4 million or $0.84 per share on a basic and $0.80 on a fully diluted
basis in the year ended March 31, 2004. The increase in net income for the year
ended March 31, 2005, was achieved primarily through the following:
o a 25.4% increase in revenue;
o an increase in our gross profit margin from 59.6% to 63.3%.
Revenue. Revenue for the year ended March 31, 2005 increased 25.4% to $89.0
million from $70.9 million for the year ended March 31, 2004. NextGen Division
revenue increased 35.2% from $54.4 million to approximately $73.6 million in the
period, while QSI Division revenue declined by 6.8% during the period from
approximately $16.5 million to $15.4 million.
We divide revenue into two categories, "System sales" and "Maintenance, EDI, and
other services". Revenue in the system sales category includes software license
fees, third party hardware and software, and implementation and training
services related to purchase of the Company's software systems. Revenue in the
maintenance and other services category includes maintenance, EDI, and other
revenue. Maintenance and EDI revenue are the principle sources of revenue in
this category.
System Sales. Company-wide sales of systems for the twelve months ended March
31, 2005 increased 22.8% to $48.5 million from $39.5 million in the prior year.
Our increase in revenue from sales of systems was principally the result of a
24.8% increase in category revenue at our NextGen Division whose sales in this
category grew from $37.3 million during the year ended March 31, 2004 to $46.6
million during the year ended March 31, 2005. This increase was driven primarily
by higher sales of NextGen(emr) and NextGen(epm) software to both new and
existing clients, as well as an increase in the delivery of related
implementation services offset by a decline in the sale of related hardware,
third party software and supplies.
Systems sales revenue in the QSI Division declined 11.1% to approximately $1.9
million in the year ended March 31, 2005 from $2.2 million in the year ended
March 31, 2004.
29
<PAGE>
The following table breaks down our reported system sales into software,
hardware, third party software, supplies, and implementation and training
services components by Division:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Hardware,
Third Party Implementation
Software and and Training Total
Software Supplies Services System Sales
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Twelve months ended
March 31, 2005
QSI Division............ $ 889 $ 744 $ 306 $ 1,939
NextGen Division........ 33,230 4,811 8,548 46,589
------------- ------------- -------------- -------------
Consolidated............ $ 34,119 $ 5,555 $ 8,854 $ 48,528
============= ============= ============== =============
Twelve months ended
March 31, 2004
QSI Division............ $ 807 $ 1,029 $ 345 $ 2,181
NextGen Division........ 24,657 6,139 6,548 37,344
------------- ------------- -------------- -------------
Consolidated............ $ 25,464 $ 7,168 $ 6,893 $ 39,525
============= ============= ============== =============
</TABLE>
NextGen Division software revenue increased 34.8% between the twelve months
ended March 31, 2004 and the twelve months ended March 31, 2005. The Division's
software revenue accounted for 71.3% of divisional system sales revenue during
the twelve months ended March 31, 2005, an increase from 66.0% in the prior year
period. The increase in software's share of systems sales was not the result of
any new trend or change in emphasis on our part relative to software sales.
Software license revenue growth continues to be an area of primary emphasis for
the NextGen Division and management was pleased with the Division's performance
in this area.
During the twelve months ended March 31, 2005, 10.3% of NextGen's system sales
revenue was represented by hardware and third party software compared to 16.4%
in the same prior year period. We have noted that the last several quarter's
results have included a relatively lower amount of hardware and third party
software compared to prior year periods. However, this decrease was not the
result of any change in emphasis on our part. The number of customers who
purchase hardware and third party software and the dollar amount of hardware and
third party software revenue fluctuates each year depending on the needs of
customers. The inclusion of hardware and third party software in the division's
sales arrangements is typically at the request of the customer and is not a
priority focus for us.
Implementation and training revenue at the NextGen Division increased 30.5% in
the twelve months ended March 31, 2005 compared to the twelve months ended March
31, 2004. Implementation and training revenue at the NextGen Division increased
its share of divisional system sales revenue to 18.3% in the twelve months ended
March 31, 2005 from 17.5% in the twelve months ended March 31, 2004. The growth
in implementation and training revenue is the result of increases in the amount
of implementation and training services rendered to our customers. The amount of
implementation and training services revenue and the corresponding rate of
growth compared to a prior period in any given year is dependant on several
factors including timing of customer implementations, the availability of
qualified staff, and the mix of services being rendered. The number of
implementation and training staff increased during the twelve months ended March
31, 2005 versus March 31, 2004 in order to accommodate the increased amount of
implementation services sold in conjunction with increased software sales. In
order to achieve continued increased revenue in this area, additional staffing
increases are anticipated, though actual future increases in revenue and staff
will depend upon the availability of qualified staff, business mix and
conditions, and our ability to retain current staff members.
30
<PAGE>
The NextGen Division's growth has come in part from investments in sales and
marketing activities, including hiring additional sales representatives, trade
show attendance, and advertising expenditures. We have also benefited from
winning numerous industry awards for the NextGen Division's flagship NextGenemr
and NextGenepm software products in fiscal years 2005 and 2004, as well as in
prior years, and the apparent increasing acceptance of electronic medical
records technology in the healthcare industry.
For the QSI Division, total system sales decreased 11.1% in the twelve months
ended March 31, 2005 compared to the twelve months ended March 31, 2004. We do
not presently foresee any material changes in the business environment for the
Division with respect to the constrained environment that has been in place for
the past several years. QSI systems sales during the fiscal year ended March 31,
2005 were impacted by year over year declines in hardware and implementation and
training services.
Maintenance, EDI, and other. Company-wide revenue from maintenance, EDI, and
other services grew 28.7% to $40.4 million from $31.4 million. The increase in
this category resulted principally from an increase in maintenance and EDI
revenue generated from the NextGen Division's client base. Total NextGen
Division maintenance revenue for the year ended March 31, 2005 grew 55.7% to
$17.9 million from $11.5 million in the year ago period, while EDI revenue grew
86.0% to $5.6 million compared to $3.0 million in the year ago period. QSI
Division maintenance revenue declined 3.8% from $7.6 million to $7.3 million in
the same period while divisional EDI revenue declined by approximately 7.6% from
$5.3 million to $4.9 million.
The following table details revenue by category for the twelve month periods
ended March 31, 2005 and 2004:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Maintenance EDI Other Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Twelve months ended
March 31, 2005
QSI Division............ $ 7,279 $ 4,877 $ 1,273 $ 13,429
NextGen Division........ 17,881 5,611 3,512 27,004
------------- ------------- ------------- -------------
Consolidated............ $ 25,160 $ 10,488 $ 4,785 $ 40,433
============= ============= ============= =============
Twelve months ended
March 31, 2004
QSI Division............ $ 7,570 $ 5,276 $ 1,464 $ 14,310
NextGen Division........ 11,481 3,016 2,602 17,099
------------- ------------- ------------- -------------
Consolidated............ $ 19,051 $ 8,292 $ 4,066 $ 31,409
============= ============= ============= =============
</TABLE>
The following table provides the number of billing sites which were receiving
maintenance services as of the last business day of the period ended March 31,
2005 and 2004 respectively, as well as the number of billing sites receiving EDI
services during the last month of each respective period at each Division of the
Company. The table presents summary information only and includes billing
entities added and removed for any reason. Note also that a single client may
include one or multiple billing sites.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
NextGen QSI Consolidated
------------------------------- ------------------------------- -------------------------------
Maintenance EDI Maintenance EDI Maintenance EDI
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 2004. 421 293 321 234 742 527
Billing sites added 138 144 4 7 142 151
Billing sites removed (1) (43) (29) (23) (30) (66)
------------- ------------- ------------- ------------- ------------- -------------
March 31, 2005 558 394 296 218 854 612
============= ============= ============= ============= ============= =============
</TABLE>
31
<PAGE>
Cost of revenue. Cost of revenue for the year ended March 31, 2005 increased
13.9% to $32.7 million from $28.7 million for the year ended March 31, 2004,
while the cost of revenue as a percentage of net revenue declined to 36.7% from
40.4% during the same period. Our consolidated gross profit is impacted by the
level of hardware content included in system sales, the percentage of EDI
revenue in our overall sales mix, and certain headcount expenses directly
related to the cost of delivering our products and services. Consolidated gross
profit is also impacted by the higher margin revenues of the NextGen Division
which increased its share of total company revenue to 82.7% from 76.8% in the
prior year.
The following table details revenue and cost of revenue on a consolidated and
divisional basis for the twelve month periods ended March 31, 2005 and 2004:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------
2005 % 2004 %
<S> <C> <C> <C> <C>
Consolidated
Revenue................. $ 88,961 100.0% $ 70,934 100.0%
Cost of revenue......... 32,669 36.7 28,673 40.4
------------- ------------- ------------ -------------
Gross profit............ 56,292 63.3 42,261 59.6
NextGen Division
Revenue................. 73,594 100.0 54,443 100.0
Cost of revenue......... 25,004 34.0 20,398 37.5
------------- ------------- ------------ -------------
Gross profit............ 48,590 66.0 34,045 62.5
QSI Division
Revenue................. 15,367 100.0 16,491 100.0
Cost of revenue......... 7,665 49.9 8,275 50.2
------------- ------------- ------------ -------------
Gross profit............ $ 7,702 50.1% $ 8,216 49.8%
</TABLE>
Gross profit margins at the NextGen Division for the year ended March 31, 2005
increased to 66.0% from 62.5% primarily due to a decrease in the proportionate
level of hardware and third party software content included in revenue as well
as a slight decrease in the relative level of applicable headcount expense
associated with delivering our products and services. The QSI Division's gross
profit margin improved slightly to 50.1% in the year ended March 31, 2005 from
49.8% in the same period last year due to proportionately lower hardware and
third party software content included in revenue.
32
<PAGE>
The following table details the individual components of cost of revenue and
gross profit as a percentage of total revenue for our Company and our two
divisions:
<TABLE>
<CAPTION>
------------------------------------------------------------------- -------------
Outside
Services,
Amortization of
Hardware, Payroll and Software
Third Party related Development Total Cost of
Software Benefits Costs and Other Revenue Gross Profit
------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Twelve months ended
March 31, 2005
QSI Division.......... 6.1% 17.8% 26.0% 49.9% 50.1%
NextGen Division...... 6.8 12.6 14.6 34.0 66.0
------------- ------------- --------------- ------------- -------------
Consolidated.......... 6.7 13.5 16.5 36.7 63.3
============= ============= =============== ============= =============
Twelve months ended
March 31, 2004
QSI Division.......... 7.6 16.8 25.8 50.2 49.8
NextGen Division...... 10.8 14.2 12.5 37.5 62.5
------------- ------------- --------------- ------------- -------------
Consolidated.......... 10.0% 14.8% 15.6% 40.4% 59.6%
============= ============= =============== ============= =============
</TABLE>
During the twelve months ended March 31, 2005, hardware and third party software
constituted a smaller portion of consolidated revenue compared to the same prior
year period, driven principally by the composition of NextGen Division revenue.
This year over year reduction was not the result of any identifiable trend or
change in emphasis on our part. The number of customers who purchase hardware
and third party software and the dollar amount of hardware and third party
software purchased fluctuates each quarter depending on the needs of the
customers and is not a priority focus for us.
Our payroll and benefits expense associated with delivering our products and
services decreased to 13.5% of consolidated revenue compared to 14.8% during the
prior twelve months ended March 31, 2004. The absolute level of consolidated
payroll and benefit expenses grew primarily due to additions to related
headcount, payroll and benefits expense associated with delivering products and
services in the NextGen Division. Payroll and benefits expense associated with
delivering products and services in the QSI Division declined slightly on an
absolute basis, but increased slightly on a percentage of revenue basis. We
anticipate continued additions to headcount in the NextGen Division in areas
related to delivering products and services in future periods, but due to the
uncertainties in the timing of our sales arrangements, our sales mix, the
acquisition and training of qualified personnel, and other issues, we cannot
accurately predict if related headcount expense as a percentage of revenue will
increase or decrease in the future.
We do not currently intend to make any significant additions to related
headcount at the QSI Division.
Should the NextGen Division continue to represent an increasing share of our
revenue and should the NextGen Division continue to carry higher gross margins
than the QSI Division, our consolidated gross margin percentages should increase
to more closely match those of the NextGen Division.
As a result of the foregoing events and activities, our gross profit for the
Company and our two operating divisions increased for the twelve month period
ending March 31, 2005 versus the prior year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the year ended March 31, 2005 increased 27.2% to
$24.8 million as compared to $19.5 million for the year ended
33
<PAGE>
March 31, 2004. The increase resulted primarily from increases of $2.0 million
in selling and administrative salaries and related benefits expenses in the
NextGen Division, $0.9 million for corporate related professional services
principally in the area of Sarbanes-Oxley compliance, $0.6 million in commission
expense principally in the NextGen division, $0.4 million in corporate related
salaries and related benefit expenses, $0.4 million in NextGen travel expenses
and $1.0 million in other general and administrative expenses primarily in the
NextGen Division. Selling, general and administrative expenses as a percentage
of revenue slightly increased to 27.9% in the fiscal year ended March 31, 2005
from 27.4% in the fiscal period ended March 31, 2004 due to selling, general and
administrative expenses growing at a slightly faster rate than revenue.
We anticipate increased expenditures for trade shows, advertising and the
employment of additional sales representatives primarily at the NextGen
Division. We are hopeful that we will be able to achieve at least a moderate
reduction in expenses related to Sarbanes Oxley Act compliance. While we expect
selling, general and administrative expenses to increase on an absolute basis,
we cannot accurately predict the impact these additional expenditures will have
on selling, general, and administrative expenses as a percentage of revenue.
Research and Development Costs. Research and development costs for the year
ended March 31, 2005 and 2004 were $6.9 million and $6.1 million, respectively.
The increase in research and development costs was primarily due to increased
investment in the NextGen product line. Research and development costs as a
percentage of net revenue decreased to 7.8% from 8.7% primarily due to revenue
growing at a faster rate than the increase in research and development spending.
Research and development costs are expected to continue at or above current
levels.
Investment Income. Investment income for the year ended March 31, 2005 increased
127% to approximately $0.9 million compared with $0.4 million in the year ended
March 31, 2004. The increase was primarily due to the effect of an increase in
short term interest rates versus the prior year period as well as comparatively
higher amounts available for investment during the fiscal period ended March 31,
2005. During the fourth quarter of fiscal year 2005, the Company paid a one time
dividend of approximately $19.6 million, which reduced the amount of funds
available for investment during this period.
Provision for Income Taxes. The provision for income taxes for the year ended
March 31, 2005 was approximately $9.4 million as compared to approximately $6.6
million for the year ago period. The effective tax rates for fiscal 2005 and
2004 were 36.8% and 38.9%, respectively. The provision for income taxes for the
years ended March 31, 2005 and 2004 differ from the combined statutory rates
primarily due to the impact of varying state income tax rates and the impact of
research and development tax credits. During fiscal 2005, the Company recognized
approximately $0.5 million of research and development credits which had not
been recognized previously due to the uncertainly concerning the ultimate amount
of tax to be credited. In the quarter ended March 31, 2005, the State of
California completed an audit of the Company's tax returns and did not
materially change credits related to research and development. Based on the
results of that audit as well the expiration of the statue of limitations on
certain amended returns, the provision for income taxes for the year ended March
31, 2005 was reduced by the $0.5 million in tax credits which had not been
recognized as of March 31 2004.
34
<PAGE>
Comparison of the Years Ended March 31, 2004 and March 31, 2003
For the year ended March 31, 2004, our net income was $10.4 million or $0.84 per
share on a basic and $0.80 per share on a fully diluted basis. In comparison,
the Company earned $7.0 million or $0.57 per share on a basic and $0.55 per
shares on a diluted basis in the year ended March 31, 2003. The increase in net
income for the year ended March 31, 2004, was achieved through the following:
o a 29.5% increase in revenue;
o an increase in our gross profit margin from 56.6% to 59.6%; and
o Selling, general and administrative and research and development
expenses which grew at 27.4% and 21.3% respectively; slower than the
overall revenue growth rate.
Revenue. Net revenue for the year ended March 31, 2004 increased 29.5% to $70.9
million from $54.8 million for the year ended March 31, 2003. Sales of computer
systems, upgrades and supplies increased 35.5% to $39.5 million from $29.2
million while net revenue from maintenance, EDI, and other service grew 22.7% to
$31.4 from $25.6 million during the comparable prior period. The increase in net
revenue from sales of computer systems, upgrades and supplies was principally
due to increased sales of the Company's NextGen(epm) and NextGen(emr) software
licenses to new customers.
We divide revenue into two categories, "System sales" and "Maintenance, EDI, and
other services". Revenue in the systems sales category includes software license
fees, third party hardware and software, and implementation and training
services related to purchase of the Company's software systems. Revenue in the
maintenance and other services category includes maintenance, EDI, and other
revenue. Maintenance and EDI revenue are the principle sources of revenue in
this category.
System Sales. Company-wide sales of systems for the twelve months ended March
31, 2004 increased 35.5% to $39.5 million from $29.2 million in the prior year.
Our increase in revenue from sales of systems was principally the result of a
42.5% increase in category revenue at our NextGen Division whose sales in this
category grew from $26.2 million during the year ended March 31, 2003 to $37.3
million during the year ended March 31, 2004. This increase was driven primarily
by higher sales of NextGenemr and NextGenepm software to both new and existing
clients, as well as delivery of related implementation services and sales of
related hardware, third party software, and supplies.
Systems sales revenue in the QSI Division declined 26.2% to approximately $2.2
million in the year ended March 31, 2004 from $3.0 million in the year ended
March 31, 2003.
35
<PAGE>
The following table breaks down our reported system sales into software,
hardware, third party software, supplies, and implementation and training
services components by Division:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Hardware,
Third Party Implementation
Software and and Training Total
Software Supplies Services System Sales
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Twelve months ended
March 31, 2004
QSI Division......... $ 807 $ 1,029 $ 345 $ 2,181
NextGen Division..... 24,657 6,139 6,548 37,344
------------- ------------- -------------- -------------
Consolidated......... $ 25,464 $ 7,168 $ 6,893 $ 39,525
============= ============= ============== =============
Twelve months ended
March 31, 2003
QSI Division......... $ 1,591 $ 1,160 $ 205 $ 2,956
NextGen Division..... 17,982 4,658 3,573 26,213
------------- ------------- -------------- -------------
Consolidated......... $ 19,573 $ 5,818 $ 3,778 $ 29,169
============= ============= ============== =============
</TABLE>
Maintenance, EDI, and other. Company-wide revenue from maintenance, EDI, and
other services grew 22.7% to $31.4 million from $25.6 million. The increase in
this category resulted principally from an increase in maintenance and EDI
revenue from the NextGen Division's client base. Total NextGen Division
maintenance revenue for the year ended March 31, 2004 grew 58.0% to $11.5
million from $7.3 million in the year ago period, while EDI revenue grew 74.0%
to $3.0 million compared to $1.7 million in the same period. QSI Division
maintenance revenue declined 4.7% from $7.9 million to $7.6 million in the same
period while divisional EDI revenue declined by approximately 2.8% from $5.4
million to $5.3 million.
The following table details revenue by category for the twelve month periods
ended March 31, 2004 and 2003:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Maintenance EDI Other Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Twelve months ended
March 31, 2004
QSI Division......... $ 7,570 $ 5,276 $ 1,464 $ 14,310
NextGen Division..... 11,481 3,016 2,602 17,099
------------- ------------- ------------- -------------
Consolidated......... $ 19,051 $ 8,292 $ 4,066 $ 31,409
============= ============= ============= =============
Twelve months ended
March 31, 2003
QSI Division......... $ 7,941 $ 5,426 $ 1,100 $ 14,467
NextGen Division..... 7,267 1,733 2,133 11,133
------------- ------------- ------------- -------------
Consolidated......... $ 15,208 $ 7,159 $ 3,233 $ 25,600
============= ============= ============= =============
</TABLE>
The following table provides the number of billing sites which were receiving
maintenance services as of the last business day of the period ended March 31,
2004 and 2003 respectively, as well as the number of billing sites receiving EDI
services during the last month of each respective period at each Division of the
Company. The table presents summary information only and includes billing
entities added and removed for any reason. Note also that a single client may
include one or multiple billing sites.
36
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
NextGen QSI Consolidated
------------------------------- ------------------------------- -------------------------------
Maintenance EDI Maintenance EDI Maintenance EDI
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
March 31, 2003 315 219 348 254 663 473
Billing sites added 117 99 4 4 121 103
Billing sites removed (11) (25) (31) (24) (42) (49)
------------- ------------- ------------- ------------- ------------- -------------
March 31, 2004 421 293 321 234 742 527
============= ============= ============= ============= ============= =============
</TABLE>
Cost of Revenue. Cost of revenue for the year ended March 31, 2004 increased
20.7% to $28.7 million from $23.8 million for the year ended March 31, 2003,
while the cost of revenue as a percentage of revenue at 40.4% for 2004 declined
compared to the prior year's 43.4% of revenue.
The following table details revenue and cost of revenue on a consolidated and
divisional basis for the twelve month periods ended March 31, 2004 and 2003:
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------
2004 % 2003 %
<S> <C> <C> <C> <C>
Consolidated
Revenue................. $ 70,934 100.0% $ 54,769 100.0%
Cost of revenue......... 28,673 40.4 23,755 43.4
------------- ------------- ------------- -------------
Gross profit............ 42,261 59.6 31,014 56.6
NextGen Division
Revenue................. 54,443 100.0 37,346 100.0
Cost of revenue......... 20,398 37.5 14,511 38.9
------------- ------------- ------------- -------------
Gross profit............ 34,045 62.5 22,835 61.1
QSI Division
Revenue................. 16,491 100.0 17,423 100.0
Cost of revenue......... 8,275 50.2 9,244 53.1
------------- ------------- ------------- -------------
Gross profit............ $ 8,216 49.8% $ 8,179 46.9%
</TABLE>
Gross profit is impacted by the level of hardware content included in system
sales, the percentage of EDI revenue in our overall sales mix, and certain
headcount expenses. Gross profit at the NextGen Division for the year ended
March 31, 2004 improved to 62.5% from 61.1% primarily due to a decrease in the
relative level of applicable outside service, amortization of software
development costs and other expenses associated with delivering the Company's
products and services. The QSI Division's gross profit for the year ended March
31, 2004 improved to 49.8% from 46.9% in the same period during the prior year
primarily due to a proportionately lower hardware and third party software
content included in revenue. In addition, our gross profit percentage increased
as the higher margined NextGen Division increased its share of total Company
revenue to 76.8% from 68.2% in the prior year.
The following table details the individual components of cost of revenue and
gross profit as a percentage of total revenue for our Company and our two
divisions:
37
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Outside
Services,
Amortization of
Software
Hardware, Payroll and Development
Third Party related Costs and Total Cost
Software Benefits Other of Revenue Gross Profit
------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Twelve months ended
March 31, 2004
QSI division....... 7.6% 16.8% 25.8% 50.2% 49.8%
NextGen division... 10.8 14.2 12.5 37.5 62.5
------------- ------------- --------------- ------------- -------------
Consolidated....... 10.0 14.8 15.6 40.4 59.6
============= ============= =============== ============= =============
Twelve months ended
March 31, 2003
QSI division....... 11.1 15.5 26.5 53.1 46.9
NextGen division... 11.9 11.8 15.2 38.9 61.1
------------- ------------- --------------- ------------- -------------
Consolidated....... 11.6% 13.0% 18.8% 43.4% 56.6%
============= ============= =============== ============= =============
</TABLE>
During the twelve months ended March 31, 2004, hardware and third party software
constituted a slightly smaller portion of consolidated revenue compared to the
same year ago period driven principally by the composition of NextGen Division
revenue. This year over year reduction was not the result of any identifiable
trend or change in emphasis on our part. The number of customers who purchase
hardware and third party software and the dollar amount of hardware and third
party software purchased fluctuates each quarter depending on the needs of the
customers and is not a priority focus for us.
Our payroll and benefits expense associated with delivering our products and
services increased to 14.8% of consolidated revenue compared to 13.0% during the
prior twelve months ended March 31, 2003. The level of consolidated payroll and
benefit expenses grew due to additions to related headcount, payroll and
benefits expense associated with delivering products and services in the NextGen
Division. Payroll and benefits expense associated with delivering products and
services in the QSI Division increased slightly on both an absolute and a
percentage of revenue basis. We anticipate continued additions to headcount in
the NextGen Division in areas related to delivering products and services in
future periods but due to the uncertainties in the timing of our sales
arrangements, our sales mix, the acquisition and training of qualified
personnel, and other issues, we cannot accurately predict if related headcount
expense as a percentage of revenue will increase or decrease in the future. We
do not currently intend to make any significant additions to related headcount
at the QSI Division.
Our outside services, amortization of software development costs and other
expenses included in cost of revenue declined to 15.6% compared to 18.8% during
the twelve months ended March 31, 2003. This decline was due to a number of
factors including a slight decline in the proportion of EDI revenue included in
consolidated revenue during fiscal 2004, a slight improvement in gross profit
related to EDI revenue, and certain overhead and amortization of capitalized
software costs increasing at a slower rate compared to the rate of revenue
growth.
Should the NextGen Division continue to represent an increasing share of our
revenue and should the NextGen Division continue to carry higher gross margins
than the QSI Division, our consolidated gross profit percentages should increase
to more closely match those of the NextGen Division.
As a result of the foregoing events and activities, our gross profit for the
Company and our two operating divisions increased for the twelve month period
ending March 31, 2004 versus the prior year period.
38
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended March 31, 2004 increased 27.4% to $19.5 million from
$15.3 million for the year ended March 31, 2003, and declined on a percentage of
revenue basis to 27.4% from 27.9% for the respective fiscal years. The increase
in the amount of such expenses resulted primarily from increases of $1.1 million
in corporate expenses, principally in the area of professional service fees, as
well as $1.0 million in selling and administrative payroll and benefits
expenses, $0.9 million in commissions expenses, and $0.6 million in travel and
trade show expenses primarily in the NextGen Division. Further increases in
selling, general and administrative expenses are expected.
Research and Development Costs. Research and development costs for the year
ended March 31, 2004 and 2003 were $6.1 million and $5.1 million, respectively.
The increase in research and development costs was primarily due to increased
investment in the NextGen product line. Research and development costs as a
percentage of net revenue decreased to 8.7% from 9.2% due in part, to the fact
that revenue growth exceeded the increase in research and development spending,
and in part due to the fact that our investments in capitalized software
increased to $2.6 million from $1.7 million in the prior year, reflecting
increased expenditures directed at enhancements of the NextGen products.
Research and development costs are expected to continue at or above current
levels.
Investment Income. Investment income for the year ended March 31, 2004 decreased
11.1% to approximately $0.4 million compared with $0.4 million in the year ended
March 31, 2003. Investment income in the year ended March 31, 2004 declined
primarily due to the effect of the drop in short term interest rates versus the
prior year. The decline in interest rates was partially offset by an increase in
average funds available for investment during the year ended March 31, 2004.
Provision for Income Taxes. The provision for income taxes for the year ended
March 31, 2004 was approximately $6.6 million as compared to approximately $4.1
million for the year ago period. The effective tax rates for fiscal 2004 and
20003 were 38.9% and 36.6%, respectively. The provision for income taxes for the
years ended March 31, 2004 and 2003 differ from the combined statutory rates
primarily due to the impact of varying state income tax rates and the impact of
research and development tax credits. The effective rate for the fiscal year
2004 increased from the prior year primarily due to a relatively smaller impact
of research and development tax credits as well as slightly higher effective
state income tax rates. The provision for income taxes for the year ended March
31, 2004 and 2003 accounted for a portion of the aggregate tax credits
accumulated through the end of each period due to the uncertainly concerning the
ultimate amount of tax to be credited.
Liquidity and Capital Resources. The following table presents selected financial
statistics and information for each of the past three fiscal years:
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
2005 2004 2003
---------- ---------- -----------
<S> <C> <C> <C>
Cash and cash equivalents at year end.................... $ 51,157 $ 51,395 $ 36,443
Net (decrease) increase in cash and cash equivalents..... (238) 14,952 11,000
Net income............................................... 16,109 10,400 7,035
Net cash provided by operating activities................ $ 21,631 $ 17,303 $ 13,183
Days of sales outstanding................................ 119 98 104
</TABLE>
Cash provided by operations is our principal source of cash. Cash from
operations for the year ended March 31, 2005 consisted principally of net income
before non-cash related expenses of depreciation,
39
<PAGE>
amortization, and provision for bad debts and inventory obsolescence, and
increases in deferred revenue and other current liabilities, offset by an
increase in gross accounts receivable. We were able to generate operating cash
flows significantly in excess of net income in the year ended March 31, 2005
primarily as a result of increases in deferred revenue of $8.2 million. We were
able to generate operating cash flows significantly in excess of net income in
the year ended March 31, 2004 primarily as a result of increases in deferred
revenue of $5.6 million and improved turnover of accounts receivable. Provided
turnover of accounts receivable, increased revenue, and profitability remain
consistent with results experienced for the year ended March 31, 2005, we
anticipate continuing to generate cash from operations primarily from net
income.
Net cash used in investing activities for the year ended March 31, 2005 was $4.4
million and was primarily composed of investments in capitalized software and
equipment and improvements. We have no significant capital commitments, and
currently anticipate that additions to equipment and improvements for fiscal
2006 will be equal to or greater than historical levels.
Net cash used in financing activities for the year ended March 31, 2005 was
$17.5 million was primarily composed of a one-time dividend paid to shareholders
of $19.6 million partially offset by proceeds from the exercise of stock
options. Cash received from employee stock option exercises can fluctuate from
year to year.
At March 31, 2005, we had cash and cash equivalents of $51.2 million. We intend
to expend some of these funds for the development of products complementary to
our existing product line as well as new versions of certain of our products.
These developments are intended to take advantage of more powerful technologies
and to increase the integration of our products. We have no additional
significant current capital commitments. Management believes that our cash and
cash equivalents on hand at March 31, 2005, together with the cash flows from
operations, if any, will be sufficient to meet our working capital and capital
expenditure requirements for fiscal 2006.
The following table summarizes our significant contractual obligations at March
31, 2005, and the effect of such obligations is expected to have on our
liquidity and cash in future periods:
<TABLE>
<CAPTION>
Contractual Obligations Total 2006 2007-2008 2009-2010 Beyond 2010
<S> <C> <C> <C> <C> <C>
Non-cancelable operating leases $ 4,001 $ 1,257 $ 1,867 $ 877 --
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISKS
We have a significant amount of cash and short-term investments with maturities
less than three months. This cash portfolio exposes us to interest rate risk as
short-term investment rates can be volatile. Given the short-term maturity
structure of our investment portfolio, we believe that it is not subject to
principal fluctuations and the effective interest rate of our portfolio tracks
closely to various short-term money market interest rate benchmarks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Financial Statements identified in the Index to Financial Statements
appearing under "Item 15. Exhibits and Financial Statement Schedules" of this
report are incorporated herein by reference to Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
40
<PAGE>
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and procedures as of a date
within 90 days of the filing date of this report, our officers including our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures result in the effective recordation,
processing, summarization and reporting of information that is required to be
disclosed in the reports that we file under the Securities Exchange Act of 1934
and the rules there under.
Changes in Internal Control Over Financial Reporting
During the year ended March 31, 2005, the following changes have occurred in our
"internal controls over financial reporting" (as defined in Rule 13a-15(f) under
the Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our financial reporting function.
During the year ended March 31, 2005, the Company implemented revenue
application software "Softrax" to automate certain processes surrounding the
recognition and the deferral of revenue related to our software sales
arrangements with multiple elements. The Company added numerous additional
policies and procedures in order to strengthen the Company's internal control
structure in conjunction with the Company's evaluation of internal controls. The
Company also added a controller with public accounting and SEC reporting
experience.
There were no other significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Under the supervision and with the
participation of the Company's management, including our principal executive
officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of its internal control over financial reporting based on the
framework set forth in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, the Company's management concluded that its internal control over
financial reporting was effective as of March 31, 2005.
The Company's internal control over financial reporting is supported by written
policies and procedures, that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with
authorizations of the Company's management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
41
<PAGE>
The Company's independent registered public accounting firm has audited
management's assessment of the effectiveness of the Company's internal control
over financial reporting as of March 31, 2005 as stated in their report which is
included herein.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Except for information concerning our executive officers which is included under
the caption "Executive Officers of the Company" following Part I, Item 4 of this
Report, the information required by Item 10 is incorporated herein by reference
from our definitive proxy statement for our 2005 annual shareholders' meeting to
be filed with the Securities and Exchange Commission within 120 days after the
end of the fiscal year ended March 31, 2005.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from our
definitive proxy statement for our 2005 annual shareholders' meeting to be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year ended March 31, 2005.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated herein by reference from our
definitive proxy statement for our 2005 annual shareholders' meeting to be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year ended March 31, 2005.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference from our
definitive proxy statement for our 2005 annual shareholders' meeting to be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year ended March 31, 2005.
ITEM 14. PRINCIPAL ACCOUNTING AND FEES AND SERVICES
The information required by Item 14 is incorporated herein by reference from our
definitive proxy statement for our 2005 annual shareholders' meeting to be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year ended March 31, 2005.
42
<PAGE>
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM
10-K
(a) (1) Index to Financial Statements:
Page
----
o Report of Independent Registered Public Accounting Firm... 49
o Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting................. 50
o Consolidated Balance Sheets -- Years Ended
March 31, 2005 and March 31, 2004......................... 52
o Consolidated Statements of Income -- Years Ended
March 31, 2005, March 31, 2004 and 2003................... 53
o Consolidated Statements of Shareholders' Equity -- Years
Ended March 31, 2005, March 31, 2004 and 2003............. 54
o Consolidated Statements of Cash Flows -- Years Ended
March 31, 2005, March 31, 2004 and 2003................... 55
o Notes to Consolidated Financial Statements................ 56
(2) The following financial statement schedule for the years ended March
31, 2005, March 31, 2004 and 2003, read in conjunction with the
financial statements of Quality Systems, Inc., is filed as part of
this Annual Report on Form 10-K.
o Schedule II -- Valuation and Qualifying Accounts.......... 71
Schedules other than that listed above have been omitted since they
are either not required, not applicable, or because the information
required is included in the financial statements or the notes
thereto.
(3) The exhibits listed in the Index to Exhibits hereof are attached
hereto or incorporated herein by reference and filed as apart of
this Report.
43
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
3.1 Articles of Incorporation of the Company, as amended, are
hereby incorporated by reference to Exhibit 3.1 to our Annual
Report on Form 10-K for the year ended March 31, 1984, File
No. 2-80056.
3.1.1 Amendment to Articles of Incorporation, effective March 4,
2005. **
3.2 Bylaws of the Company, as amended and restated. **
3.3 Certificate of Amendment of Bylaws of the Company is hereby
incorporated by reference to Exhibit 3.2.1 to our Registration
Statement on Form S-1, File No. 333-00161.
3.4 Text of Sections 2 and 3 of Article II of the Bylaws of the
Company is hereby incorporated By reference to Exhibit 3.2.2
to our Quarterly report on Form 10-QSB for the period Ended
December 31, 1996, File No. 0-13801.
3.5 Certificate of Amendment of Bylaws of the Company, is hereby
incorporated by reference to Exhibit 3.2.3 to our Annual
Report on Form 10-K for the year ended March 31, 2000, File
No. 0-13801.
10.2* 1989 Incentive Stock Option Plan is hereby incorporated by
reference to Exhibit 4.1 to our Registration Statement on Form
S-8, File No. 33-31949.
10.2.1* Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to our Registration
Statement on Form S-1, File No. 333-00161.
10.2.2* Form of Non-Qualified Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.3 to our Registration
Statement on Form S-1, File No. 333-00161.
10.3* Form of Incentive Stock Option Agreement is hereby
incorporated by reference to Exhibit 10.2 to our Registration
Statement on Form S-1, File No. 2-80056.
10.4* 1993 Deferred Compensation Plan is hereby incorporated by
reference to Exhibit 10.5 to our Annual Report on Form 10-KSB
for the year ended March 31, 1994, File No. 0-13801.
10.4.2* Profit Sharing and Retirement Plan, as amended, is hereby
incorporated by reference to Exhibit 10.4.2 to our Annual
Report on Form 10-KSB for the year ended March 31, 1994, File
No. 0-13801.
10.4.3* Profit Sharing and Retirement Plan, as amended, amendments No.
2 and 3, are hereby incorporated by reference to Exhibit
10.4.3 to our Annual Report on Form 10-KSB for the year ended
March 31, 1996, File No. 0-13801.
10.5 Series "A" Convertible Preferred Stock Purchase Agreement, as
amended, dated April 21, 1995 between the Company and Clinitec
International, Inc., is hereby incorporated by reference to
Exhibit 10.11 to our Annual Report on Form 10-KSB for the year
ended March 31, 1995, File No. 0-13801.
44
<PAGE>
10.6 Form of Indemnification Agreement is hereby incorporated by
reference to Exhibit 10.10 to our Registration Statement on
Form S-1, File No. 333-00161.
10.6.1* Form of Indemnification Agreement for directors and executive
officers authorized January 27, 2005. **
10.7 Agreement and Plan of Merger, dated May 16, 1996, by and among
Quality Systems, Inc., CII Acquisition Corporation, Clinitec
International, Inc. and certain shareholders of Clinitec
International, Inc. and certain exhibits are hereby
incorporated by reference to Exhibit 2 to our Current Report
on Form 8-K, dated May 17, 1996 and filed May 30, 1996.
10.8 Asset Purchase Agreement, dated May 15, 1997, by and among
NextGen Healthcare Information Systems, Inc., MHIS Acquisition
Corp., Quality Systems, Inc., and certain shareholders of
NextGen Healthcare Information Systems, Inc. is hereby
incorporated by reference to Exhibit 2 of Company's Current
Report on Form 8-K, dated May 15, 1997 and filed May 29, 1997,
File No. 0-13801.
10.9* 1998 Employee Stock Contribution Plan is hereby incorporated
by reference to Exhibit 4.1 to our Registration Statement on
Form S-8, File No. 333-63131.
10.10* 1998 Stock Option Plan is hereby incorporated by reference to
Exhibit 4.1 to our Registration Statement on Form S-8, File
No. 333-67115.
10.10.1* Amended and Restated 1998 Stock Option Plan. **
10.11* Memorandum of Understanding regarding the April 3, 2000
resignation of Sheldon Razin between Sheldon Razin and Quality
Systems, Inc., is hereby incorporated by reference to Exhibit
10.16 to our Annual Report on Form 10-K for the year ended
March 31, 2000, File No. 0-13801.
10.12* Memorandum of Understanding Relating to Director Nominees is
hereby incorporated by reference to Company's Definitive Proxy
Statement for our 1999 Shareholder's Meeting, File No.
001-12537.
10.13* Employment Agreement dated July 20, 2000 between Quality
Systems, Inc. and Lou Silverman is hereby incorporated by
reference to Exhibit 10.18 to our Quarterly Report on Form
10-Q for the quarter ended September 30, 2000, File No.
0-13801.
10.14 Lease Agreement between Company and Tower Place, L.P. dated
November 15, 2000, commencing February 5, 2001 is hereby
incorporated by reference to Exhibit 10.14 to our Annual
Report on Form 10-K for the year ended March 31, 2001, File
No. 0-13801.
10.15 Lease Agreement between Company and Orangewood Business Center
Inc. dated April 3, 2000, amended February 22, 2001, is hereby
incorporated by reference to Exhibit 10.15 to our Annual
Report on Form 10-K for the year ended March 31, 2001, File
No. 0-13801.
10.16 Lease Agreement between Company and Craig Development
Corporation dated February 20, 2001 is hereby incorporated by
reference to Exhibit 10.16 to our Annual Report on Form 10-K
for the year ended March 31, 2001, File No. 0-13801.
10.17 Sublease Agreement between Company and Infinium Software dated
February 22, 2002 is hereby incorporated by reference to
Exhibit 10.17 to our Annual Report on Form 10-K for the year
ended March 31, 2003, File No. 0-13801.
45
<PAGE>
10.18 Lease Agreement between Company and HUB Properties LLC dated
May 8, 2002 is hereby incorporated by reference to Exhibit
10.18 to our Annual Report on Form 10-K for the year ended
March 31, 2003, File No. 0-13801.
10.19 Lease Agreement between the Company and LakeShore Towers
Limited Partnership Phase IV, a California limited
partnership, dated September 15, 2004. **
10.20* Board Service Agreement between the Company and Lou Silverman
is incorporated by reference to Exhibit 10.2.1 to our Current
Report of Form 8-K, dated May 31, 2005, File No. 001-12537.
10.21* Board Service Agreement between the Company and Patrick Cline
is incorporated by reference to Exhibit 10.2.1 to our Current
Report of Form 8-K, dated May 31, 2005, File No. 001-12537.
21 List of Subsidiaries.
23.1 Consent of Independent Certified Public Accountants - Grant
Thornton LLP.
31.1 Certifications Required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. **
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
* This exhibit is a management contract or a compensatory plan or
arrangement.
** Filed herewith.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this Report to be signed on our behalf by the
undersigned, thereunto duly authorized.
By: /s/ LOUIS E. SILVERMAN
--------------------------
Louis E. Silverman,
President and Chief Executive Officer
Date: June 3, 2005
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature
appears below hereby constitutes and appoints Louis E. Silverman and Paul Holt,
each of them acting individually, as his attorney-in-fact, each with the full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming our signatures as they may be signed by our said attorney-in-fact and
any and all amendments to this Annual Report on Form 10-K.
Pursuant to the requirement of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on our behalf in the capacities and on
the dates indicated.
Signature Title Date
- ----------------------- ----------------------------------------- ------------
/s/ SHELDON RAZIN Chairman of the Board June 9, 2005
- -----------------------
Sheldon Razin
/s/ LOUIS E. SILVERMAN. Director, President and Chief Executive June 9, 2005
- ----------------------- Officer (Principal Executive
Louis E. Silverman Officer)/Director
/s/ PATRICK CLINE Director, President, NextGen Healthcare June 9, 2005
- ----------------------- Information Systems Division
Patrick Cline
/s/ PAUL HOLT Secretary and Chief Financial Officer June 9, 2005
- ----------------------- (Principal Financial Officer)
Paul Holt
/s/ WILLIAM BOTTS Director June 9, 2005
- -----------------------
William Botts
/s/ MAURICE DEWALD Director June 9, 2005
- -----------------------
Maurice DeWald
47
<PAGE>
Signature Title Date
- ----------------------- ----------------------------------------- ------------
/s/ AHMED HUSSEIN Director June 9, 2005
- -----------------------
Ahmed Hussein
/s/ JONATHAN JAVITT Director June 9, 2005
- -----------------------
Jonathan Javitt
/s/ VINCENT LOVE Director June 6, 2005
- -----------------------
Vincent Love
/s/ STEVEN PLOCHOCKI Director June 9, 2005
- -----------------------
Steven Plochocki
48
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Quality Systems, Inc.
We have audited the accompanying consolidated balance sheets of Quality Systems,
Inc. as of March 31, 2005 and 2004, and the related consolidated statements of
income, shareholders' equity, and cash flow for each of the three years in the
period ended March 31, 2005. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Quality
Systems, Inc. as of March 31, 2005 and 2004 and the consolidated results of
operations and its consolidated cash flows for each of the three years in the
period ended March 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
We have also audited Schedule II of Quality Systems, Inc. for each of the three
years in the period ended March 31, 2005. In our opinion, this schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Quality
Systems, Inc.'s internal control over financial reporting as of March 31, 2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated June 3, 2005, expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
Irvine, California
June 3, 2005
49
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Shareholders
Quality Systems, Inc.
We have audited management's assessment, included in the accompanying Quality
Systems, Inc. Management's Report on Internal Control Over Financial Reporting,
that Quality Systems, Inc. maintained effective internal control over financial
reporting as of March 31, 2005, based on criteria established in Internal
Control - Integrated Framework issues by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Quality Systems, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Quality Systems, Inc. maintained
effective internal control over financial reporting as of March 31, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, Quality Systems,
Inc. maintained, in all material respects, effective internal control over
financial reporting as of March 31, 2005, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Quality Systems, Inc. as of March 31, 2005 and 2004, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of
50
<PAGE>
the three years in the period ended March 31, 2005, and our report dated June 3,
2005 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Irvine, California
June 3, 2005
51
<PAGE>
QUALITY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
--------------------
March 31, March 31,
2005 2004
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents .............................................. $ 51,157 $ 51,395
Accounts receivable, net ............................................... 33,362 20,280
Inventories, net ....................................................... 960 725
Income tax receivable .................................................. 15 --
Net current deferred tax assets ........................................ 1,796 2,979
Other current assets ................................................... 1,677 1,493
-------- --------
Total current assets ............................................. 88,967 76,872
Other assets
Equipment and improvements, net ........................................ 2,697 2,012
Capitalized software costs, net ........................................ 4,334 3,608
Net long-term deferred tax assets ...................................... -- 1,104
Goodwill, net .......................................................... 1,840 1,840
Other assets, net ...................................................... 1,604 1,242
-------- --------
Total assets ..................................................... $ 99,442 $ 86,678
======== ========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ....................................................... $ 2,284 $ 1,655
Deferred revenue ....................................................... 24,115 16,060
Accrued employee compensation and benefits ............................. 3,436 2,610
Income tax payable ..................................................... -- 273
Other current liabilities .............................................. 4,021 2,859
-------- --------
Total current liabilities ........................................ 33,856 23,457
Deferred revenue, net of current .............................................. 1,362 1,203
Net deferred tax liabilities .................................................. 291 --
Deferred compensation ......................................................... 1,202 1,013
-------- --------
Total liabilities 36,711 25,673
-------- --------
Commitments and contingencies ................................................. -- --
Shareholders' equity
Common Stock, $0.01 par value; 40,000 shares authorized, 13,111 and
12,650 shares issued and outstanding at March 31, 2005 and 2004,
respectively ......................................................... 131 127
Additional paid-in capital ............................................. 44,499 39,671
Retained earnings ...................................................... 19,213 22,750
Deferred compensation .................................................. (1,112) (1,543)
-------- --------
Total shareholders' equity ....................................... 62,731 61,005
-------- --------
Total liabilities and shareholders' equity ....................... $ 99,442 $ 86,678
======== ========
</TABLE>
________________________________________________________________________________
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated statements.
52
<PAGE>
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
2005 2004 2003
------- ------- -------
<S> <C> <C> <C>
Revenue:
Software, hardware and supplies ..................... $39,672 $32,632 $25,391
Implementation and training services ................ 8,856 6,893 3,778
------- ------- -------
System sales .............................................. 48,528 39,525 29,169
------- ------- -------
Maintenance and other services ...................... 29,945 23,117 18,441
Electronic data interchange services ................ 10,488 8,292 7,159
------- ------- -------
Maintenance, EDI, and other services ...................... 40,433 31,409 25,600
------- ------- -------
Total revenue ....................................... 88,961 70,934 54,769
------- ------- -------
Cost of revenue:
Software, hardware and supplies ..................... 7,525 8,141 7,299
Implementation and training services ................ 6,300 5,197 2,929
------- ------- -------
Total cost of system sales 13,825 13,338 10,228
------- ------- -------
Maintenance and other ............................... 12,120 10,313 9,072
Electronic data interchange services ................ 6,724 5,022 4,455
------- ------- -------
Total cost of maintenance, EDI, and other services 18,844 15,335 13,527
------- ------- -------
Total cost of revenue ............................... 32,669 28,673 23,755
------- ------- -------
Gross profit ........................................ 56,292 42,261 31,014
------- ------- -------
Operating expenses:
Selling, general and administrative expenses .............. 24,776 19,482 15,293
Research and development costs ............................ 6,903 6,139 5,062
------- ------- -------
Total operating expenses ............................ 31,679 25,621 20,355
------- ------- -------
Income from operations .............................. 24,613 16,640 10,659
Investment income ......................................... 876 386 434
------- ------- -------
Income before provision for income taxes .................. 25,489 17,026 11,093
Provision for income taxes ................................ 9,380 6,626 4,058
------- ------- -------
Net income .......................................... $16,109 $10,400 $ 7,035
======= ======= =======
Net income per share, basic ............................... $ 1.25 $ 0.84 $ 0.57
Net income per share, diluted ............................. $ 1.22 $ 0.80 $ 0.55
Weighted average shares outstanding, basic ................ 12,872 12,436 12,254
Weighted average shares outstanding, diluted .............. 13,203 12,966 12,778
</TABLE>
________________________________________________________________________________
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated statements.
53
<PAGE>
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS'
EQUITY
For the Three Years Ended March 31, 2005, 2004 and 2003
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Total
----------------- Retained Deferred Shareholders'
Shares Amount APIC Earnings Compensation Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 2002 12,210 $ 122 $ 34,613 $ 5,315 $ -- $ 40,050
Exercise of stock options ................... 94 1 351 -- -- 352
Tax benefit resulting from stock
options ..................................... -- -- 96 -- -- 96
Net income .................................. -- -- -- 7,035 -- 7,035
------ -------- -------- -------- ------------ -----------
Balance, March 31, 2003 12,304 123 35,060 12,350 -- 47,533
Exercise of stock options ................... 346 4 1,304 -- -- 1,308
Tax benefit resulting from stock
options ..................................... -- -- 1,454 -- -- 1,454
Stock based compensation .................... -- -- 1,853 -- (1,543) 310
Net income .................................. -- -- -- 10,400 -- 10,400
------ -------- -------- -------- ------------ -----------
Balance, March 31, 2004 12,650 127 39,671 22,750 (1,543) 61,005
Exercise of stock options ................... 461 4 2,148 -- -- 2,152
Tax benefit resulting from stock
options ..................................... -- -- 2,680 -- -- 2,680
Stock based compensation .................... -- -- -- -- 431 431
Dividends paid .............................. -- -- -- (19,646) -- (19,646)
Net income .................................. -- -- -- 16,109 -- 16,109
------ -------- -------- -------- ------------ -----------
Balance, March 31, 2005 13,111 $ 131 $ 44,499 $ 19,213 $ (1,112) $ 62,731
====== ======== ======== ======== ============ ===========
</TABLE>
________________________________________________________________________________
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated statements.
54
<PAGE>
QUALITY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------
2005 2004 2003
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 16,109 $ 10,400 $ 7,035
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation .............................................. 1,012 836 910
Amortization of capitalized software costs ................ 1,952 1,490 1,267
Provision for bad debts ................................... 797 647 623
Provision for inventory obsolescence ...................... 160 54 40
Non-cash compensation from stock option grants ............ 431 310 --
Loss on short-term investments and other .................. -- -- 21
Tax benefit from exercise of stock options ................ 2,680 1,454 96
Deferred income taxes, net ................................ 2,578 (235) 298
Change in assets and liabilities:
Accounts receivable ....................................... (13,879) (3,400) (4,455)
Inventories ............................................... (395) (112) 411
Income tax receivable ..................................... (15) -- --
Other current assets ...................................... (184) 627 (943)
Other assets .............................................. (362) (373) --
Accounts payable .......................................... 629 (822) (180)
Deferred revenue .......................................... 8,214 5,564 5,544
Accrued compensation and related benefits ................. 826 248 687
Income tax payable ........................................ (273) 273 --
Other current liabilities ................................. 1,162 8 1,871
Deferred compensation ..................................... 189 334 (42)
-------- -------- --------
Net cash provided by operating activities 21,631 17,303 13,183
-------- -------- --------
Cash flows from investing activities:
Additions to capitalized software costs ........................ (2,678) (2,587) (1,660)
Additions to equipment and improvements ........................ (1,697) (1,072) (1,109)
Proceeds from the sale of short-term investments ............... -- -- 234
-------- -------- --------
Net cash used in investing activities .................. (4,375) (3,659) (2,535)
-------- -------- --------
Cash flows from financing activities:
Dividends paid (19,646) -- --
Proceeds from the exercise of stock options ............... 2,152 1,308 352
-------- -------- --------
Net cash (used in) provided by financing activities .... (17,494) 1,308 352
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ................ (238) 14,952 11,000
Cash and cash equivalents, beginning of year ........................ 51,395 36,443 25,443
-------- -------- --------
Cash and cash equivalents, end of year .............................. $ 51,157 $ 51,395 $ 36,443
======== ======== ========
</TABLE>
________________________________________________________________________________
The accompanying notes to these consolidated financial statements are an
integral part of these consolidated statements.
Supplemental Information. During fiscal 2005, 2004 and 2003 the Company made
income tax payments of $4,541, $4,716, and $4,280, respectively.
55
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 and 2004
(dollars in thousands, except per share amounts)
1. Description of Business
Quality Systems, Inc., comprised of the QSI Division (QSI Division) and a wholly
owned subsidiary, NextGen Healthcare Information Systems, Inc. (NextGen
Division) (collectively, the Company), develops and markets proprietary
healthcare information systems that automate medical and dental group practices,
community health centers, physician hospital organizations, management service
organizations, and dental schools. The Company's software systems include
general patient information, appointment scheduling, billing, insurance claims
submission and processing, managed care plan implementation and referral
management, treatment outcome studies, treatment planning, drug formularies,
electronic patient records, dental charting and letter generation. In addition
to providing fully integrated solutions, the Company offers its clients
comprehensive hardware and software maintenance and support services, system
training services and electronic claims submission services. The Company's
principal administrative, accounting and QSI Division operations are located in
Irvine, California. The principal office of the NextGen Division is located in
Horsham, Pennsylvania.
On February 2, 2005, the Board of Directors declared a 2-for-1 stock split with
respect to the Company's outstanding shares of common stock. The stock split
record date was March 4, 2005 and the stock began trading post split on March
28, 2005. References to share and per share data contained in the consolidated
financial statements and notes to the consolidated financial statements has been
retroactively adjusted to reflect the stock split.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated.
Basis of Presentation. The accompanying consolidated financial statements
have been prepared in accordance with accounting principals generally accepted
in the United States of America.
References to dollar amounts in this financial statement sections are in
thousands, except share and per share data, unless otherwise specified. Certain
prior year amounts have been reclassified to conform with fiscal year 2005
presentation.
Revenue recognition. The Company currently recognizes revenue pursuant to
Statement of Position No. 97-2, "Software Revenue Recognition" (SOP 97-2), as
amended by Statement of Position No. 98-9 "Modification of SOP 97-2, Software
Revenue Recognition" (SOP 98-9). The Company generates revenue from the sale of
licensing rights to its software products directly to end-users and value-added
resellers (VARs). The Company also generates revenue from sales of hardware and
third party software, implementation, training, software customization,
Electronic Data Interchange (EDI), post-contract support (maintenance) and other
services performed for customers who license its products.
A typical system contract contains multiple elements of the above items. SOP
98-9, requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair values of
those elements. The fair value of an element must be based on vendor specific
objective evidence (VSOE). The Company limits its assessment of VSOE for each
element to either the price charged when the same element is sold separately
(using a rolling average of stand alone transactions) or the price established
by management having the relevant authority to do so, for an element not yet
sold separately. VSOE calculations are updated and reviewed at the end of each
quarter.
When evidence of fair value exists for the delivered and undelivered elements of
a transaction, then discounts for individual elements are aggregated and the
total discount is allocated to the individual elements in proportion to the
elements' fair value relative to the total contract fair value.
56
<PAGE>
When evidence of fair value exists for the undelivered elements only, the
residual method, provided for under SOP 98-9, is used. Under the residual
method, the Company defers revenue related to the undelivered elements in a
system sale based on VSOE of fair value of each of the undelivered elements, and
allocates the remainder of the contract price net of all discounts to revenue
recognized from the delivered elements. Undelivered elements of a system sale
may include implementation and training services, hardware and third party
software, maintenance, future purchase discounts, or other services. If VSOE of
fair value of any undelivered element does not exist, all revenue is deferred
until VSOE of fair value of the undelivered element is established or the
element has been delivered.
The Company bills for the entire contract amount upon contract execution.
Amounts billed in excess of the amounts contractually due are recorded in
accounts receivable as advance billings. Amounts are contractually due when
services are performed or in accordance with contractually specified payment
dates.
Provided the fees are fixed and determinable and collection is considered
probable, revenue from licensing rights and sales of hardware and third party
software is generally recognized upon shipment and transfer of title. In certain
transactions where collection risk is high, the cash basis method is used to
recognized revenue. Revenue from implementation and training services is
recognized as the corresponding services are performed. Maintenance revenue is
recognized ratably over the contractual maintenance period.
Contract accounting is applied where services include significant software
modification, development or customization. In such instances, the arrangement
fee is accounted for in accordance with Statement of Position No. 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts" (SOP 81-1). Pursuant to SOP 81-1, the Company uses the percentage of
completion method provided all of the following conditions exist:
o contract includes provisions that clearly specify the enforceable rights
regarding goods or services to be provided and received by the parties,
the consideration to be exchanged, and the manner and terms of settlement;
o the customer can be expected to satisfy its obligations under the
contract;
o the Company can be expected to perform it's contractual obligations; and
o reliable estimates of progress towards completion can be made.
The Company measures completion using labor input hours. Costs of providing
services, including services accounted for in accordance with SOP 81-1, are
expensed as incurred.
If a situation occurs in which a contract is so short term that the financial
statements would not vary materially from using the percentage-of-completion
method or in which the Company is unable to make reliable estimates of progress
of completion of the contract, the completed contract method is utilized.
From time to time, the Company offers future purchase discounts on its products
and services as part of its sales arrangements. Pursuant to AICPA TPA 5100.51,
such discounts which are incremental to the range of discounts reflected in the
pricing of the other elements of the arrangement, which are incremental to the
range of discounts typically given in comparable transactions, and which are
significant, are treated as an additional element of the contract to be
deferred. Amounts deferred related to future purchase options are not recognized
until either the customer exercises the discount offer or the offer expires.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash,
money market funds and short term U.S. Treasuries with maturities of less than
90 days. The money market fund in which the Company holds a portion of its cash
invests in only investment grade money market instruments from a variety of
industries, and therefore bears minimal risk. The average maturity of the
investments held by the money market fund is approximately two months.
Short-Term Investments. The Company classifies any short-term investments
into one of the following categories:
57
<PAGE>
o Trading - Debt securities that do not meet the "intent-to-hold" criteria
and equity securities, both of which are bought and held principally for
the purpose of being sold in the near term.
o Available-for-sale - Debt securities that do not meet the "intent-to-hold"
criteria and which are not classified as trading securities, as well as
all equity securities not otherwise classified as trading securities.
o Held to maturity - Debt securities for which the Company has the intent
and the ability to hold to maturity.
Trading securities are carried on the balance sheet at fair market value and
unrealized gains and losses are recorded in the statement of operations.
Available-for-sale securities are carried in the balance sheet at fair market
value; realized gains and losses are recorded in the statement of operations
when they are earned or incurred, and unrealized gains and losses, net of tax
effect, are recognized as a component of shareholders' equity. Held to maturity
securities are carried in the balance sheet at cost (unless there are declines
in the values of individual securities that are not due to temporary declines),
and realized gains and losses are recorded in the statement of operations in the
period that they are earned or incurred. Realized gains and losses from
investment transactions are determined on a specific identification basis. The
Company had no short term investments at March 31, 2005 or 2004.
Accounts Receivable. The Company provides credit terms ranging from thirty
days to less than twelve months for most system and maintenance contract sales
and generally does not require collateral. The Company performs ongoing credit
evaluations of it's customers and maintains reserves for estimated credit
losses. Reserves for potential credit losses are determined by establishing both
specific and general reserves. Specific reserves are based on management's
estimate of the probability of collection for certain troubled accounts. General
reserves are established based on our historical experience of bad debt expense
and the aging of our accounts receivable balances, net of deferred revenue and
specifically reserved accounts. Accounts are written off as uncollectible only
after the Company has expended extensive collection efforts.
Included in accounts receivable are amounts related to maintenance and services
which were billed, but which had not yet been rendered as of the end of the
fiscal year. Undelivered maintenance and services are included on the balance
sheet in deferred revenue.
Inventories. Inventories consist of hardware for specific customer orders
and spare parts, and are valued at lower of cost (first-in, first-out) or
market. Management provides a reserve to reduce inventory to its net realizable
value.
Equipment and Improvements. Equipment and improvements are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization of
equipment and improvements are provided over the estimated useful lives of the
assets, or the related lease terms if shorter, generally by the straight-line
method. Useful lives range as follows:
<TABLE>
<S> <C>
Computers and electronic test equipment 3-5 years
Furniture and fixtures 5-7 years
Vehicles 7 years
Leasehold improvements lesser of lease term or estimated useful life of asset
</TABLE>
Software Development Costs. Development costs incurred in the research and
development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. After technological feasibility is established, any additional
development costs are capitalized in accordance with the Statement of Financial
Accounting Standards No. 86, "Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed" (SFAS 86). Such capitalized costs are
amortized on a straight line basis over the estimated economic life of the
related product, of three years. The Company performs an annual review of the
recoverability of such capitalized software costs. At the time a determination
is made that capitalized amounts are not recoverable based on the estimated cash
flows to be generated from the applicable software, any remaining capitalized
amounts are written off.
Goodwill and Intangible Assets. The Company follows Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
This statement applies to the
58
<PAGE>
amortization of goodwill and other intangible assets. The Company ceased
amortizing amounts related to goodwill effective April 1, 2001. The balance of
goodwill is related to the NextGen Division. Under SFAS 142, management is
required to perform an annual assessment of the implied fair value of goodwill
and intangible assets with indefinite lives for impairment. The Company compared
the fair value of the NextGen Division with the carrying amount of its assets
and determined that none of the goodwill recorded was impaired as of June 30,
2004 (the date of the Company's last annual impairment test). The fair value of
the NextGen Division was determined using an estimate of future cash flows for
the NextGen Division over ten years and risk adjusted discount rates of between
15 and 25 percent to compute a net present value of future cash flows.
Long Lived Assets. The Company follows Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" (SFAS 144). SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets, including discontinued operations.
SFAS 144 superseded Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS 121), and Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (APB 30). Management periodically reviews the carrying
value of long-lived assets to determine whether or not impairment to such value
has occurred and has determined that there was no impairment at March 31, 2005.
Income Taxes. Income taxes are provided for the tax effects of
transactions reported in the financial statements and consists of taxes
currently due plus deferred taxes related to differences between the basis of
assets and liabilities for financial and tax reporting. The deferred income tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred income taxes also are recognized
for operating losses that are available to offset future taxable income and tax
credits that are available to offset future income taxes. Valuation allowances
are established as a reduction of net deferred income tax assets when management
determines that it is more likely than not that the deferred assets will not be
realized.
Advertising Costs. Advertising costs are charged to operations as
incurred. The Company does not have any direct-response advertising. Advertising
costs, which includes trade shows and conventions, were approximately $1,251,
$1,262 and $874 for the years ended March 31, 2005, 2004 and 2003, respectively,
and were included primarily in selling, general and administrative expenses in
the consolidated statements of income
Marketing Assistance Agreements. The Company has entered into marketing
assistance agreements with existing users of the Company's products which
provide the opportunity for those users to earn commissions if and only if they
host specific site visits upon our request for prospective customers which
directly result in a purchase of our software by the visiting prospects. Amounts
earned by existing users under this program are treated as a selling expense in
the period in which commissionable software has been recognized as revenue.
Earnings per Share. Pursuant to Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128), the Company provides dual
presentation of "basic" and "diluted" earnings per share (EPS).
Basic EPS excludes dilution from common stock equivalents and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from common stock equivalents.
59
<PAGE>
The following table reconciles the weighted average shares outstanding for basic
and diluted net income per share for the periods presented.
<TABLE>
<CAPTION>
(In thousands except per share amounts) Year Ended March 31,
------------------------------
2005 2004 2003
-------- -------- --------
<S> <C> <C> <C>
Basic net income per share:
Net income ................................................. $ 16,109 $ 10,400 $ 7,035
Weighted average of common shares outstanding .............. 12,872 12,436 12,254
-------- -------- --------
Net income share ........................................... $ 1.25 $ 0.84 $ 0.57
======== ======== ========
Diluted net income per share:
Weighted average of common shares outstanding 12,872 12,436 12,254
Weighted average of common shares equivalents:
Weighted average options outstanding ....................... 331 530 524
-------- -------- --------
Weighted average number of common and common equivalent
shares ..................................................... 13,203 12,966 12,778
======== ======== ========
Net income per share ....................................... $ 1.22 $ 0.80 $ 0.55
======== ======== ========
</TABLE>
Stock-Based Compensation. The Company accounts for stock-based employee
compensation as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), and has adopted the
disclosure provisions from the Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure" (SFAS
148) that supersedes Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 148 requires pro
forma disclosures of net income and net income per share as if the fair value
based method of accounting for stock-based awards had been applied for both
employee and non-employee grants. It also requires disclosure of option status
on a more prominent and frequent basis. Such disclosure for the years ended
March 31, 2005, 2004 and 2003 is presented immediately below. The Company
accounts for stock options and warrants issued to non-employees based on the
fair value method, but has not elected this treatment for grants to employees
and board members. Under the fair value based method, compensation cost is
recorded based on the value of the award at the grant date and is recognized
over the service period.
The Company's fair value calculations for options granted on February 11,
2005 were made using the Black-Scholes option pricing model with the following
assumptions: expected life - approximately 57 months from the date of the grant;
stock volatility - 47.7% , risk free interest rate of 3.7% and, no dividends
during the expected term. Although the Company announced a one-time $1.50 per
share dividend on January 31, 2005, no commitment to any future dividends was
made at the time the dividend was announced and no commitment to any future
dividends exists as of the filing of the Company's annual report. The Company
had not paid a dividend to its shareholders prior to the one-time dividend
announced on January 31, 2005. Therefore, management believes that using a zero
dividend rate in the valuation of the stock options granted on February 11, 2005
is appropriate.
The Company's fair value calculations for options granted in fiscal years
ended 2005 and 2004 with the exception of the above grant on February 11, 2005,
were made using the Black-Scholes option pricing model with the following
assumptions: expected life - approximately 48 months from the date of the grant;
stock volatility - 55 to 57% , risk free interest rate of 3.0% ; and, no
dividends during the expected term. No options were granted in fiscal 2003.
60
<PAGE>
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of
awards had been amortized to expense over the vesting period of the awards, pro
forma net income and net income per share would have been as follows:
(in thousands, except for per share amounts) Year Ended March 31,
------------------------------
2005 2004 2003
-------- -------- -------
Net income ..................................... $ 16,109 $ 10,400 $ 7,035
Option compensation expense (net of taxes) ..... 272 189 --
Proforma option compensation cost (net of taxes) (1,483) (414) (322)
-------- -------- -------
Proforma net income ............................ 14,898 10,175 6,713
======== ======== =======
Reported basic net income per share ........ $ 1.25 $ 0.84 $ 0.57
Proforma basic net income per share ........ 1.16 0.82 0.55
Reported diluted net income per share ...... 1.22 0.80 0.55
Proforma diluted net income per share ...... 1.13 0.78 0.53
Fair value of option awards granted ............ $ 12,707 $ 2,078 $ --
Had the Company used a different methodology such as the binomial model to
value options, a different valuation may have been determined which may have
changed the proforma expense.
Segment Disclosures. The Company presents reporting information regarding
operating segments in accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" (SFAS 131). Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions on how to allocate resources and assess performance.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. On an on-going basis, the
Company evaluates its estimates, including those related to uncollectible
receivables, vendor specific objective evidence, and the percentage of
completion related to certain service revenue. The Company bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
New Accounting Pronouncements. In November 2004, the FASB issued Statement
of Financial Accounting Standards No. 151 "Inventory Costs - an amendment of ARB
No. 43, Chapter 4" (SFAS 151) to clarify the accounting for abnormal amount of
idle facility expense, freight, handling costs and wasted material. This
statement requires that those items be recognized as current period charges. In
addition, this statement requires that allocation of fixed production overhead
to the costs of conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company does not expect the adoption of
SFAS 151 to have material effect on its financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment"
(SFAS 123R) which is a revision of SFAS 123. Statement 123R supersedes APB 25
and amends Statement of Financial Accounting Standards No. 95, "Statement of
Cash Flows" (SFAS 95). SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values and the pro forma disclosure alternative is
no longer allowable under Statement 123R. Subsequently, in April 2005, the
Securities and Exchange Commission (SEC) changed the effective date from the
first interim or annual reporting period beginning after June 15, 2005 to the
first annual reporting period beginning after June 15, 2005, which for the
Company will be fiscal year 2007. The Company has not completed the process of
evaluating the impact that will result from adopting SFAS 123R and is
61
<PAGE>
therefore unable to disclose the impact that adoption will have on the Company's
financial position and results of operations.
3. Intangible Assets - Capitalized Software Costs
As of March 31, 2005 and 2004, the Company had the following amounts
related to intangible assets with definite lives:
(in thousands) As of March 31,
------------------
2005 2004
-------- --------
Capitalized software development (3 yrs):
Gross carry amount ....................................... $ 13,287 $ 10,610
Accumulated amortization ................................. (8,953) (7,002)
-------- --------
Net capitalization software development .................. $ 4,334 $ 3,608
======== ========
Aggregate amortization expense during year ended March 31. $ 1,952 $ 1,490
======== ========
Information related to net capitalized software costs is as follows:
(in thousands) As of March 31,
------------------
2005 2004
-------- --------
Beginning of year .......................................... $ 3,608 $ 2,511
Capitalization ............................................. 2,678 2,587
Amortization ............................................... (1,952) (1,490)
-------- --------
End of year ................................................ $ 4,334 $ 3,608
======== ========
The following table represents the remaining estimated amortization of
intangible assets with determinable lives as of March 31, 2005 (in thousands):
For the year ended March 31,
- ----------------------------
2006 ..................................................... $ 2,055
2007 ..................................................... 1,574
2008 ..................................................... 705
--------
Total $ 4,334
========
4. Cash and Cash Equivalents
At March 31, 2005 and 2004, the Company had cash and cash equivalents of
$51,157 and $51,395, respectively, invested in both a major national brokerage
firm's institutional fund that specializes in U.S. government securities and
commercial paper with high credit ratings, and short term U.S. treasury
securities.
Investment income for each of the three years ended March 31 consists of
the following:
(in thousands) Year Ended
---------------------------------------------------
March 31, 2005 March 31, 2004 March 31, 2003
-------------- -------------- --------------
Investment income .... $ 876 $ 386 $ 434
62
<PAGE>
5. Composition of Certain Financial Statement Captions
<TABLE>
<CAPTION>
(in thousands) March 31,
--------------------
2005 2004
-------- --------
<S> <C> <C>
Accounts Receivable
Accounts receivable, excluding undelivered maintenance and services ..... $ 22,162 $ 13,075
Undelivered maintenance and services billed in advance, included in
deferred revenue ........................................................ 13,037 8,498
Reserved for bad debt ................................................... (1,837) (1,293)
-------- --------
Accounts receivable, net .......................................... $ 33,362 $ 20,280
======== ========
Inventories
Computer systems and components, net of reserve for obsolescence of $146
and $207, respectively .................................................. $ 891 $ 478
Replacement parts for certain client systems, net of accumulated
amortization of $849 and $684, respectively ............................. -- 221
Miscellaneous parts and supplies ........................................ 69 26
-------- --------
Inventories, net .................................................. $ 960 $ 725
======== ========
Equipment and Improvements
Computer and electronic test equipment .................................. $ 5,788 $ 4,568
Furniture and fixtures .................................................. 1,950 1,509
Vehicles ................................................................ -- 8
Leasehold improvements .................................................. 187 151
-------- --------
7,925 6,236
Accumulated depreciation and amortization ............................... (5,228) (4,224)
-------- --------
Equipment and improvements, net ................................... $ 2,697 $ 2,012
======== ========
Deferred Revenue
Maintenance ............................................................. $ 4,639 $ 3,794
Implementation services ................................................. 17,471 10,756
Undelivered software and other .......................................... 3,367 2,713
-------- --------
Deferred revenue .................................................. $ 25,477 $ 17,263
======== ========
Accrued Compensation and Related Benefits
Bonus ................................................................... $ 1,998 $ 1,435
Vacation ................................................................ 1,438 1,175
-------- --------
$ 3,436 $ 2,610
======== ========
Other current liabilities
Sales tax payable ....................................................... $ 726 $ 442
Commissions payable ..................................................... 625 356
Customer deposits ....................................................... 527 397
Accrued EDI expenses .................................................... 419 467
Professional services ................................................... 417 96
Deferred rent ........................................................... 198 352
Other accrued expenses .................................................. 1,109 749
-------- --------
$ 4,021 $ 2,859
======== ========
</TABLE>
6. Income Taxes
During the year ended March 31, 2003, the Company filed amended federal
returns for the fiscal years ended March 31, 1999 through 2001 and certain state
tax returns for the fiscal years ended March 31, 1998 through 2001, to take
advantage of available tax credits related to its research and development
activities. The tax credits reported on the aforementioned returns resulted in
refund claims of $418 for federal and $158 for state income tax purposes.
Additionally, the Company claimed research and
63
<PAGE>
development credits of $781 for the years ended March 31, 2002, 2003, and 2004
and has estimated $400 in tax credits for the year ended March 31, 2005.
The provision for income taxes for the year ended March 31, 2004 and 2003
accounted for a portion of the aggregate tax credits accumulated through the end
of each period due to the uncertainly concerning the ultimate amount of tax to
be credited. As of March 31, 2004, the Company had a balance of $505 in credits
which had not been recognized. In the quarter ended March 31, 2005, the state of
California completed an audit of the Company's tax returns and did not
materially change credits related to research and development. Based on the
results of that audit, the provision for income taxes for the year ended March
31, 2005 was offset by the recognition of the $505 in tax credits which had not
been recognized as of March 31 2004.
The provision for income taxes consists of the following components:
(in thousands) Year Ended
-------------------------------
March 31, March 31, March 31,
2005 2004 2003
-------- -------- --------
Current:
Federal taxes ................... $ 5,365 $ 5,551 $ 3,211
State taxes .................... 1,438 1,310 549
-------- -------- --------
Total .................. 6,803 6,861 3,760
-------- -------- --------
Deferred:
Federal taxes ................... 2,040 (179) 268
State taxes ..................... 537 (56) 30
-------- -------- --------
2,577 (235) 298
-------- -------- --------
Total ...................... $ 9,380 $ 6,626 $ 4,058
======== ======== ========
The provision for income taxes differs from the amount computed at the
federal statutory rate as follows:
(in thousands) Year Ended
-------------------------------
March 31, March 31, March 31,
2005 2004 2003
-------- -------- --------
Federal income tax statutory ........... 35.0% 35.0% 34.0%
Increase (decreases) resulting from:
State income taxes .................. 4.6 4.9 5.1
Research & development tax credits .. (4.3) (1.0) (1.9)
Other ............................... 1.5 -- (0.6)
-------- -------- --------
Effective income tax rate .............. 36.8% 38.9% 36.6%
======== ======== ========
64
<PAGE>
The net deferred tax assets in the accompanying consolidated balance
sheets consist of the following at March 31, 2005 and 2004:
(in thousands) As of March 31,
-------------------
2005 2004
-------- --------
Deferred tax assets:
Deferred revenue and bad debt allowance ............ $ 1,081 $ 2,477
Inventory valuation 195 164
Purchased in-process research and development ...... 2,038 2,348
Intangible assets .................................. 118 118
Accrued compensation ............................... 903 716
Deferred compensation .............................. 517 442
Other .............................................. 102 147
-------- --------
Total deferred tax assets .................... 4,954 6,412
-------- --------
Deferred tax liabilities:
Accelerated depreciation ........................... (1,791) (927)
Capitalized software ............................... (1,469) (1,133)
State income taxes/Other ........................... (189) (269)
-------- --------
Total deferred tax liabilities ............... (3,449) (2,329)
-------- --------
Total deferred tax assets, net ............... $ 1,505 $ 4,083
======== ========
The deferred tax assets and liabilities have been shown net in the
accompanying consolidated balance sheets based on the long-term or short-term
nature of the items which give rise to the deferred amount. No valuation
allowance has been made against the deferred tax assets as the Company expects
to receive the full benefit of the assets recorded.
7. Employee Benefit Plans and Employment Agreements
The Company has a 401 (k) for the benefit of substantially all of its
employees. Participating employees may defer up to the IRS limit based on the
IRS Code per year. The annual contribution is determined by a formula set by the
Company's Board of Directors and may include matching and/or discretionary
contributions. The Retirement Plans may be amended or discontinued at the
discretion of the Board of Directors. Contributions of $162, $161 and $143 were
made by the Company to the retirement plan for the fiscal years ended March 31,
2005, 2004 and 2003, respectively.
The Company has a deferred compensation plan (the Deferral Plan) for the
benefit of officers and key employees. Participating employees may defer between
five and 50% of their compensation for a Deferral Plan year. In addition, the
Company may, but is not required to, make contributions into the Deferral Plan
on behalf of participating employees. Each employee's deferrals together with
earnings thereon are accrued as part of the long-term liabilities of the
Company. Investment decisions are made by each participating employee from a
family of mutual funds. To offset this liability, the Company has purchased life
insurance policies on most of the participants. The Company is the owner and
beneficiary of the policies and the cash values are intended to produce cash
needed to help make the benefit payments to employees when they retire or
otherwise leave the Company. The values of the life insurance policies and the
cumulative liability for deferrals are included on the balance sheet of the
Company. . The net cash surrender value of the life insurance policies and an
equal amount of related Company obligation for deferred compensation was $1,202
and $1,013 at March 31, 2005 and 2004, respectively. The values of the life
insurance policies and the related Company obligation are included on the
balance sheet in other assets and other liabilities, respectively. The Company
made contributions of $13, $12 and $12 to the Deferral Plan for each of the
fiscal years ended March 31, 2005, 2004 and 2003, respectively.
The Company has a voluntary employee stock contribution plan for the
benefit of all full time employees. The plan is designed to allow employees to
acquire shares of the Company's common stock through automatic payroll
deduction. Each eligible employee may authorize the withholding of up to
65
<PAGE>
10% of his/her gross payroll each pay period to be used to purchase shares on
the open market by a broker designated by the Company. In addition, the Company
will match 5% of each employee's contribution and will pay all brokerage
commissions and fees in connection with each purchase. The amount of the Company
match is discretionary and subject to change. The plan is not intended to be an
employee benefit plan under the Employee Retirement Income Security Act of 1974,
and is therefore not required to comply with that act. Contributions of
approximately $6, $3 and $1 were made by the Company for fiscal years ended
March 31, 2005, 2004 and 2003, respectively.
The Company has an Employment Agreement ("Agreement") with Mr. Louis E.
Silverman dated July 20, 2000 which details the terms of his employment as its
Chief Executive Officer. Mr. Silverman is eligible for a cash bonus of up to 50%
of his annual base compensation based on performance goals established jointly
between himself and the Board of Directors.
Mr. Silverman's employment may be terminated for any reason by himself or
the Company upon 60 days written notice. Should Mr. Silverman terminate his
employment due to the Company's breach of the Agreement he will be entitled to
(i) a lump sum payment equal to six months base compensation; and (ii) 12 months
worth of accelerated vesting of stock options granted pursuant to the agreement.
Should Mr. Silverman's employment be terminated without cause or by himself for
good reason, he will be entitled to (i) unpaid base compensation and vacation
earned and accrued through his date of termination plus a lump sum equal to six
months base compensation, (ii) any other performance bonus earned and not paid,
and (iii) 12 months worth of accelerated vesting of stock options granted
pursuant to the agreement. Should Mr. Silverman's employment be terminated due
to a "change of control" he will be entitled to (i) unpaid base compensation and
vacation earned plus a lump sum payment equal to six months base compensation;
(ii) any performance bonus earned but not paid; and (iii) immediate vesting of
all unvested options. A "change of control" is defined as the earliest
occurrence of any of the following events: the direct or indirect sale, lease,
exchange or other transfer of 35% or more of the total assets of the Company,
the merger or consolidation of the Company with another company with the effect
that the shareholders of the Company immediately prior to the merger hold less
than 51% of the combined voting power of the then outstanding securities of the
surviving company; the replacement of a majority of the Company's Directors
without the approval of the Board of Directors; the purchase of 25% or more of
the combined voting power of the outstanding securities of the Company with the
exception of the purchase of securities by Sheldon Razin or Ahmed Hussein of
shares owned by either Sheldon Razin or Ahmed Hussein. The Agreement also grants
immediate vesting of all unvested options should a change of control occur
whether or not Mr. Silverman's employment is terminated.
8. Employee Stock Option Plans
During fiscal 1990, the Company's shareholders approved a stock option
plan (the "1989 Plan") under which 2,000,000 shares of Common Stock were
reserved for the issuance of options. The 1989 Plan provides that salaried
officers, key employees and non-employee Directors of the Company may, at the
discretion of the Board of Directors, be granted options to purchase shares of
Common Stock at an exercise price not less than 85% of their fair market value
on the option grant date. Upon an acquisition of the Company by merger or asset
sale, each outstanding option may be subject to accelerated vesting under
certain circumstances. The 1989 Plan terminated on June 30, 1999, and there are
no outstanding options under this plan at March 31, 2005.
In September 1998, the Company's shareholders approved a stock option plan
(the "1998 Plan") under which 2,000,000 shares of Common Stock have been
reserved for the issuance of options. The 1998 Plan provides that employees,
directors and consultants of the Company, at the discretion of the Board of
Directors or a duly designated compensation committee, be granted options to
purchase shares of Common Stock. The exercise price of each option granted shall
be determined by the Board of Directors at the date of grant. Upon an
acquisition of the Company by merger or asset sale, each outstanding option may
be subject to accelerated vesting under certain circumstances. The 1998 Plan
terminates on December 31, 2007, unless sooner terminated by the Board. At March
31, 2005, 138,150 shares were available for future grant under the 1998 Plan. As
of March 31, 2005, there were 1,084,722 outstanding options related to this
plan.
66
<PAGE>
On February 11, 2005, the Board of Directors granted 522,450 options under
the 1998 plan to selected employees and to Directors (7,000 for each Director)
at an exercise price equal to the market price of the Company's Common Stock on
the date of grant ($38.68 per share). The options granted to employees vest in
four annual installments beginning February 11, 2006 and expire on February 11,
2012. The options granted to Directors fully vested on May 11, 2005 and expire
on February 11, 2012. No compensation expense has been recorded for these
options.
On September 21, 2004, the Board of Directors granted 35,000 options under
the 1998 plan to Directors (5,000 for each Director) at an exercise price equal
to the market price of the Company's Common Stock on the date of the grant
($25.50 per share). The options fully vested on March 21, 2005 and expire on
September 21, 2009. No compensation expense has been recorded for these options.
On September 3, 2004, the Board of Directors granted 30,000 options under
the 1998 plan to selected employees at an exercise price equal to the market
price of the Company's Common Stock on the date of the grant ($23.71 per share).
The options vest in four equal annual installments beginning September 3, 2005
and expire on September 3, 2009. No compensation expense has been recorded for
these options.
On June 10, 2004, the Board of Directors granted 300,000 options under the
1998 plan to selected employees at an exercise price equal to the market price
of the Company's Common Stock on the date of the grant ($23.34 per share). The
options vest in four equal annual installments beginning June 10, 2005 and
expire on June 10, 2009. No compensation expense has been recorded for these
options.
On October 29, 2003, the Board of Directors granted 7,000 options under
the 1998 plan to Emad Zikry, a then Director of the Company, at an exercise
price of $3.50 per share, as director fees solely for his service on the Board
of Directors. The options vested immediately and expire on October 20, 2008.
This option grant resulted in compensation expense of approximately $130
recorded in the quarter ended December 31, 2003 using the intrinsic value
method.
On October 29, 2003, the Board of Directors granted 120,000 options under
the 1998 plan to employees at an exercise price of $7.73 per share. The options
vest in four equal annual installments beginning October 29, 2004 and expire on
October 29, 2008. Based on the closing share price of the Company's stock on
October 29, 2003 ($22.08 per share), this option grant will result in
compensation expense of up to $1,722 (assuming all employees granted options
continue their employment at the Company throughout the entire four year vesting
period) to be amortized evenly over the next four years ending October, 2007.
During the years ended March 31, 2005 and 2004, the Company recognized
compensation expense of $431 and $180 related to these options. During the years
ended March 31, 2005, 2004 and 2003, the Company received tax benefit from the
exercise of stock options of $2,680, $1,454 and $96, respectively.
A summary of option transactions under the 1989 & 1998 Plans for the three
years ended March 31, 2005 is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
2005 2004 2003
---------------------- ---------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 661,174 $ 5.26 896,154 4.37 990,966 $ 4.31
Granted 887,450 32.46 127,000 7.50 -- --
Exercised (460,278) 4.58 (346,480) 3.78 (94,812) 3.72
Canceled (3,624) 4.05 (15,500) 4.49 -- --
--------- --------- ----------
Outstanding,
end of year 1,084,722 $ 27.77 661,174 $ 5.26 896,154 $ 4.37
--------- ========= --------- ========= ---------- ==========
Available
for future grants 138,150 1,025,600 1,152,600
========= ========= ==========
</TABLE>
67
<PAGE>
The majority of the outstanding stock options vest ratably over a
four-year period commencing from the respective option grant dates. Stock
options outstanding at March 31, 2005 are summarized as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- --------------------- ----------- ---------------- -------- ----------- --------
<C> <C> <C> <C> <C> <C>
$ 3.50 to $ 7.73 197,272 2.44 $ 6.68 46,550 $ 5.46
23.34 to 25.50 365,000 4.17 23.57 35,000 25.50
$ 38.68 to $ 38.68 522,450 6.22 $ 38.68 -- $ --
</TABLE>
9. Commitments and Contingencies
Litigation. The Company is a party to various legal proceedings incidental
to its business, none of which are considered by management to be material.
Rental Commitments. The Company leases facilities and offices under
irrevocable operating lease agreements expiring at various dates through March
2010. Rent expense for the years ended March 31, 2005, 2004, and 2003 was
$1,285, $1,226 and $1,068, respectively. Rental commitments under these
agreements are as follows:
Year Ending March 31,
- ---------------------
2006 ........................................ $ 1,257
2007 ........................................ 925
2008 ........................................ 942
2009 ........................................ 671
2010 ........................................ 206
--------
$ 4,001
========
Commitments & Guarantees. Software license agreements in both our QSI and
NextGen Divisions include a performance guarantee that our software products
will substantially operate as described in the applicable program documentation
for a period of 365 days after delivery. To date, we have not incurred any
significant costs associated with these warranties and do not expect to incur
significant warranty costs in the future. Therefore, no accrual has been made
for potential costs associated with these warranties.
We have historically offered short-term rights of return of less than 20
days in certain of our sales arrangements. Based on our historical experience
with similar types of sales transactions bearing these short-term rights of
return, we have not recorded any accrual for returns in our financial
statements.
Our standard sales agreements in the NextGen Division contain an
indemnification provision pursuant to which we indemnify, hold harmless, and
agree to reimburse the indemnified party for losses suffered or incurred by the
indemnified party in connection with any United States patent, any copyright or
other intellectual property infringement claim by any third party with respect
to our software. The QSI division arrangements occasionally utilize this type of
language as well. As we have not incurred any significant costs to defend
lawsuits or settle claims related to these indemnification agreements, we
believe that our estimated exposure on these agreements is currently minimal.
Accordingly, we have no liabilities recorded for these indemnification
obligations.
68
<PAGE>
10. Fair Value of Financial Instruments
The Company's financial instruments include cash, accounts receivable,
accounts payable, deferred revenue and accrued liabilities. Management believes
that the fair value of cash, accounts receivable, accounts payable, deferred
revenue, and accrued liabilities approximate their carrying values due to the
short-term nature of these instruments.
11. Operating Segment Information
The Company has prepared operating segment information in accordance with
SFAS 131 "Disclosures About Segments of an Enterprise and Related Information"
to report components that are evaluated regularly by its chief operating
decision maker, or decision making group in deciding how to allocate resources
and in assessing performance. Reportable operating segments include the NextGen
Division and the QSI Division.
The accounting policies of the Company's operating segments are the same
as those described in Note 2 - Summary of Significant Accounting Policies,
except that the disaggregated financial results of the segments reflect
allocation of certain functional expense categories consistent with the basis
and manner in which Company management internally disaggregates financial
information for the purpose of assisting in making internal operating decisions.
Certain corporate overhead costs, such as executive and accounting department
personnel related expenses, are not allocated to the individual segments by
management. Management evaluates performance based on stand-alone segment
operating income. Because the Company does not evaluate performance based on
return on assets at the operating segment level, assets are not tracked
internally by segment. Therefore, segment asset information is not presented.
Operating segment data for the three years ended March 31, was as follows:
<TABLE>
<CAPTION>
(in thousands)
Unallocated Corp.
Year Ended March 31, QSI Division NextGen Division Expenses Consolidated
<S> <C> <C> <C> <C>
2005
Revenue ........................ $ 15,367 $ 73,594 $ -- $ 88,961
Operating income (loss) ........ 4,162 25,904 (5,453) 24,613
2004
Revenue. ....................... 16,491 54,443 -- 70,934
Operating income (loss) ........ 4,877 15,789 (4,026) 16,640
2003
Revenue ........................ 17,423 37,346 -- 54,769
Operating income (loss) ........ $ 4,675 $ 8,902 $ (2,918) $ 10,659
</TABLE>
69
<PAGE>
12. Selected Quarterly Operating Results (unaudited)
The following table presents quarterly unaudited consolidated financial
information for the eight quarters in the period ended March 31, 2005. Such
information is presented on the same basis as the annual information presented
in other sections of this report. In management's opinion, this information
reflects all adjustments that are necessary for a fair presentation of the
results for these periods.
COMPARISON BY QUARTER *
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
(in thousands) Quarter Ended (Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
6/30/03 9/30/03 12/31/03 3/31/04 6/30/04 9/30/04 12/31/04 3/31/05
------- ------- -------- ------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Software, hardware and supplies $ 7,819 $ 8,244 $ 8,068 $ 8,501 $ 8,819 $ 9,307 $ 9,781 $ 11,765
Implementation and training 1,655 1,782 1,791 1,665 2,265 2,300 1,889 2,402
------- ------- -------- ------- -------- ------- -------- --------
Total system sales 9,474 10,026 9,859 10,166 11,084 11,607 11,670 14,167
------- ------- -------- ------- -------- ------- -------- --------
Maintenance, EDI and other 6,832 7,616 8,340 8,621 9,046 9,610 10,418 11,359
------- ------- -------- ------- -------- ------- -------- --------
Total revenue 16,306 17,642 18,199 18,787 20,130 21,217 22,088 25,526
Cost of revenue:
------- ------- -------- ------- -------- ------- -------- --------
Software, hardware and supplies 1,972 2,603 1,966 1,600 2,352 1,692 1,384 2,097
------- ------- -------- ------- -------- ------- -------- --------
Implementation and training 1,253 1,129 1,427 1,388 1,392 1,579 1,575 1,754
------- ------- -------- ------- -------- ------- -------- --------
Total cost of system sales 3,225 3,732 3,393 2,988 3,744 3,271 2,959 3,851
------- ------- -------- ------- -------- ------- -------- --------
Cost of maintenance, EDI and
other 3,385 3,760 4,130 4,060 4,357 4,666 4,556 5,265
------- ------- -------- ------- -------- ------- -------- --------
Total cost of revenue 6,610 7,492 7,523 7,048 8,101 7,937 7,515 9,116
------- ------- -------- ------- -------- ------- -------- --------
Gross profit 9,696 10,150 10,676 11,739 12,029 13,280 14,573 16,410
Selling, general, & administrative 4,740 4,768 4,902 5,072 4,953 5,414 6,420 7,989
Research and development 1,366 1,502 1,628 1,643 1,612 1,818 1,707 1,766
------- ------- -------- ------- -------- ------- -------- --------
Income from operations 3,590 3,880 4,146 5,024 5,464 6,048 6,446 6,655
Investment income 100 89 95 102 120 170 263 323
------- ------- -------- ------- -------- ------- -------- --------
Income before provision for
income taxes 3,690 3,969 4,241 5,126 5,584 6,218 6,709 6,978
Provision for income taxes 1,413 1,561 1,630 2,022 2,202 2,503 2,488 2,187
------- ------- -------- ------- -------- ------- -------- --------
Net income $ 2,277 $ 2,408 $ 2,611 $ 3,104 $ 3,382 $ 3,715 $ 4,221 $ 4,791
======= ======= ======== ======= ======== ======= ======== ========
Net income per share - basic* $ 0.18 $ 0.20 $ 0.21 $ 0.25 $ 0.27 $ 0.29 $ 0.33 $ 0.37
Net income per share - diluted* $ 0.18 $ 0.19 $ 0.20 $ 0.24 $ 0.26 $ 0.28 $ 0.32 $ 0.36
Weighted average shares
outstanding - basic 12,314 12,334 12,478 12,624 12,666 12,780 12,952 13,089
Weighted average shares
outstanding - diluted 12,932 12,982 13,098 13,164 13,154 13,196 13,282 13,370
</TABLE>
* will not add to annual EPS due to rounding
70
<PAGE>
Schedule II
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(in thousands)
Additions
Balance at Charged to
Beginning Costs and Balance at
For the Year Ended of Period Expenses Deductions End of Period
March 31, 2005 ............ $ 1,293 $ 797 $ (253) $ 1,837
March 31, 2004 ............ $ 990 $ 647 $ (344) $ 1,293
March 31, 2003 ............ $ 813 $ 623 $ (446) $ 990
ALLOWANCE FOR INVENTORY OBSOLESCENSE
(in thousands)
Additions
Balance at Charged to
Beginning Costs and Balance at
For the Year Ended of Period Expenses Deductions End of Period
March 31, 2005 ............ $ 207 $ 160 $ (221) $ 146
March 31, 2004 ............ $ 160 $ 54 $ (7) $ 207
March 31, 2003 ............ $ 127 $ 40 $ (7) $ 160
71
<PAGE>
INDEX TO EXHIBITS
3.1.1 Amendment to Articles of Incorporation, effective March 4, 2005.
3.6 Bylaws of the Company, as amended and restated.
10.6.1 Form of Indemnification Agreement for directors and executive officers
authorized January 27, 2005.
10.10.1 Amended and Restated 1998 Stock Option Plan.
10.19 Lease Agreement between the Company and Lakeshore Towers Limited
Partnership Phase IV, a California limited partnership.
23.1 Consent of Independent Registered Public Accounting Firm - Grant
Thornton LLP.
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
72
<PAGE>
QUALITY SYSTEMS, INC.
LIST OF SUBSIDIARIES
1. NextGen Healthcare Information Systems, Inc, Inc., a California
corporation, is a wholly-owned subsidiary of Quality Systems, Inc.
73
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.1.1
<SEQUENCE>2
<FILENAME>d64225_ex3-1.txt
<DESCRIPTION>AMEDMENT TO ARTICLES OF INCORPORATION
<TEXT>
Exhibit 3.1.1
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
QUALITY SYSTEMS, INC.
The undersigned certify that:
1. They are the president and the secretary, respectively, of Quality
Systems, Inc., a California corporation.
2. Article Third of the Articles of Incorporation of this corporation is
hereby amended to read in its entirety as follows:
THIRD: This corporation is authorized to issue
only one class of shares, to be called "Common Stock."
The total number of such shares that this corporation
shall have authority to issue is Twenty Million
(20,000,000), and each such share shall have a par value
of one cent ($.01). On the amendment of this article to
read as set forth herein, each outstanding share of
Common Stock is split up and converted into two shares
of Common Stock, and each such share shall have a par
value of one cent $.01).
3. The foregoing amendment of Articles of Incorporation has been duly
approved by the board of directors of the corporation.
4. The foregoing amendment of Articles of Incorporation is one that may be
adopted with approval by the board of directors alone pursuant to Section
902(c) of the California General Corporation Law, because the corporation
has only one class of shares outstanding and the amendment effects only a
stock split.
5. The amendment shall become effective at the close of business on March 4,
2005.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of my/our own knowledge.
Dated: February 18, 2005
/s/LOU SILVERMAN
-----------------------------
Lou Silverman, President
/s/PAUL HOLT
-----------------------------
Paul Holt, Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.6
<SEQUENCE>3
<FILENAME>d64225_ex3-6.txt
<DESCRIPTION>BYLAWS OF THE COMPANY, AS AMENDED AND RESTATED
<TEXT>
Exhibit 3.6
AMENDED AND RESTATED
BYLAWS
for the regulation, except
as otherwise provided by statute or
the Articles of Incorporation,
of
QUALITY SYSTEMS, INC.
(a California corporation)
ARTICLE I OFFICES
Section 1. PRINCIPAL EXECUTIVE OFFICE.
The corporation's principal executive office is fixed and located at 18191
Von Karman Avenue, Suite 450, Irvine, California 92612. The Board of Directors
(herein called the "Board") is granted full power and authority to change said
principal executive office from one location to another. Any such change shall
be noted on the Bylaws opposite this Section, or this Section may be amended to
state the new location.
Section 2. OTHER OFFICES.
Branch or subordinate offices may be established at any time by the Board
at any place or places.
ARTICLE II SHAREHOLDERS
Section 1. PLACE OF MEETINGS.
Meetings of shareholders shall be held either at the principal executive
office of the corporation or at any other place within or without the State of
California which may be designated either by the Board or by the written consent
of all persons entitled to vote thereat, given either before or after the
meeting and filed with the Secretary.
Section 2. ANNUAL MEETING.
(a) The annual meeting of shareholders shall be held each year on a date
and at a time designated by the Board. At each annual meeting,
directors shall be elected and any other proper business may be
transacted.
(b) At an annual meeting of shareholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall
have been brought before the annual meeting by or at the direction
of a majority of the directors or by any shareholder of the
corporation who complies with the notice procedures set forth
-1-
<PAGE>
in this Section 2(b). For a proposal to be properly brought before
an annual meeting by a shareholder, the shareholder must have given
timely notice thereof in writing to the secretary of the
corporation. To be timely, a shareholder's notice must be delivered
to, or mailed and received at, the principal executive offices of
the corporation not less than sixty (60) days nor more than one
hundred twenty (120) days prior to the scheduled annual meeting,
regardless of any postponements, deferrals or adjournments of that
meeting to a later date; provided, however, that if less than
seventy (70) days notice or prior public disclosure of the date of
the scheduled annual meeting is given or made, notice by the
shareholder, to be timely, must be so delivered or received not
later than the close of business on the tenth day following the
earlier of the day on which such notice of the date of the scheduled
annual meeting was mailed or the day on which such public disclosure
was made. A shareholder's notice to the secretary shall set forth as
to each matter the shareholder proposes to bring before the annual
meeting (i) a brief description of the proposal desired to be
brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name and address, as
they appear on the corporation's books, of the shareholder proposing
such business and any other shareholders known by such shareholder
to be supporting such proposal, (iii) the class and number of shares
of the corporation's stock which are beneficially owned by the
shareholder on the date of such shareholder notice and by any other
shareholders known by such shareholder to be supporting such
proposal on the date of such shareholder notice, and (iv) any
financial interest of the shareholder in such proposal. The
presiding officer of the annual meeting shall determine and declare
at the annual meeting whether the shareholder proposal was made in
accordance with the terms of this Section 2(b). If the presiding
officer determines that a shareholder proposal was not made in
accordance with the terms of this Section 2(b), he or she shall so
declare at the annual meeting and any such proposal shall not be
acted upon at the annual meeting. This provision shall not prevent
the consideration and approval or disapproval at the annual meeting
of reports of officers, directors and committees of the Board, but,
in connection with such reports, no new business shall be acted upon
at such annual meeting unless stated, filed and received as herein
provided.
(c) Only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors. Nominations
of persons for election to the Board may be made at a meeting of
shareholders by or at the direction of the Board, by any nominating
committee or person appointed by the Board or by any shareholder of
the corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in
this Section 2(c). Such nominations, other than those made by or at
the direction of the Board, shall be made pursuant to timely notice
in writing to the secretary of the corporation. To be timely, a
shareholder's notice must be delivered to, or mailed and received
at, the principal executive offices of the corporation not less than
sixty (60) days nor more than one hundred twenty (120) days prior to
the scheduled annual meeting, regardless of any postponements,
deferrals or adjournments of that
-2-
<PAGE>
meeting to a later date, provided, however, that if less than
seventy (70) days notice or prior public disclosure of the date of
the scheduled annual meeting is given or made, notice by the
shareholder, to be timely, must be so delivered or received not
later than the close of business on the tenth day following the
earlier of the day on which such notice of the date of the scheduled
annual meeting was mailed or the day on which such public disclosure
was made. A shareholder's notice to the secretary shall set forth
(i) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (A) the name, age, business
address and residence address of the person, (B) the principal
occupation or employment of the person (C) the class and number of
shares of capital stock of the corporation which are beneficially
owned by the person and (D) any other information relating to the
person that is required to be disclosed in solicitations for proxies
for election of directors pursuant to applicable rules and
regulations of the Securities and Exchange Commission promulgated
under the Securities Exchange Act of 1934, as amended, and (ii) as
to the shareholder giving the notice (A) the name and address, as
they appear on the corporation's books, of the shareholder and (B)
the class and number of shares of the corporation's stock which are
beneficially owned by the shareholder on the date of such
shareholder notice. The corporation may require any proposed nominee
to furnish such other information as may reasonably be required by
the corporation to determine the eligibility of such proposed
nominee to serve as director of the corporation. The presiding
officer of the annual meeting shall determine and declare at the
annual meeting whether the nomination was made in accordance with
the terms of the Section 2(c). If the presiding officer determines
that a nomination was not made in accordance with the terms of this
Section 2(c), he or she shall so declare at the annual meeting and
any such defective nomination shall be disregarded.
Section 3. SPECIAL MEETING.
(a) A special meeting of the shareholders may be called at any time by
the Board, or by the chairman of the board, or by the president, or
by one or more shareholders holding shares in the aggregate entitled
to cast not less than ten percent (10%) of the votes at that
meeting.
(b) For a special meeting of shareholders to be properly called by any
person or persons other than the Board, the request must be in
writing, specifying the date and time of such meeting and the
information set forth in Section 3(c) hereof, and must be delivered
to, or mailed and received by, the chairman of the board, the
president or the secretary of the corporation not less than
thirty-five (35) nor more than sixty (60) days prior to the date
requested for such meeting. The officer receiving the request shall
cause notice to be promptly given to the shareholders entitled to
vote, in accordance with the provisions of Sections 4 and 5 of this
Article II, that a meeting will be held at the time requested by the
person or persons calling the meeting. If the notice is not given
within twenty (20) days after receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing
contained in this paragraph of this Section 3 shall be
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construed as limiting, fixing or affecting the time when a meeting
of shareholders called by action of the Board may be held.
(c) Any request for a special meeting submitted by a shareholder
pursuant to Section 3(b) hereof shall set forth as to each matter
the shareholder proposes to bring before the special meeting (i) a
brief description of the proposal desired to be brought before the
special meeting and the reasons for conducting such business at the
special meeting, (ii) the name and address, as they appear on the
corporation's books, of the shareholder proposing such business and
any other shareholders known by such shareholder to be supporting
such proposal, (iii) the class and number of shares of the
corporation's stock which are beneficially owned by the shareholder
on the date of such shareholder request and by any other
shareholders known by such shareholder to be supporting such
proposal on the date of such shareholder request, and (iv) any
financial interest of the shareholder in such proposal. In addition
to whatever other limitations are imposed by applicable law, no
person may be nominated for election to the Board by any of the
person or persons making a request for a special meeting pursuant to
Section 3(b) hereof unless the request sets forth as to each person
whom the requesting person or persons propose to nominate for
election as a director, (A) the name, age, business address and
residence address of the person, (B) the principal occupation or
employment of the person, (C) the class and number of shares of
capital stock of the corporation which are beneficially owned by the
person and (D) any other information relating to the person that is
required to be disclosed in solicitations for proxies for election
of directors pursuant to applicable rules and regulations of the
Securities and Exchange Commission promulgated under the Securities
Exchange Act of 1934, as amended.
Section 4. NOTICE OF ANNUAL OR SPECIAL MEETINGS.
Written notice of each annual or special meeting of shareholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each shareholder entitled to vote thereat. Such notice shall
state the place, date and hour of the meeting and (a) in the case of a special
meeting, the general nature of the business to be transacted, and no other
business may be transacted, or (b) in the case of the annual meeting, those
matters which the Board, at the time of the mailing of the notice, intends to
present for action by the shareholders, but, subject to the provisions of
applicable law, any proper matter may be presented at the meeting for such
action. The notice of any meeting at which directors are to be elected shall
include the names of nominees intended at the time of the notice to be presented
by the Board for election.
Notice of a shareholders' meeting shall be given either personally or by
mail or by other means of written communication, addressed to the shareholder at
the address of such shareholder appearing on the books of the corporation or
given by the shareholder to the corporation for the purpose of notice, or, if no
such address appears or is given, at the place where the principal executive
office of the corporation is located or by publication at least once in a
newspaper of general circulation in the county in which the principal executive
office is located. Notice by
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mail shall be deemed to have been given at the time a written notice is
deposited in the United States mails, postage prepaid. Any other written notice
shall be deemed to have been given at the time it is personally delivered to the
recipient or is delivered to a common carrier for transmission, or actually
transmitted by the person giving the notice by electronic means, to the
recipient.
Section 5. QUORUM.
A majority of the shares entitled to vote, represented in person or by
proxy, shall constitute a quorum at any meeting of shareholders. If a quorum is
present, the affirmative vote of a majority of the shares represented and voting
at the meeting (which shares voting affirmatively also constitute at least a
majority of the required quorum) shall be the act of the shareholders, unless
the vote of a greater number or voting by classes is required by law or by the
Articles of Incorporation, except as provided in the following sentence. The
shareholders present at a duly called or held meeting at which a quorum is
present may continue to do business until adjournment, notwithstanding the
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum.
Section 6. ADJOURNED MEETINGS AND NOTICE THEREOF.
Any shareholders' meeting, whether or not a quorum is present, may be
adjourned from time to time by the vote of a majority of the shares represented
either in person or by proxy, but in the absence of a quorum (except as provided
in Section 5 of this Article) no other business may be transacted at such
meeting.
It shall not be necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken; provided,
however, when any shareholders' meeting is adjourned for more than 45 days or,
if after adjournment a new record date is fixed for the adjourned meeting,
notice of the adjourned meeting shall be given as in the case of an original
meeting.
Section 7. VOTING.
The shareholders entitled to notice of any meeting or to vote at any such
meeting shall be only persons in whose name shares stand on the stock records of
the corporation on the record date determined in accordance with Section 8 of
this Article.
Subject to the following sentence and to the provisions of Section 708 of
the California General Corporation Law, every shareholder entitled to vote at
any election of directors may cumulate such shareholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are
entitled, or distribute the shareholder's votes on the same principle among as
many candidates as the shareholder thinks fit. No shareholder shall be entitled
to cumulate votes for any candidate or candidates pursuant to the preceding
sentence unless such candidate or candidates' names have been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting prior to the voting of the shareholder's intention to cumulate the
shareholder's votes. If
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any one shareholder has given such notice, all shareholders may cumulate their
votes for candidates in nomination.
Elections need not be by ballot; provided, however, that all elections for
directors must be by ballot upon demand made by a shareholder at the meeting and
before the voting begins.
In any election of directors, the candidates receiving the highest number
of votes of the shares entitled to be voted for them up to the number of
directors to be elected by such shares are elected.
Voting shall in all cases be subject to the provisions of Chapter 7 of the
California General Corporation Law, and to the following provisions:
(a) Subject to clause (g), shares held by an administrator, executor,
guardian, conservator or custodian may be voted by such holder
either in person or by proxy, without a transfer of such shares into
the holder's name; and shares standing in the name of a trustee may
be voted by the trustee, either in person or by proxy, but no
trustee shall be entitled to vote shares held by such trustee
without a transfer of such shares into the trustee's name.
(b) Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may
be voted by such a receiver without the transfer thereof into the
receiver's name if authority to do so is contained in the order of
the court by which such receiver was appointed.
(c) Subject to the provisions of Section 705 of the California General
Corporation Law and except where otherwise agreed in writing between
the parties, a shareholder whose shares are pledged shall be
entitled to vote such shares until the shares have been transferred
into the name of the pledgee, and thereafter the pledgee shall be
entitled to vote the shares so transferred.
(d) Shares standing in the name of a minor may be voted and the
corporation may treat all rights incident thereto as exercisable by
the minor, in person or by proxy, whether or not the corporation has
notice, actual or constructive, of the nonage, unless a guardian of
the minor's property has been appointed and written notice of such
appointment given to the corporation.
(e) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxyholder as the
bylaws of such other corporation may prescribe or, in the absence of
such provision, as the Board of Directors of such other corporation
may determine or, in the absence of such determination, by the
chairman of the board, president or any vice president of such other
corporation, or by any other person authorized to do so by the
chairman of the board, president or any vice president of such other
corporation. Shares which are purported to be voted or any proxy
purported to be executed in the name of a corporation (whether or
not any title of the person signing is
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indicated) shall be presumed to be voted or the proxy executed in
accordance with the provisions of this clause, unless the contrary
is shown.
(f) Shares of the corporation owned by any subsidiary shall not be
entitled to vote on any matter.
(g) Shares held by the corporation in a fiduciary capacity, and shares
of the issuing corporation held in a fiduciary capacity by any
subsidiary, shall not be entitled to vote on any matter, except to
the extent that the settlor or beneficial owner possesses and
exercises a right to vote or to give the corporation binding
instructions as to how to vote such shares.
(h) If shares stand of record in the names of two or more persons,
whether fiduciaries, members of a partnership, joint tenants,
tenants in common, husband and wife as community property, tenants
by the entirety, voting trustees, persons entitled to vote under a
shareholder voting agreement or otherwise, or if two or more persons
(including proxyholders) have the same fiduciary relationship
respecting the same shares, unless the secretary of the corporation
is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to
voting shall have the following effect:
(i) If only one votes, such act binds all;
(ii) If more than one vote, the act of the majority so voting binds
all;
(iii) If more than one vote, but the vote is evenly split on any
particular matter, each faction may vote the securities in
question proportionately.
If the instrument so filed or the registration of the shares shows that
any such tenancy is held in unequal interests, a majority or even split for the
purpose of this section shall be a majority or even split in interest.
Section 8. RECORD DATE.
The Board may fix, in advance, a record date for the determination of the
shareholders entitled to notice of any meeting or to vote or entitled to receive
payment of any dividend or other distribution, or any allotment or rights, or to
exercise rights in respect of any other lawful action. The record date so fixed
shall be not more than 60 days nor less than 10 days prior to the date of the
meeting nor more than 60 days prior to any other action. When a record date is
so fixed, only shareholders of record on that date are entitled to notice of and
to vote at the meeting or to receive the dividend, distribution, or allotment of
rights, or to exercise of the rights, as the case may be, notwithstanding any
transfer of shares on the books of the corporation after the record date. A
determination of shareholders of record entitled to notice of or to vote at a
meeting of shareholders shall apply to any adjournment of the meeting unless the
Board fixes a new record date for the adjourned meeting. The Board shall fix a
new record date if the meeting is adjourned for more than 45 days.
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If no record date is fixed by the Board, the record date for determining
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the business day next preceding the day on which
notice is given or, if notice is waived, at the close of business on the
business day next preceding the day on which the meeting is held. The record
date for determining shareholders for any purpose other than set forth in this
Section 8 or Section 10 of this Article shall be at the close of business on the
day on which the Board adopts the resolution relating thereto, or the sixtieth
(60th) day prior to the date of such other action, whichever is later.
Section 9. CONSENT OF ABSENTEES.
The transactions of any meeting of shareholders, however called and
noticed, and wherever held, are as valid as though had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not present in person or by proxy, signs a written waiver of notice, or
a consent to the holding of the meeting or an approval of the minutes thereof.
All such waivers, consents or approvals shall be filed with the corporate
records or made a part of the minutes of the meeting. Attendance of a person at
a meeting shall constitute a waiver of notice of and presence at such meeting,
except when the person objects, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters required by the California General
Corporation Law to be included in the notice but not so included, if such
objection is expressly made at the meeting. Neither the business to be
transacted at nor the purpose of any regular or special meeting of shareholders
need be specified in any written waiver of notice, consent to the holding of the
meeting or approval of the minutes thereof, except as provided in Section 601(f)
of the California General Corporation Law.
Section 10. ACTION WITHOUT MEETING.
Subject to Section 603 of the California General Corporation Law, any
action which, under any provision of the California General Corporation Law, may
be taken at any annual or special meeting of shareholders, may be taken without
a meeting and without prior notice if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted. Unless a record date for voting purposes be fixed as provided
in Section 8 of this Article, the record date for determining shareholders
entitled to give consent pursuant to this Section 10, when no prior action by
the Board has been taken, shall be the day on which the first written consent is
given.
Section 11. PROXIES.
Every person entitled to vote shares has the right to do so either in
person or by one or more persons authorized by a written proxy executed by such
shareholder and filed with the Secretary. Any proxy duly executed is not revoked
and continues in full force and effect until revoked by the person executing it
prior to the vote pursuant thereto. Such revocation may be
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effected either (i) by a writing delivered to the Secretary of the Corporation
stating that the proxy is revoked, (ii) by a subsequent proxy executed by the
person executing the prior proxy and presented to the meeting, or (iii) by
attendance at the meeting and voting in person by the person executing the
proxy; provided, however, that no proxy shall be valid after the expiration of
eleven months from the date of its execution unless otherwise provided in the
proxy.
Section 12. INSPECTORS OF ELECTION.
In advance of any meeting of shareholders, the Board may appoint
inspectors of election to act at such meeting and any adjournment thereof. If
inspectors of election be not so appointed, or if any persons so appointed fail
to appear or refuse to act, the chairman of any such meeting may, and on the
request of any shareholder or shareholder's proxy shall, make such appointment
at the meeting. The number of inspectors shall be either one or three. If
appointed at a meeting on the request of one or more shareholders or proxies,
the majority of shares present shall determine whether one or three inspectors
are to be appointed.
The duties of such inspectors shall be as prescribed by Section 707(b) of
the California General Corporation Law and shall include: determining the number
of shares outstanding and the voting power of each; determining the shares
represented at the meeting; determining the existence of a quorum; determining
the authenticity, validity, and effect of proxies; receiving votes, ballots or
consents; hearing and determining all challenges and questions in any way
arising in connection with the right to vote; counting and tabulating all votes
or consents; determining when the polls shall close; determining the result; and
doing such acts as may be proper to conduct the election or vote with fairness
to all shareholders. If there are three inspectors of election, the decision,
act or certificate of a majority is effective in all respects as the decision,
act or certificate of all.
Section 13. CONDUCT OF MEETING.
The President shall preside as chairman at all meetings of the
shareholders. The chairman shall conduct each such meeting in a businesslike and
fair manner, but shall not be obligated to follow any technical, formal or
parliamentary rules or principles of procedure. The chairman's rulings on
procedural matters shall be conclusive and binding on all shareholders, unless
at the time of a ruling a request for a vote is made to the shareholders holding
shares entitled to vote and which are represented in person or by proxy at the
meeting, in which case the decision of a majority of such shares shall be
conclusive and binding on all shareholders. Without limiting the generality of
the foregoing, the chairman shall have all of the powers usually vested in the
chairman of a meeting of shareholders.
ARTICLE III DIRECTORS
Section 1. POWERS.
Subject to limitations of the Articles of Incorporation, of these Bylaws
and of the California General Corporation Law relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the Board. The
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Board may delegate the management of the day-to-day operation of the business of
the corporation to a management company or other person provided that the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised under the ultimate direction of the Board. Without
prejudice to such general powers, but subject to the same limitations, it is
hereby expressly declared that the Board shall have the following powers in
addition to the other powers enumerated in these Bylaws:
(a) To select and remove all the other officers, agents and employees of
the corporation, prescribe the powers and duties for them as may not
be inconsistent with law, the Articles of Incorporation or these
Bylaws, fix their compensation and require from them security for
faithful service.
(b) To conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor not
inconsistent with law, the Articles of Incorporation or these
Bylaws, as the Board may deem best.
(c) To adopt, make and use a corporate seal, and to prescribe the forms
of certificates of stock, and to alter the form of such seal and of
such certificates from time to time as they may deem best.
(d) To authorize the issuance of shares of stock of the corporation from
time to time, upon such terms and for such consideration as may be
lawful.
(e) To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in
the corporate name, promissory notes, bonds, debentures, deeds of
trust, mortgages, pledges, hypothecations or other evidences of debt
and securities therefor.
Section 2. NUMBER OF DIRECTORS.
The authorized number of directors shall be not less than five (5) nor
more than nine (9) until changed by amendment of the Articles of Incorporation
or by a Bylaw duly adopted by approval of the outstanding shares. The exact
number of directors shall be fixed, within the limits specified, by amendment of
the next sentence duly adopted either by the Board or the shareholders. The
exact number of directors shall be nine (9) until changed as provided in this
Section 2.
Section 3. ELECTION AND TERM OF OFFICE.
The directors shall be elected at each annual meeting of the shareholders,
but if any such meeting is not held or the directors are not elected thereat,
the directors may be elected at any special meetings of shareholders held for
that purpose. Each director shall hold office until the next annual meeting and
until a successor had been elected and qualified.
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Section 4. VACANCIES.
Any director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board, unless the
notice specifies a later time for the effectiveness of such resignation. If the
resignation is effective at a future time, a successor may be elected to take
office when the resignation becomes effective.
Vacancies in the Board, except those existing as a result of a removal of
a director, may be filled by a majority of the remaining directors, though less
than a quorum, or by a sole remaining director, and each director so elected
shall hold office until the next annual meeting and until such director's
successor has been elected and qualified.
A vacancy or vacancies in the Board shall be deemed to exist in case of
the death, resignation or removal of any director, or if the authorized number
of directors be increased, or if the shareholders fail, at any annual or special
meeting of shareholders at which any director or directors are elected, to elect
the full authorized number of directors to be voted for at that meeting.
The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent other than to fill a vacancy created by removal requires the consent of
a majority of the outstanding shares entitled to vote. Any such election by
written consent to fill a vacancy created by removal requires unanimous consent.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of the director's term of
office.
Section 5. PLACE OF MEETING.
Regular or special meetings of the Board shall be held at any place within
or without the State of California which have been designated from time to time
by the Board. In the absence of such designation, regular meetings shall be held
at the principal executive office of the corporation.
Section 6. REGULAR MEETINGS.
Immediately following each annual meeting of shareholders the Board shall
hold a regular meeting for the purpose of organization, election of officers and
the transaction of other business.
Other regular meetings of the Board shall be held without call on such
dates and at such times as may be fixed by the Board. Call and notice of all
regular meetings of the Board are hereby dispensed with.
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Section 7. SPECIAL MEETINGS.
Special meetings of the Board for any purpose or purposes may be called at
any time by the Chairman of the Board, the President, any Vice President, the
Secretary or by any two directors.
Special meetings of the Board shall be held upon four days written notice
or forty-eight hours notice given personally or by telephone, including a voice
messaging system or other system or technology designed to record and
communicate messages, telegraph, facsimile, electronic mail, or other electronic
means. Any such notice shall be addressed or delivered to each director at such
director's address as it is shown upon the records of the corporation or as may
have been given to the corporation by the director for purposes of notice or, if
such address is not shown on such records or is not readily ascertainable, at
the place in which the meetings of the directors are regularly held.
Notice by mail shall be deemed to have been given at the time a written
notice is deposited in the United States mails, postage prepaid. Any other
written notice shall be deemed to have been given at the time it is personally
delivered to the recipient or is delivered to a common carrier for transmission,
or actually transmitted by the person giving the notice by electronic means, to
the recipient. Oral notice shall be deemed to have been given at the time it is
communicated, in person or by telephone or wireless, to the recipient or to a
person at the office of the recipient who the person giving the notice has
reason to believe will promptly communicate it to the recipient, or when
communicated to a voice messaging system or other system or technology designed
to record and communicate messages where the person giving the notice has reason
to believe the recipient will promptly receive the message.
Section 8. QUORUM.
A majority of the authorized number of directors constitutes a quorum of
the Board for the transaction of business, except to adjourn as provided in
Section 11 of this Article. Every act or decision done or made by a majority of
the directors present at a meeting duly held at which a quorum is present shall
be regarded as the act of the Board, unless a greater number be required by law
or by the Articles of Incorporation, except as provided in the next sentence. A
meeting at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, if any action taken is approved by
at least a majority of the required quorum for such meeting.
Section 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board may participate in a meeting through use of
conference telephone, electronic video screen communication, or other
communications equipment. Participation in a meeting through use of conference
telephone constitutes presence in person at that meeting as long as all members
participating in the meeting are able to hear one another. Participation in the
meeting through the use of electronic video screen communication or other
communications equipment, other than conference telephone, constitutes presence
in person at that meeting if all of the following apply:
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(A) Each member participating in the meeting can communicate with all of
the other members concurrently.
(B) Each member is provided the means of participating in all matters
before the board, including, without limitation, the capacity to propose, or to
interpose an objection to, a specific action to be taken by the corporation.
(C) The corporation adopts and implements some means of verifying both of
the following: (i) A person participating in the meeting is a director or other
person entitled to participate in the Board meeting; and (ii) All actions of, or
votes by, the Board are taken or cast only by the directors and not by persons
who are not directors.
Section 10. WAIVER OF NOTICE.
Notice of a meeting need not be given to any director who signs a waiver
of notice or a consent to holding the meeting or an approval of the minutes
thereof, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice to such
director. All such waivers, consents and approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Section 11. ADJOURNMENT.
A majority of the directors present, whether or not a quorum is present,
may adjourn any directors' meeting to another time and place. Notice of the time
and place of holding an adjourned meeting need not be given to absent directors
if the time and place be fixed at the meeting adjourned, except as provided in
the next sentence. If the meeting is adjourned for more than 24 hours, notice of
any adjournment to another time or place shall be given prior to the time of the
adjourned meeting to the directors who were not present at the time of the
adjournment.
Section 12. FEES AND COMPENSATION.
Directors and members of committee may receive such compensation, if any,
for their services, and such reimbursement for expenses, as may be fixed or
determined by the Board.
Section 13. ACTION WITHOUT MEETING.
Any action required or permitted to be taken by the Board may be taken
without a meeting if all members of the Board shall individually or collectively
consent in writing to such action. Such consent or consents shall have the same
effect as a unanimous vote of the Board and shall be filed with the minutes of
the proceedings of the Board.
Section 14. RIGHTS OF INSPECTION.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and also of its subsidiary
corporations, domestic or foreign. Such inspection by a
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director may be made in person or by agent or attorney and includes the right to
copy and obtain extracts.
Section 15. COMMITTEES.
The Board may appoint one or more committees, each consisting of two or
more directors, and delegate to such committees any of the authority of the
Board except with respect to:
(a) The approval of any action for which the General Corporation Law
also requires shareholders' approval or approval of the outstanding
shares;
(b) The filling of vacancies in the Board or on any committee;
(c) The fixing of compensation of the directors for serving on the Board
or on any committee;
(d) The amendment or repeal of bylaws or the adoption of new bylaws;
(e) The amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable;
(f) A distribution to the shareholders of the corporation except at a
rate or in a periodic amount or within a price range determined by
the Board; or
(g) The appointment of other committee of the Board or the members
thereof.
Any such committee must be designated, and the members or alternate
members thereof appointed, by resolution adopted by a majority of the authorized
number of directors and any such committee may be designated an Executive
Committee or by such other name as the Board shall specify. Alternate members of
a committee may replace any absent member at any meeting of the committee. The
Board shall have the power to prescribe the manner in which proceedings of any
such committee shall be conducted. In the absence of any such prescription, such
committee shall have the power to prescribe the manner in which its proceedings
shall be conducted. Unless the Board or such committee shall otherwise provide,
the regular and special meetings and other actions of any such committee shall
be governed by the provisions of this Article applicable to meetings and actions
of the Board. Minutes shall be kept of each meeting of each committee.
ARTICLE IV OFFICERS
Section 1. OFFICERS.
The officers of the corporation shall be a President, a Secretary and a
Chief Financial Officer. The corporation may also have, at the discretion of the
Board, a Chairman of the Board, one or more Vice Presidents, one or more
Assistant Secretaries, one or more Assistant
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Treasurers, and such other officers as may be elected or appointed in accordance
with the provisions of Section 3 of this Article.
Section 2. ELECTION.
The officers of the corporation, except such officers as may be elected or
appointed in accordance with the provisions of Section 3 or Section 5 of this
Article, shall be chosen annually by, and shall serve at the pleasure of, the
Board, and shall hold their respective offices until their resignation, removal,
or other disqualification from service, or until their respective successors
shall be elected.
Section 3. SUBORDINATE OFFICERS.
The Board may elect, and may empower the President to appoint, such other
officers as the business of the corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in these Bylaws or as the Board may from time to time determine.
Section 4. REMOVAL AND RESIGNATION.
Any officer may be removed, either with or without cause, by the Board at
any time or, except in the case of an officer chosen by the Board, by any
officer upon whom such power of removal may be conferred by the Board. Any such
removal shall be without prejudice to the rights, if any, of the officer under
any contract of employment of the officer.
Any officer may resign at any time by giving written notice to the
corporation, but without prejudice to the rights, if any, of the corporation
under any contract to which the officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or at any later time
specified therein and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these Bylaws for regular election or appointment to such office.
Section 6. CHAIRMAN OF THE BOARD.
The Chairman of the Board, if there shall be such an officer, shall, if
present, preside at all meetings of the Board and exercise and perform such
other powers and duties as may be from time to time assigned by the Board.
Section 7. PRESIDENT.
Subject to such powers, if any, as may be given by the Board to the
Chairman of the Board, if there be such an officer, the President is the general
manager and chief executive
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<PAGE>
officer of the corporation and has, subject to the control of the Board, general
supervision, direction and control of the business and officers of the
corporation. The President shall preside at all meetings of the shareholders
and, in the absence of the Chairman of the Board, or if there be none, at all
meetings of the Board. The President has the general powers and duties of
management usually vested in the office of president and general manager of a
corporation and such other powers and duties as may be prescribed by the Board.
Section 8. VICE PRESIDENTS.
In the absence or disability of the President, the Vice Presidents in
order of their rank as fixed by the Board or, if not ranked, the Vice President
designated by the Board, shall perform all the duties of the President and, when
so acting, shall have all the powers of, and be subject to all the restrictions
upon, the President. The Vice Presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the Board.
Section 9. SECRETARY.
The Secretary shall keep or cause to be kept, at the principal executive
office and such other place as the Board may order, a book of minutes of all
meetings of shareholders, the Board and its committees, with the time and place
of holding, whether regular or special, and if special, how authorized, the
notice thereof given, the names of those present at Board and committee
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof. The Secretary shall keep, or cause to be kept, a
copy of the Bylaws of the corporation at the principal executive office or
business office in accordance with Section 213 of the California General
Corporation Law.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, if one
be appointed, a share register, or a duplicate share register, showing the names
of the shareholders and their addresses, the number and classes of shares held
by each, the number and date of certificates issued for the same, and the number
and date of cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board and any committees thereof required by these
Bylaws or by law to be given, shall keep the seal of the corporation in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board.
Section 10. CHIEF FINANCIAL OFFICER.
The Chief Financial Officer of the corporation shall keep and maintain, or
cause to be kept and maintained, adequate and correct accounts of the properties
and business transactions of the corporation, and shall send or cause to be sent
to the shareholders of the corporation such financial statements and reports as
are by law or these Bylaws required to be sent to them. The books of account
shall at all times be open to inspection by any director.
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<PAGE>
The Chief Financial Officer shall deposit all moneys and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the Board. The Chief Financial Officer shall disburse the funds
of the corporation as may be ordered by the Board, shall render to the President
and the directors, whenever they request it, an account of all transactions as
Chief Financial Officer and of the financial condition of the corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the Board.
ARTICLE V OTHER PROVISIONS
Section 1. INSPECTION OF CORPORATE RECORDS.
(a) A shareholder or shareholders holding at least five percent in the
aggregate of the outstanding voting shares of the corporation or who
hold at least one percent of such voting shares and have filed a
Schedule 14A with the United States Securities and Exchange
Commission shall have an absolute right to do either or both of the
following:
(i) Inspect and copy the record of shareholders' names and
addresses and shareholdings during usual business hours upon
five business days' prior written demand upon the corporation;
or
(ii) Obtain from the transfer agent, if any, for the corporation,
upon written demand and upon the tender of its usual charges
for such a list (the amount of which charges shall be stated
to the shareholder by the transfer agent upon request), a list
of the shareholders' names and addresses who are entitled to
vote for the election of directors and their shareholdings, as
of the most recent record date for which it has been compiled
or as of a date specified by the shareholder subsequent to the
date of demand. The list shall be made available on or before
the later of five business days after the demand is received
or the date specified therein as the date as of which the list
is to be compiled.
(b) The record of shareholders shall also be open to inspection and
copying by any shareholder or holder of a voting trust certificate
at any time during usual business hours upon written demand on the
corporation, for a purpose reasonably related to such holder's
interest as a shareholder or holder of a voting trust certificate.
(c) The accounting books and records and minutes of proceedings of the
shareholders and the Board and committees of the Board shall be open
to inspection upon written demand on the corporation of any
shareholder or holder of voting trust certificate at any reasonable
time during usual business hours, for a purpose reasonably related
to such holder's interests as a shareholder or as a holder of such
voting trust certificate.
(d) Any inspection and copying under this Article may be made in person
or by agent or attorney.
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<PAGE>
Section 2. INSPECTION OF BYLAWS.
The corporation shall keep in its principal executive office in the State
of California, or if its principal executive office is not in such State at its
principal business office in such State, the original or a copy of these Bylaws
as amended to date, which shall be open to inspection by shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is located outside the State of California and the corporation has
no principal business office in such state, it shall upon the written request of
any shareholder furnish to such shareholder a copy of these Bylaws as amended to
date.
Section 3. ENDORSEMENT OF DOCUMENTS; CONTRACTS.
Subject to provisions of applicable law, any note, mortgage, evidence of
indebtedness, contract, share certificate, conveyance or other instrument in
writing and any assignment or endorsements thereof executed or entered into
between the corporation and any other person, when signed by the Chairman of the
Board, the President or any Vice President and the Secretary, any Assistant
Secretary, the Chief Financial Officer or any Assistant Chief Financial Officer
of the corporation is not invalidated as to the corporation by any lack of
authority of the signing officers in the absence of actual knowledge on the part
of the other person that the signing officers had no authority to execute the
same. Any such instruments may be signed by any other person or persons and in
such manner as from time to time shall be determined by the Board, and, unless
so authorized by the Board, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or amount.
Section 4. CERTIFICATES OF STOCK.
Every holder of shares of the corporation shall be entitled to have a
certificate signed in the name of the corporation by the Chairman of the Board,
the President or a Vice President and by the Chief Financial Officer or an
Assistant Chief Financial Officer or the Secretary or an Assistant Secretary,
certifying the number of shares and the class or series of shares owned by the
shareholder. Any or all of the signatures on the certificate may be facsimile.
If any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if such person were an
officer, transfer agent or registrar at the date of issue.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the Board may provide; provided, however,
that on any certificate issued to represent any partly paid shares, the total
amount of the consideration to be paid therefor and the amount paid thereon
shall be stated.
Except as provided in this Section, no new certificate for shares shall be
issued in lieu of an old one unless the latter is surrendered and cancelled at
the same time. The Board may, however, if any certificate for shares is alleged
to have been lost, stolen or destroyed, authorize the issuance of a new
certificate in lieu thereof, and the corporation may require that the
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<PAGE>
corporation be given a bond or other adequate security sufficient to indemnify
it against any claim that may be made against it (including expense or
liability) on account of the alleged loss, theft or destruction of such
certificate or the issuance of such new certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER CORPORATIONS.
The President or any other officer or officers authorized by the Board or
the President are each authorized to vote, represent and exercise on behalf of
the corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of the corporation. The
authority herein granted may be exercised either by any such officer in person
or by any other person authorized so to do by proxy or power of attorney duly
executed by said officer.
Section 6. STOCK PURCHASE PLANS.
The corporation may adopt and carry out a stock purchase plan or agreement
or stock option plan or agreement providing for the issue and sale for such
consideration as may be fixed of its unissued shares, or of issued shares
acquired or to be acquired, to one or more of the employees or directors of the
corporation or of a subsidiary or to a trustee on their behalf and for the
payment for such shares in installments or at one time, and may provide for
aiding any such persons in paying for such shares by compensation for services
rendered, promissory notes or otherwise.
Any such stock purchase plan or agreement or stock option plan or
agreement may include, among other features, the fixing of eligibility for
participation therein, the class and price of shares to be issued or sold under
the plan or agreement, the number of shares which may be subscribed for, the
method of payment therefor, the reservation of title until full payment
therefor, the effect of the termination of employment, an option or obligation
on the part of the corporation to repurchase the shares upon termination of
employment (subject to the provisions of Chapter 5 of the California General
Corporation Law), restrictions upon transfer of the shares, the time limits of
and termination of the plan, and any other matters, not in violation of
applicable law, as may be included in the plan as approved or authorized by the
Board or any committee of the Board.
Section 7. CONSTRUCTION AND DEFINITIONS.
Unless the context otherwise requires, the general provisions, rules of
construction and definitions contained in the General Provisions of the
California Corporations Code and in the California General Corporation Law shall
govern the construction of these Bylaws.
Section 8. AMENDMENTS.
These Bylaws may be amended or repealed either by approval of the
outstanding shares (as defined in Section 152 of the California General
Corporation Law) or by the approval of the Board; provided, however, that after
the issuance of shares, a bylaw specifying or changing a fixed number of
directors or the maximum or minimum number or changing from a fixed to a
variable number of directors or vice versa may be adopted only by approval of
the outstanding
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<PAGE>
shares, and a bylaw reducing the fixed number or the minimum number of directors
to a number less than five shall be subject to the provisions of Section 212 (a)
of the California General Corporation Law.
ARTICLE VI INDEMNIFICATION
Section 1. DEFINITIONS.
For the purposes of this Article, "agent" means any person who is or was a
director, officer, employee or other agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another foreign or domestic corporation, partnership, joint venture,
trust or other enterprise, or was a director, officer, employee or agent of a
foreign or domestic corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation; "proceeding" means any threatened, pending or completed action or
proceeding, whether civil, criminal, administrative or investigative; and
"expenses" includes without limitation attorneys fees and any expenses of
establishing a right to indemnification under Sections 4 or 5 (d) of this
Article.
Section 2. INDEMNIFICATION IN ACTIONS BY THIRD PARTIES.
The corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any proceeding (other than an
action by or in the right of the corporation to procure a judgment in its favor)
by reason of the fact that such person is or was an agent of the corporation,
against expenses, judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with such proceeding if such person acted in
good faith and in a manner such person reasonably believed to be in the best
interests of the corporation and, in the case of a criminal proceeding, had no
reasonable cause to believe the conduct of such person was unlawful. The
termination of any proceeding by judgment, order, settlement, conviction or upon
a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which the
person reasonably believed to be in the best interests of the corporation or
that the person had reasonable cause to believe that the person's conduct was
unlawful.
Section 3. INDEMNIFICATION IN ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.
The corporation shall have the power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that such person is or was an agent of the
corporation, against expenses actually and reasonably incurred by such person in
connection with the defense or settlement of such action if such person acted in
good faith, in a manner such person believed to be in the best interests of the
corporation and its shareholders.
No indemnification shall be made under this Section 3:
(a) In respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation in the
performance of such person's duty
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to the corporation and its shareholders, unless and only to the
extent that the court in which such proceeding is or was pending
shall determine upon application that, in view of all the
circumstance of the case, such person is fairly and reasonably
entitled to indemnity for the expenses which such court shall
determine;
(b) Of amounts paid in settling or otherwise disposing of a pending
action, without court approval; or
(c) Of expenses incurred in defending a pending action which is settled
or otherwise disposed of without court approval.
Section 4. INDEMNIFICATION AGAINST EXPENSES.
To the extent that an agent of the corporation has been successful on the
merits in defense of any proceeding referred to in Sections 2 or 3 of this
Article or in defense of any claim, issue or matter therein, the agent shall be
indemnified against expenses actually and reasonably incurred by the agent in
connection therewith.
Section 5. REQUIRED DETERMINATIONS.
Except as provided in Section 4 of this Article, any indemnification under
this Article shall be made by the corporation only if authorized in the specific
case, upon a determination that indemnification of the agent is proper in the
circumstances because the agent has met the applicable standard of conduct set
forth in Sections 2 or 3 of this Article, by:
(a) A majority vote of a quorum consisting of directors who are not
parties to such proceeding;
(b) If such a quorum of directors is not obtainable, by independent
legal counsel in a written opinion;
(c) Approval of the shareholders, with the shares owned by the person to
be indemnified not being entitled to vote thereon; or
(d) The court in which such proceeding is or was pending upon
application made by the corporation or the agent or the attorney or
other person rendering services in connection with the defense,
whether or not such application by the agent, attorney or other
person is opposed by the corporation.
Section 6. ADVANCE OF EXPENSES.
Expenses incurred in defending any proceeding may be advanced by the
corporation prior to the final disposition of such proceeding upon receipt of an
undertaking by or on behalf of the agent to repay such amount if it shall be
determined ultimately that the agent is not entitled to be indemnified as
authorized in this Article.
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<PAGE>
Section 7. OTHER INDEMNIFICATION.
No provision made by the corporation to indemnify its or its subsidiary's
directors or officers for the defense of any proceeding, whether contained in
the Articles of Incorporation, Bylaws, a resolution of shareholders or
directors, an agreement or otherwise, shall be valid unless consistent with this
Article. Nothing contained in this Article shall affect any right to
indemnification to which persons other than such directors and officers may be
entitled by contract or otherwise.
Section 8. FORMS OF INDEMNIFICATION NOT PERMITTED.
No indemnification or advance shall be made under this Article, except as
provided in Sections 4 or 5 (d), in any circumstance where it appears:
(a) That it would be inconsistent with a provision of the Articles of
Incorporation, these Bylaws, a resolution of the shareholders or an
agreement in effect at the time of the accrual of the alleged cause
of action asserted in the proceeding in which the expenses were
incurred or other amounts were paid, which prohibits or otherwise
limits indemnification; or
(b) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
Section 9. INSURANCE.
The corporation shall have power to purchase and maintain insurance on
behalf of any agent of the corporation against any liability asserted against or
incurred by the agent in such capacity or arising out of the agent's status as
such whether or not the corporation would have the power to indemnify the agent
against such liability under the provisions of this Article.
Section 10. NONAPPLICABILITY TO FIDUCIARIES OF EMPLOYEE BENEFIT PLANS.
This Article does not apply to any proceeding against any trustee,
investment manager or other fiduciary of an employee benefit plan in such
person's capacity as such, even though such person may also be an agent of the
corporation as defined in Section 1 of this Article. The corporation shall have
power to indemnify such trustee, investment manager or other fiduciary to the
extent permitted by subdivision (f) of Section 207 of the California General
Corporation Law.
Section 11. INDEMNIFICATION MANDATORY.
The corporation shall indemnify each director, officer, employee or agent
of the corporation to the fullest extent that the corporation has power to
indemnify such persons under applicable provisions of California law and the
Articles of Incorporation of the corporation with respect to any matter which
might be subject to indemnification under this Article VI. Any repeal or
modification of the provisions of this Article VI shall not adversely affect any
rights or
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<PAGE>
protections of any director, officer, employee or agent of the corporation
existing at the time of such repeal or modification.
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<PAGE>
EXHIBIT A
Quality Systems, Inc.
Corporate Governance Provisions
(as made part of Bylaws)
1. At least a majority of the members of the board of directors (the "Board")
shall be independent directors as defined below.
An "independent director" means a person other than an officer or employee of
the Company or its subsidiaries or any other individual having a relationship,
which, in the opinion of the Board, would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. The
following persons shall not be considered independent:
(a) a director who is, or at any time during the past three years was,
employed by the Company or by any parent or subsidiary of the
Company;
(b) a director who accepted or who has a family member (as defined
below) who accepted any payments from the Company or any parent or
subsidiary of the Company in excess of $60,000 during the current or
any of the past three fiscal years, other than the following:
(i) compensation for Board or Board committee service;
(ii) payments arising solely from investments in the Company's
securities;
(iii) compensation paid to a family member who is a
non-executive employee of the Company or a parent or
subsidiary of the Company;
(iv) benefits under a tax-qualified retirement plan, or
non-discretionary compensation; or
(v) loans permitted under Section 13(k) of the Exchange Act of
1934;
(c) a director who is a family member of an individual who is or at any
time during the past three years was, employed by the Company or by
any parent or subsidiary of the Company as an executive officer;
(d) a director who is, or has a family member who is, a partner in, or a
controlling shareholder or an executive officer of, any organization
to which the Company made, or from which the Company received,
payments for property or services in the current or any of the past
three fiscal years that exceed 5% of the recipient's consolidated
gross revenues for that year, or $200,000, whichever is more, other
than the following:
(i) payments arising solely from investments in the Company's
securities; or
(ii) payments under non-discretionary charitable contribution
matching programs;
(e) a director of the Company who is, or has a family member who is,
employed as an executive officer of another entity where at any time
during the past three years any of the officers of the Company serve
on the compensation committee of such other entity; or
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<PAGE>
(f) a director who is, or has a family member who is, a current partner
of the Company's outside auditor, or was a partner or employee of
the Company's outside auditor who worked on the Company's audit at
any time during any of the past three years.
A "family member" for these purposes means a person's spouse, parents, children
and siblings, whether by blood, marriage or adoption, or anyone residing in such
person's home.
2. There shall be an Audit committee of the Board, composed entirely of
independent directors, which shall oversee the Company's financial
reporting process and internal controls, review compliance with laws and
accounting standards, recommend the appointment of public accountants, and
provide a direct channel of communication to the Board for public
accountants, internal auditors and finance officers.
3. There shall be a Nominating Committee of the Board, composed entirely of
independent directors, which shall be responsible for the evaluation and
nomination of Board members.
4. There shall be a Compensation Committee of the Board, composed entirely of
independent directors, which shall be responsible for (i) ensuring that
senior management will be accountable to the Board through the effective
application of compensation policies, and (ii) monitoring the
effectiveness of both senior management and the Board (including
committees thereof). The Compensation Committee shall establish
compensation policies applicable to the Company's executive officers. A
fair summary of such policies and the relationship of corporate
performance to executive compensation, including the factors and criteria
upon which the Chief Executive Officer's compensation was based, shall be
disclosed to shareholders in the Company's proxy statement for the annual
meeting.
5. There shall be a Transaction Committee of the Board, composed entirely of
independent directors, which shall be responsible for reviewing all
related-party transactions involving the Company, and considering and
making recommendations to the full Board with respect to all proposals
involving (i) a change in control, or (ii) the purchase or sale of assets
constituting more than 10% of the Company's total assets. Additionally,
the Transaction Committee shall be responsible for reviewing all
transactions or proposed transactions that trigger the Company's
Shareholder Rights Plan, if any.
6. If at any time the Chairman of the Board shall be an executive officer of
the Company, or for any other reason shall not be an independent director,
a non-executive Lead Director shall be selected by the independent
directors. The Lead Director shall be one of the independent directors,
shall be a member of the Audit Committee and of the Executive Committee,
if there is such a committee, and shall be responsible for coordinating
the activities of the independent directors. He shall assist the Board in
assuring compliance with these corporate governance procedures and
policies, and shall coordinate, develop the agenda for, and moderate
executive sessions of the Board's independent directors. Such executive
sessions shall be held immediately following each regular meeting of the
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Board, and may be held at other times as designated by the Lead Director.
The Lead Director shall approve, in consultation with the other
Independent Directors, the retention of consultants who report directly to
the Board. If at any time the Chairman of the Board is one of the
independent directors, then he or she shall perform the duties of the Lead
Director.
7. The foregoing provisions are adopted as part of the Bylaws of the Company
and cannot be amended or repealed without either (a) approval by the
shareholders of the Company, or (b) approval by a two-thirds majority of
all the authorized number of directors of the Company including two-thirds
of the independent directors, and cannot be amended or repealed prior to
the 1999 Annual Meeting of the Company. Any inconsistent provisions of the
Bylaws are hereby modified to be consistent with these provisions. The
foregoing provisions, insofar as they establish eligibility to serve as a
director or as a committee member, shall not have the effect of removing
any director or committee member from office but shall be given effect at
the next election of directors and the next selection of committee
members, as the case may be, in calendar year 1999 and thereafter. The
foregoing provisions shall not be construed to limit or restrict the
effective exercise of statutory cumulative voting rights by any
shareholder, but the Nominating Committee shall not nominate candidates
for election to the Board except as may be consistent with such
provisions, and no corporate funds may be expended for the solicitation of
proxies which are inconsistent with the foregoing provisions.
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.6.1
<SEQUENCE>4
<FILENAME>d64225_ex10-6.txt
<DESCRIPTION>FORM OF INDEMNIFICATION AGREEMENT
<TEXT>
Exhibit 10.6.1
QUALITY SYSTEMS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made as of
_____________, by and between QUALITY SYSTEMS, INC., a California corporation
(the "Company"), and ____________ ("Indemnitee").
RECITALS
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining quality directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of cost effective liability insurance has been severely limited; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's services as an officer
or director of the Company (as the case may be), the Company and Indemnitee
hereby agree as follows:
1. Indemnification.
(a) Third Party Proceedings. The Company shall indemnify
Indemnitee if Indemnitee is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit, proceeding or any
alternative dispute resolution mechanism, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Company) by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, or by reason
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including reasonable
attorneys' fees and costs), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) actually and reasonably incurred by Indemnitee in
connection with such action, suit or proceeding if Indemnitee acted in good
faith and in a manner Indemnitee reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that Indemnitee did not act in good
faith and in a manner which Indemnitee reasonably believed to be
<PAGE>
in or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that Indemnitee's
conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company
shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Company or any subsidiary of the Company to procure a judgment
in its favor by reason of the fact that Indemnitee is or was a director,
officer, employee or agent of the Company, or any subsidiary of the Company, or
by reason of the fact that Indemnitee is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including reasonable attorneys' fees and costs) and, to the fullest extent
permitted by law, amounts paid in settlement actually and reasonably incurred by
Indemnitee in connection with the defense or settlement of such action or suit
if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed
to be in or not opposed to the best interests of the Company, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been adjudged to be liable to the Company unless and
only to the extent that the Superior Court of the State of California or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, Indemnitee is fairly and reasonably entitled to indemnity for such
expenses which the Superior Court of the State of California or such other court
shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this Section 1, or in
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including reasonable attorneys' fees and costs) actually and
reasonably incurred by Indemnitee in connection therewith.
2. Agreement to Serve. In consideration of the protection afforded by
this Agreement, if Indemnitee is a director of the Company he agrees to serve at
least for the 90 days after the effective date of this Agreement as a director
and not to resign voluntarily during such period without the written consent of
a majority of the Board of Directors. If Indemnitee is an officer of the Company
not serving under an employment contract, he agrees to serve in such capacity at
least for the 90 days after the effective date of this Agreement and not to
resign voluntarily during such period without the written consent of a majority
of the Board of Directors. Following the applicable period set forth above,
Indemnitee agrees to continue to serve in such capacity at the will of the
Company (or under separate agreement, if such agreement exists) so long as he is
duly appointed or elected and qualified in accordance with the applicable
provisions of the Bylaws of the Company or any subsidiary of the Company or
until such time as he tenders his resignation in writing. Nothing contained in
this Agreement is intended to create in Indemnitee any right to continued
employment.
3. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all
expenses incurred by Indemnitee in connection with the investigation, defense,
settlement or appeal of any civil or criminal action, suit or proceeding
referenced in Section 1(a) or (b) hereof (but not
- 2 -
<PAGE>
amounts actually paid in settlement of any such action, suit or proceeding).
Indemnitee hereby undertakes to repay such amounts advanced only if, and to the
extent that, it shall ultimately be determined that Indemnitee is not entitled
to be indemnified by the Company as authorized hereby. The advances to be made
hereunder shall be paid by the Company to Indemnitee within thirty (30) days
following delivery of a written request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to his or her right to be indemnified under this Agreement,
give the Company written notice as soon as practicable of any claim for which
Indemnitee will or could seek indemnification under this Agreement. In addition,
Indemnitee shall give the Company such information and cooperation as it may
reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than thirty (30) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Articles of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within thirty (30) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 8 and 10(g) of this Agreement, Indemnitee
shall also be entitled to be paid for the expenses (including reasonable
attorneys' fees and costs) of bringing such action. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in connection with any action, suit or proceeding in advance of its
final disposition) that Indemnitee has not met the standards of conduct which
make it permissible under applicable law for the Company to indemnify Indemnitee
for the amount claimed. However, Indemnitee shall be entitled to receive interim
payments of expenses pursuant to Section 3(a) unless and until such defense may
be finally adjudicated by court order or judgment from which no further right of
appeal exists. It is the parties' intention that if the Company contests
Indemnitee's right to indemnification, the question of Indemnitee's right to
indemnification shall be for a court of competent jurisdiction to decide, and
neither the failure of the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) to have made a determination that indemnification of
Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct required by applicable law, nor an actual
determination by the Company (including it Board of Directors, any committee or
subgroup of the Board of Directors, independent legal counsel, or its
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall create a presumption that Indemnitee has or has not met the applicable
standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a
notice of a claim pursuant to Section 3(b) hereof, the Company has director and
officer liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
- 3 -
<PAGE>
(e) Selection of Counsel. In the event the Company shall be
obligated under Section 3(a) hereof to pay the expenses of any proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume the
defense of such proceeding, with counsel approved by Indemnitee (which approval
shall not be unreasonably withheld), upon the delivery to Indemnitee of written
notice of its election to do so. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ his counsel in any
such proceeding at Indemnitee's expense; and (ii) if (A) the employment of
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not, in fact, have employed counsel to assume the
defense of such proceeding, then the fees and expenses of Indemnitee's counsel
shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by the California General Corporation Law (the "CGCL"),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Articles of Incorporation, the
Company's Bylaws or by statute. In the event of any change, after the date of
this Agreement, in any applicable law, statute, or rule which expands the right
of a California corporation to indemnify a member of its board of directors or
an officer, such changes shall be, ipso facto, within the purview of
Indemnitee's rights and Company's obligations, under this Agreement. In the
event of any change in any applicable law, statute or rule which narrows the
right of a California corporation to indemnify a member of its board of
directors or an officer, such changes, to the extent not otherwise required by
such law, statute or rule to be applied to this Agreement shall have no effect
on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may be
entitled under the Company's Articles of Incorporation, its Bylaws, any
agreement, any vote of stockholders or disinterested Directors, the CGCL, or
otherwise, both as to action in Indemnitee's official capacity and as to action
in another capacity while holding such office. The indemnification provided
under this Agreement shall continue as to Indemnitee for any action taken or not
taken while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually and reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
- 4 -
<PAGE>
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer. Notwithstanding the foregoing, the
Company shall have no obligation to obtain or maintain such insurance if the
Company determines in good faith that such insurance is not reasonably
available, if the premium costs for such insurance are disproportionate to the
amount of coverage provided, if the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or if Indemnitee
is covered by similar insurance maintained by a subsidiary or parent of the
Company.
8. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance
expenses to Indemnitee with respect to proceedings or claims initiated or
brought voluntarily by Indemnitee and not by way of defense, except with respect
to proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the CGCL, but such indemnification or advancement of expenses may
be provided by the Company in specific cases if the Board of Directors has
approved the initiation or bringing of such suit; or
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company; or
- 5 -
<PAGE>
(d) Claims Under Section 16(b). To indemnify Indemnitee for
expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
9. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that if Indemnitee is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee or agent of the Company
which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants, or
beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan, Indemnitee shall be deemed to have acted in a
manner "not opposed to the best interests of the Company" as referred to in this
Agreement.
10. Miscellaneous.
(a) Choice of Law. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of California , as
applied to contracts between California residents entered into and to be
performed entirely within California without regard to the conflict of law
principles thereof.
(b) Consent to Jurisdiction. The Company and Indemnitee each
hereby irrevocably consent to the jurisdiction of the courts of the State of
California for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be brought only in the state courts of the State of
California .
(c) Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by both the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
- 6 -
<PAGE>
(d) Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
(e) Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs and legal representatives.
(f) Severability. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law. The Company's inability, pursuant to court
order, to perform its obligations under this Agreement shall not constitute a
breach of this Agreement. If this Agreement or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee to the full extent permitted by
any applicable portion of this Agreement that shall not have been invalidated,
and the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
(g) Attorneys' Fees. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, the court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
as a basis for such action were not made in good faith or were frivolous. In the
event of an action instituted by or in the name of the Company under this
Agreement or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
(h) Notice. All notices, requests, demands and other
communications required or permitted under this Agreement shall be in writing
and shall be delivered personally by hand or by courier, mailed by United States
first-class mail, postage prepaid, sent by facsimile or sent by electronic mail
directed to the party to be notified at the address, facsimile number or
electronic mail address indicated for such person on the signature page hereof,
or at such other address, facsimile number or electronic mail address as such
party may designate by ten (10) days' advance written notice to the other
parties hereto. All such notices and other communications shall be deemed given
upon personal delivery, on the date of mailing, upon confirmation of facsimile
transfer or when directed to the electronic mail address set forth on signature
page hereof.
(i) Period of Limitations. No legal action shall be brought and
no cause of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a
- 7 -
<PAGE>
legal action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
(j) Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable the
Company effectively to bring suit to enforce such rights.
(k) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
QUALITY SYSTEMS, INC.
By:________________________________________
Its:_______________________________________
Address:
18191 Von Karman Avenue, Suite 450
Irvine, CA 92612
Facsimile #: 949-255-2610
Email: pholt@qsii.com (Corporate Secretary)
AGREED TO AND ACCEPTED:
"Indemnitee"
_____________________________________
Signature
_____________________________________
Print Name
Address:
_____________________________________
_____________________________________
_____________________________________
Facsimile #:_________________________
Email:_______________________________
- 9 -
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.10.1
<SEQUENCE>5
<FILENAME>d64225_ex10-10.txt
<DESCRIPTION>AMENDED & RESTATED 1998 STOCK OPTION PLAN
<TEXT>
Exhibit 10.10.1
QUALITY SYSTEMS, INC.
AMENDED AND RESTATED
1998 STOCK OPTION PLAN
NOTICE: QUALIFIED OPTIONS UNDER THIS PLAN BEAR RESTRICTIONS GOVERNED BY SECTION
422 OF THE INTERNAL REVENUE CODE. PLAN PARTICIPANTS ARE URGED TO READ SECTION
422 AND TO UNDERSTAND THE RESTRICTIONS CONTAINED THEREIN. NOT ALL SECTION 422
RESTRICTIONS ARE REFERENCED IN THIS PLAN. OPTIONS GRANTED HEREUNDER MAY BEAR
RESTRICTIONS IMPOSED BY FEDERAL AND STATE SECURITIES LAWS. PLAN PARTICIPANTS ARE
URGED TO CONSULT WITH THEIR TAX AND LEGAL ADVISORS CONCERNING THE NATURE AND
RESTRICTIONS UPON THE OPTIONS GOVERNED HEREBY.
1. Purposes.
(a) The purpose of the Plan is to provide a means by which selected
Employees, Directors and Consultants of the Company and its Affiliates, may be
given an opportunity to benefit from increases in value of the stock of the
Company through the granting of Incentive Stock Options and Nonstatutory Stock
Options, as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants of the Company or its
Affiliates, to secure and retain the services of new Employees, Directors and
Consultants, and to provide incentives for such persons to exert maximum efforts
for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to Section 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options. All Options shall
be separately designated Incentive Stock Options or Nonstatutory Stock Options
at the time of grant, and in such form as issued pursuant to Section 6, and a
certificate or certificates will be issued for shares purchased on exercise of
such Options.
2. Definitions.
(a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
(d) "Committee" means a Committee appointed by the Board in accordance
with Section 3(c) of the Plan.
(e) "Company" means Quality Systems, Inc., a California corporation.
(f) "Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting or advisory services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.
(g) "Continuous Status as an Employee, Director or Consultant" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave or any other personal leave; provided, however, that for
purposes of Incentive Stock Options, any such leave may not exceed three (3)
months, unless reemployment upon the expiration of such leave is guaranteed by
contract, Company policies or statute; or (ii) transfers between locations of
the Company or between the Company, Affiliates or their successors.
(h) "Director" means a member of the Board.
(i) "Employee" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(k) "Fair Market Value" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a
share of Common Stock shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such system or
exchange on the day the Option is granted, as reported in the Wall Street
Journal or such other source as the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market System thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a share of Common Stock shall be the mean between the
closing bid and asked prices for the Common Stock on the day the Option is
granted, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
-2-
<PAGE>
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Board.
(l) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(m) "Non-Employee Director" shall mean a Director who:
(i) Is not currently an officer (as defined in Rule 16a-1(f) of
the Exchange Act) of the Company or a parent or subsidiary of the Company,
or otherwise currently employed by the Company or a parent or subsidiary
of the Company;
(ii) Does not receive compensation, either directly or indirectly,
from the Company or a parent or subsidiary of the Company, for services
rendered as a consultant or in any capacity other than as a Director,
except for an amount that does not exceed the dollar amount for which
disclosure would be required pursuant to Rule 404(a) of the Exchange Act;
(iii) Does not possess an interest in any other transaction for
which disclosure would be required pursuant to Rule 404(a) of the Exchange
Act; and
(iv) Is not engaged in a business relationship for which
disclosure would be required pursuant to Rule 404(b) of the Exchange Act.
(n) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(o) "Officer" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Option Agreement" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(r) "Optionee" means an Employee, Director or Consultant who holds an
outstanding Option.
(s) "Participant" means an Employee, Director or Consultant who is
granted Options.
(t) "Plan" means this 1998 Stock Option Plan.
(u) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(v) "Securities Act" means the Securities Act of 1933, as amended.
-3-
<PAGE>
3. Administration.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in Section 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how Options shall be
granted; whether an Option will be an Incentive Stock Option or a
Nonstatutory Stock Option, the provisions of each Option granted (which
need not be identical), including the vesting schedule for the Options,
and the number of shares underlying such Options to be granted to each
such person;
(ii) To construe and interpret the Plan and Options granted under
it, and to establish amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement,
in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective;
(iii) To amend the Plan as provided in Section 12; and
(iv) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or advisable to promote the best interests of
the Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"), all
of the members of which Committee shall be Non-Employee Directors. If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board (and references in this Plan to the Board shall thereafter be to
the Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
4. Shares Subject to the Plan.
Subject to the provisions of Section 11 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Options shall not
exceed in the aggregate One Million (1,000,000) shares of the Company's Common
Stock. If any Option shall for any reason expire or otherwise terminates, in
whole or in part, without having been exercised in full, the stock not acquired
under such Option shall revert to and again become available for issuance under
the Plan.
5. Eligibility.
(a) Incentive Stock Options may be granted only to Employees.
Nonstatutory Stock Options may be granted only to Employees, Directors or
Consultants.
-4-
<PAGE>
(b) A Director shall be eligible for the benefits of the Plan provided
that such Director's participation conforms to the requirements of Rule 16b-3,
if applicable.
(c) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Incentive Stock Option is at
least one hundred ten percent (110%) of the Fair Market Value of such stock at
the date of grant.
6. Option Provisions.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted. In addition, any option granted to a
person who owns (or is deemed to own pursuant to Section 424(d) of the Code)
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or of any Affiliate may not be made
exercisable after the expiration of five (5) years from the date the Option is
granted.
(b) Price. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, the exercise price of any Incentive Stock Option granted hereunder to
any stockholder possessing at least 10% of the total combined voting power of
all classes of stock of the Company shall be not less than one hundred ten
percent (110%) of the Fair Market Value of the stock subject to the Option on
the date the Option is granted.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, (ii) at the
discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, by delivering to the Company other shares of Common
Stock of the Company (provided that the shares have been held for the period
required to avoid a charge to the Company's reported earnings), (iii) at the
discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, by delivering to the Company all or any part of an
Option granted under this Plan for a cashless exercise (provided that such
cashless exchange will not result in a charge to the Company's reported
earnings), or (iv) by tendering any other form of legal consideration that may
be acceptable to the Board.
(d) Transferability. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option granted to an
Optionee subject to Section 16 of the Exchange Act on the date of grant shall
not be transferable except by will or by the laws of descent and distribution,
and shall
-5-
<PAGE>
be exercisable during the lifetime of the person to whom the Option is granted
only by such person. A Nonstatutory Stock Option granted to an Optionee who is
not subject to Section 16 of the Exchange Act on the date of grant may not be
transferable except by will or by the laws of descent and distribution, unless
otherwise permitted by the Board, and shall be exercisable during the lifetime
of the person to whom the Option is granted only by such person or, subsequent
to any permitted transfer, only by a permitted transferee. The person to whom
the Option is granted may, by delivering written notice to the Company, in a
form satisfactory to the Company, designate a third party who, in the event of
the death of the Optionee or in the case of a permitted transfer of a
Nonstatutory Stock Option during the Optionee's lifetime, shall thereafter be
entitled to exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
Section 6(e) are subject to any Option provisions governing the minimum number
of shares as to which an Option may be exercised.
(f) Termination of Employment or Relationship as a Director or
Consultant Other than by Disability or Death. In the event that an Optionee's
Continuous Status as an Employee, Director or Consultant is terminated either by
the voluntary resignation by the Optionee or for cause by the Company, all
Options granted to the Optionee shall terminate immediately. In the event an
Optionee's Continuous Status as an Employee, Director or Consultant is
terminated without cause by the Company, the Optionee may exercise his or her
Option (to the extent that the Optionee was entitled to exercise it at the date
of termination) but only within such period of time ending on the earlier of (i)
the date thirty (30) days after the termination of the Optionee's Continuous
Status as an Employee, Director or Consultant (or such longer period specified
in the Option Agreement), or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, at the date of termination, the Optionee
is not entitled to exercise his or her entire Option or the Option terminated as
specified above, the shares covered by the unexercisable portion of the Option
or terminated Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(g) Disability of Optionee. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date three hundred
sixty-five (365) days following such termination (or such longer period
specified in the Option Agreement), or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, at the date of termination, the
Optionee is not entitled to exercise his
-6-
<PAGE>
or her entire Option, the shares covered by the unexercisable portion of the
Option shall revert to and again become available for issuance under the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(h) Death of Optionee. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to Section 6(d), but
only within the period ending on the earlier of (i) the date three hundred
sixty-five (365) days following the date of death (or such longer period
specified in the Option Agreement), or (ii) the expiration of the term of such
Option as set forth in the Option Agreement. If, at the time of death, the
Optionee was not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after death, the Option is not
exercised within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
7. Cancellation and Regrant of Option.
The Board or the Committee shall have the authority to effect, at any time
and from time to time, (i) the repricing of any outstanding Options under the
Plan, and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of stock, but having an exercise price per share not
less than one hundred percent (100%) of the Fair Market Value in the case of an
Incentive Stock Option or, in the case of a ten percent (10%) stockholder (as
described in Section 5(c)) not less than one hundred ten percent (110%) of the
Fair Market Value in the case of an Incentive Stock Option.
8. Covenants of the Company.
(a) During the terms of the Options, the Company shall keep available at
all times the number of shares of stock which would be issuable under such
outstanding Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Options or any stock issued or issuable
pursuant to any such Options. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless and until
such authority is obtained.
-7-
<PAGE>
9. Use of Proceeds from Stock.
Proceeds from the sale of Common Stock upon exercise of the Options shall
constitute general funds of the Company.
10. Miscellaneous.
(a) Neither an Optionee nor any person to whom an Option is transferred
under Section 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(b) Nothing in the Plan or any Option granted pursuant thereto shall
confer upon any Employee, Director, Consultant or other holder of Options any
right to continue in the employ of the Company or any Affiliate (or to continue
acting as a Director or Consultant) or shall affect the right of the Company or
any Affiliate to terminate the employment or relationship as a Director or
Consultant of any Employee, Director, Consultant or other holder of Options with
or without cause.
(c) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
granted are exercisable for the first time by an Optionee during any calendar
year under all plans of the Company and its Affiliates exceeds One Hundred
Thousand Dollars ($100,000), the Options or portions thereof which exceed such
limit (according to the order in which they were granted) shall be treated as
Nonstatutory Stock Options.
(d) The Company may require any person to whom an Option is granted, or
any person to whom an Option is transferred under Section 6(d), as a condition
of exercising any Option, (1) to give written assurances satisfactory to the
Company as to such person's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Option; and (2)
to give written assurances satisfactory to the Company stating that such person
is acquiring the stock subject to the Option for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Option has been registered under a
then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(e) To the extent provided by the terms of an Option Agreement, the
person to whom an Option is granted may, at the discretion of the Board, satisfy
any mandatory federal, state or
-8-
<PAGE>
local tax withholding obligation relating to the exercise or acquisition of
stock under an Option by any of the following means or by a combination of such
means: (1) tendering cash payment; (2) authorizing the Company to withhold
shares from the shares of the Common Stock otherwise issuable to the Participant
as a result of the exercise or acquisition of stock under the Option provided
that such arrangement will not result in a charge to the Company's reported
earnings; or (3) delivering to the Company owned and unencumbered shares of the
Common Stock of the Company that have been held for the period required to avoid
a charge to the Company's reported earnings. The exercise of the Option may be
conditioned upon the receipt by the Company of satisfactory evidence of the
Participant's satisfaction of any withholding obligations.
11. Adjustments Upon Changes in Stock.
(a) Subject to any required action by stockholders, the number and type
of (i) shares which have been authorized for issuance under this Plan but as to
which Options have not yet been granted or that have been returned to the Plan
upon cancellation or expiration of an Option, and (ii) shares which may be
purchased upon the exercise of each outstanding Option, shall be appropriately
changed and proportionately increased or decreased upon the occurrence of any
change, increase or decrease in the number and type of issued shares of Common
Stock of the Company, without receipt of consideration by the Company, which
change results from a stock split, stock dividend, merger, consolidation,
reorganization, reincorporation, recapitalization, combination of shares, change
in corporate structure or other like capital adjustment. As a result of the
foregoing adjustment, appropriate adjustment shall be made in the number and
type of shares for which Options may be granted under this Plan and, upon the
exercise of each then outstanding Option, the holders of such Options shall
receive the number and type of securities which the holders would have received
had the Options been exercised on the date preceding such change, increase or
decrease. In the event of any such adjustment, the exercise price for each share
shall be likewise adjusted in inverse proportion to the increase or decrease in
the number of shares purchasable.
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then to the extent permitted by applicable law: (i) any
surviving corporation shall assume any Options outstanding under the Plan or
shall substitute similar Options for those outstanding under the Plan, or (ii)
such Options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such Options, or to substitute similar
options for those outstanding under the Plan, then, with respect to Options held
by persons then performing services as Employees, Directors or Consultants, the
time during which such Options vest may, at the discretion of the Board, be
accelerated and the Options terminated if not exercised prior to such event.
-9-
<PAGE>
12. Amendment of the Plan.
(a) The Board at any time, and from time to time, may amend the Plan
provided that the implementation of such amendment by the Company complies with
all applicable law.
(b) The Board may in its sole discretion submit any amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Option granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Option was
granted, and (ii) such person consents in writing.
13. Termination or Suspension of the Plan.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on December 31, 2007, which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Options may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the Option was granted.
14. Effective Date of Plan.
The Plan shall become effective as determined by the Board, but no Options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
15. Financial Information.
The Company will provide to each Optionee financial statements of the
Company at least annually in accordance with Section 260.140.46 of Title 10 of
the California Code of Regulations.
-10-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>6
<FILENAME>d64225_ex10-19.txt
<DESCRIPTION>LEASE AGREEMENT
<TEXT>
OFFICE LEASE
LAKESHORE TOWERS
LAKESHORE TOWERS LIMITED PARTNERSHIP PHASE II,
a California limited partnership,
as Landlord,
and
QUALITY SYSTEMS, INC.,
a California corporation,
as Tenant,
LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS ............................ 1
1.1 Premises, Building, Project and Common Areas .................................. 1
1.1.1 The Premises ......................................................... 1
1.1.2 The Building and The Project ......................................... 1
1.1.3 Common Areas ......................................................... 1
1.2 Verification of Rentable Square Feet and Usable Square Feet of Premises,
Building, and Project ......................................................... 2
ARTICLE 2 LEASE TERM ............................................................... 2
2.1 Lease Term .................................................................... 2
ARTICLE 3 BASE RENT ................................................................ 2
ARTICLE 4 ADDITIONAL RENT .......................................................... 2
4.1 General Terms ................................................................. 2
4.2 Definitions of Key Terms Relating to Additional Rent .......................... 3
4.2.1 Base Year ............................................................ 3
4.2.2 Building Direct Expenses ............................................. 3
4.2.3 Building Operating Expenses .......................................... 3
4.2.4 Building Tax Expenses ................................................ 3
4.2.5 Direct Expenses ...................................................... 3
4.2.6 Expense Year ......................................................... 3
4.2.7 Operating Expenses.................................................... 3
4.2.7.1 Inclusions to Operating Expenses ............................ 3
4.2.7.2 Exclusions to Operating Expenses ............................ 4
4.2.8 Taxes ................................................................ 7
4.2.8.1 Tax Expenses ................................................ 7
4.2.8.2 Other Costs ................................................. 8
4.2.8.3 Base Taxes .................................................. 8
4.2.9 Tenant's Share ....................................................... 8
4.3 Allocation of Direct Expenses ................................................. 8
4.4 Calculation and Payment of Additional Rent .................................... 9
4.4.1 Statement of Actual Building Direct Expenses and Payment by
Tenant ............................................................... 9
4.4.2 Statement of Estimated Building Direct Expenses ...................... 9
4.5 Taxes and Other Charges for Which Tenant Is Directly Responsible .............. 9
4.6 Landlord's Books and Records .................................................. 10
4.7 Security Deposit .............................................................. 10
4.7.1 Security Deposit ..................................................... 10
4.7.2 Landlord's Transfer of Security Deposit on Transfer of Real
Property ............................................................. 11
4.7.3 Restoration of Security Deposit ...................................... 11
4.7.4 Interest on Security Deposit ......................................... 11
4.7.5 Return of Security Deposit ........................................... 11
ARTICLE 5 USE OF PREMISES .......................................................... 11
5.1 Permitted Use ................................................................. 11
5.2 Prohibited Uses ............................................................... 11
</TABLE>
-i-
LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 6 SERVICES AND UTILITIES .................................................. 11
6.1 Standard Tenant Services ..................................................... 11
6.2 Overstandard Tenant Use ...................................................... 12
6.2.1 Non-Electrical Usage ................................................ 12
6.2.2 Electrical Usage .................................................... 12
6.3 Interruption of Use .......................................................... 13
ARTICLE 7 REPAIRS ................................................................. 13
ARTICLE 8 ADDITIONS AND ALTERATIONS ............................................... 13
8.1 Landlord's Consent to Alterations ............................................ 13
8.2 Manner of Construction ....................................................... 13
8.2.1 Conditions to Alterations ........................................... 13
8.2.2 Base Building Changes ............................................... 14
8.3 Payment for Improvements ..................................................... 14
8.4 Payment For Initial Alterations .............................................. 14
8.5 Construction Insurance ....................................................... 15
8.6 Landlord's Property .......................................................... 15
8.7 Communications and Computer Lines ............................................ 15
ARTICLE 9 COVENANT AGAINST LIENS .................................................. 16
ARTICLE 10 INSURANCE ............................................................... 16
10.1 Indemnification and Waiver ................................................... 16
10.2 Tenant's Compliance With Landlord's Fire and Casualty Insurance .............. 16
10.3 Tenant's Insurance ........................................................... 16
10.4 Form of Policies ............................................................. 17
10.5 Subrogation .................................................................. 17
10.6 Additional Insurance Obligations ............................................. 17
ARTICLE 11 DAMAGE AND DESTRUCTION .................................................. 18
11.1 Repair of Damage to Premises by Landlord ..................................... 18
11.1.1 Damage to Building .................................................. 18
11.1.2 Damage to Premises .................................................. 18
11.2 Landlord's Option to Repair .................................................. 18
11.3 Tenant's Option to Cause Early Expiration .................................... 19
11.4 Waiver of Statutory Provisions ............................................... 19
ARTICLE 12 NONWAIVER ............................................................... 19
ARTICLE 13 CONDEMNATION ............................................................ 20
ARTICLE 14 ASSIGNMENT AND SUBLETTING ............................................... 20
14.1 Transfers .................................................................... 20
14.2 Landlord's Consent ........................................................... 21
14.3 Transfer Premium ............................................................. 21
14.4 Landlord's Option as to Subject Space ........................................ 22
14.5 Effect of Transfer ........................................................... 22
14.6 Occurrence of Default ........................................................ 23
14.7 Non-Transfers ................................................................ 23
</TABLE>
-ii-
LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND REMOVAL OF
TRADE FIXTURES .......................................................... 23
15.1 Surrender of Premises ........................................................ 23
15.2 Removal of Tenant Property by Tenant ......................................... 23
ARTICLE 16 HOLDING OVER ............................................................ 24
ARTICLE 17 ESTOPPEL CERTIFICATES ................................................... 24
ARTICLE 18 SUBORDINATION ........................................................... 24
ARTICLE 19 DEFAULTS; REMEDIES ...................................................... 25
19.1 Events of Default ............................................................ 25
19.2 Remedies Upon Default ........................................................ 25
19.3 Subleases of Tenant .......................................................... 26
19.4 Efforts to Relet ............................................................. 26
19.5 Landlord Default ............................................................. 27
ARTICLE 20 COVENANT OF QUIET ENJOYMENT ............................................. 27
ARTICLE 21 INTENTIONALLY DELETED ................................................... 27
ARTICLE 22 SIGNS ................................................................... 27
22.1 Tenant's Entry Door Signage .................................................. 27
22.2 Prohibited Signage and Other Items ........................................... 27
22.3 Building Directory ........................................................... 27
ARTICLE 23 COMPLIANCE WITH LAW ..................................................... 27
23.1 Applicable Laws .............................................................. 27
23.2 Hazardous Materials .......................................................... 28
23.3 Warranties; Notice of Release and Investigation .............................. 28
23.4 Indemnification .............................................................. 28
23.5 Remediation Obligations; Tenant's Rights on Cleanup by Landlord .............. 29
23.6 Definition of "Hazardous Material" ............................................. 29
ARTICLE 24 LATE CHARGES............................................................. 29
ARTICLE 25 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY
TENANT .................................................................. 30
25.1 Landlord's Cure .............................................................. 30
25.2 Tenant's Reimbursement ....................................................... 30
ARTICLE 26 ENTRY BY LANDLORD ....................................................... 30
ARTICLE 27 TENANT PARKING .......................................................... 31
27.1 Parking In General ........................................................... 31
27.2 Landlord Reservations ........................................................ 31
27.3 Visitor Validations .......................................................... 31
27.4 Parking Pass System .......................................................... 31
ARTICLE 28 MISCELLANEOUS PROVISIONS ................................................ 31
28.1 Terms; Captions .............................................................. 31
28.2 Binding Effect ............................................................... 32
28.3 No Air Rights ................................................................ 32
28.4 Modification of Lease ........................................................ 32
28.5 Transfer of Landlord's Interest .............................................. 32
</TABLE>
-iii-
LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
28.6 Prohibition Against Recording ................................................ 32
28.7 Landlord's Title ............................................................. 32
28.8 Relationship of Parties ...................................................... 32
28.9 Application of Payments ...................................................... 32
28.10 Time of Essence .............................................................. 32
28.11 Partial Invalidity ........................................................... 32
28.12 No Warranty .................................................................. 33
28.13 Landlord Exculpation ......................................................... 33
28.14 Entire Agreement ............................................................. 33
28.15 Right to Lease ............................................................... 33
28.16 Force Majeure ................................................................ 33
28.17 Waiver of Redemption by Tenant ............................................... 33
28.18 Notices ...................................................................... 33
28.19 Joint and Several ............................................................ 34
28.20 Authority .................................................................... 34
28.21 Attorneys' Fees .............................................................. 34
28.22 GOVERNING LAW; WAIVER OF TRIAL BY JURY ....................................... 34
28.23 Submission of Lease .......................................................... 35
28.24 Brokers ...................................................................... 35
28.25 Independent Covenants ........................................................ 35
28.26 Project or Building Name and Signage ......................................... 35
28.27 Counterparts ................................................................. 35
28.28 Confidentiality .............................................................. 35
28.29 Development of the Project ................................................... 35
28.29.1 Subdivision ......................................................... 35
28.29.2 The Other Improvements .............................................. 35
28.29.3 Construction of Project and Other Improvements ...................... 36
28.30 Building Renovations ......................................................... 36
28.31 No Violation ................................................................. 36
28.32 No Discrimination ............................................................ 36
28.33 Definition of Landlord ....................................................... 36
28.34 Tenant Representation With Respect to the General Electric Pension Trust ..... 36
</TABLE>
-iv-
LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
EXHIBITS
A OUTLINE OF PREMISES
B PROJECT LEGAL DESCRIPTION
C DIRECT EXPENSES ALLOCATION
D RULES AND REGULATIONS
E FORM OF TENANT'S ESTOPPEL CERTIFICATE
-i-
LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
LIST OF DEFINED TERMS
Page
----
Accountant ............................................................. 10
Additional Rent ........................................................ 3
Additional Required Work ............................................... 14
Affiliate .............................................................. 23
Alterations ............................................................ 13
Applicable Laws ........................................................ 28
Base Building .......................................................... 14
Base Building Systems .................................................. 14
Base Rent .............................................................. 2
Base Year .............................................................. 3
BOMA ................................................................... 8
Brokers ................................................................ 35
Building ............................................................... 1
Building Common Areas .................................................. 1
Building Direct Expenses ............................................... 3
Building Hours ......................................................... 12
Building Operating Expenses ............................................ 3
Building Tax Expenses .................................................. 3
CC&Rs .................................................................. 1
CEW Report ............................................................. 28
Common Areas ........................................................... 1
Comparable Buildings ................................................... 1
Contemplated Effective Date ............................................ 22
Contemplated Transfer Space ............................................ 22
Control ................................................................ 23
Direct Expenses ........................................................ 3
Electricity Usage Standard ............................................. 12
Environmental Laws ..................................................... 28
Estimate ............................................................... 9
Estimate Statement ..................................................... 9
Estimated Excess ....................................................... 9
Excess ................................................................. 9
Expense Year ........................................................... 3
Force Majeure .......................................................... 33
Hazardous Material ..................................................... 29
Holidays ............................................................... 12
HVAC ................................................................... 11
Initial Alterations .................................................... 15
Intention to Transfer Notice ........................................... 22
Lakeshore Towers ....................................................... 1
Landlord ............................................................... 1
Landlord Parties ....................................................... 16
Landlord Repair Notice ................................................. 18
Lease .................................................................. 1
Lease Commencement Date ................................................ 2
Lease Expiration Date .................................................. 2
Lease Term ............................................................. 2
Lease Year ............................................................. 2
Lines .................................................................. 15
Mail ................................................................... 34
Management Fee Cap ..................................................... 6
Nine Month Period ...................................................... 22
Notices ................................................................ 34
Operating Expenses ..................................................... 3
Original Improvements .................................................. 17
Other Improvements ..................................................... 35
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Parking Structure ...................................................... 31
Premises ............................................................... 1
Project ................................................................ 1
Project Common Areas ................................................... 1
Proposition 13 ......................................................... 7
Renovations ............................................................ 36
Rent ................................................................... 3
rentable square feet ................................................... 2
Repair Notice .......................................................... 19
Security Deposit ....................................................... 10
Statement .............................................................. 9
Subject Space .......................................................... 20
Summary ................................................................ 1
Tax Expenses ........................................................... 7
Tenant ................................................................. 1
Tenant Auditor.......................................................... 10
Tenant's Share ......................................................... 8
Tenant's Transfer Costs ................................................ 22
Transfer Notice ........................................................ 20
Transfer Premium ....................................................... 22
Transferee ............................................................. 20
Transfers .............................................................. 20
usable square feet ..................................................... 2
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LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
LAKESH0RE TOWERS
OFFICE LEASE
This Office Lease (the "Lease"), dated as of the date set forth in Section
1 of the Summary of Basic Lease Information (the "Summary"), below, is made by
and between LAKESH0RE TOWERS LIMITED PARTNERSHIP PHASE IV, a California limited
partnership ("Landlord"), and QUALITY SYSTEMS, INC., a California corporation
("Tenant").
SUMMARY OF BASIC LEASE INFORMATION
TERMS OF LEASE DESCRIPTION
- -------------- -----------
1. Date: September 15,2004
2. Premises
(Article 1).
2.1 Building: Lakeshore Towers Building II
18191 Von Karman Avenue
Irvine, California
2.2 Premises: Approximately 11,996 rentable (10,643
usable) square feet of space located on
the fourth floor of the Building and
commonly known as Suite 450, as further
set forth in Exhibit A to the Lease.
3. Lease Term
(Article 2).
3.1 Length of Term of Lease
of Premises: Three (3) years and one (1) month.
3.2 Lease Commencement Date: May 1, 2005.
3.3 Lease Expiration Date: May 31, 2008.
4. Base Rent (Article 3):
Annual
Monthly Rental Rate
Annual Installment per Rentable
Period Base Rent of Base Rent Square Foot
------------ ------------ ------------
May 2005* through
May 2006 $323,892.00 $26,991.00 $27.00
June 2006 through
May 2007 $331,089.60 $27,590.80 $27.60
June 2007 through
May 2008 $338,287.20 $28,190.60 $28.20
* Notwithstanding the foregoing, no monthly Base Rent shall be due for May
2005.
5. Base Year Calendar year 2005
(Article 4):
6. Tenant's Share Approximately 9.38%
(Article 4):
7. Permitted Use General office use consistent with a
(Article 5): first-class office building.
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8. Security Deposit $28,190.60
(Article 4):
9. Parking 43 unreserved parking spaces in the
(Article 27): Parking Structure and four (4) reserved
parking spaces in the Building's
subterranean parking area at the rates
set forth below. In addition, Tenant
shall have the right to use an
additional thirteen (13) unreserved
parking spaces in the Parking Structure
at the rates provided below subject to
Tenant's advising Landlord not less
than thirty (30) days in advance of the
date Tenant desires to use such
additional unreserved parking spaces.
Tenant may also use additional
unreserved parking spaces in the
Parking Structure subject to
availability of such spaces and payment
of Landlord's then current parking
charges for unreserved spaces or Fifty
Dollars ($50) per unreserved space,
whichever is greater. To the extent
available, Tenant may convert up to
five (5) of its unreserved parking
spaces to reserved parking spaces in
the Parking Structure at the reserved
rate set forth below.
<TABLE>
<CAPTION>
Parking Parking Structure Parking Structure Building
Space Fees: Unreserved Reserved Rate Reserved Rate
Rate Per Space Per Space Per Space
Per Month Per Month Per Month
----------------- ----------------- -------------
<S> <C> <C> <C>
$50.00 $125.00 $145.00
</TABLE>
10. Address of Tenant Quality Systems, Inc.
(Section 28.18): 18191 Yon Kannan Avenue, Suite 450
Irvine, California 92612
(Prior to and After Lease Commencement
Date)
11. Address of Landlord
(Section 28.18): See Section 28.18 of the Lease.
12. Broker(s) Kern Olson Real Estate Services
(Section 28.24): 4101 Birch Street, Suite 150
Newport Beach, California 92660
Attention: James F. Kern
and
Cushman & Wakefield of California, Inc,
1920 Main Street, Suite 600
Irvine, California 92614
Attention: Jeffrey L. Osborn
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[Quality Systems, Inc.]
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ARTICLE 1
PREMISES, BUILDING, PROJECT, AND COMMON AREAS
1.1 Premises, Building, Project and Common Areas.
1.1.1 The Premises. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord the premises set forth in Section 2.2 of the Summary
(the "Premises"). The outline of the Premises is set forth in Exhibit A attached
hereto. The parties hereto agree that the lease of the Premises is upon and
subject to the terms, covenants and conditions herein set forth, and Tenant,
covenants as a material part of the consideration for this Lease to keep and
perform each and all of such terms, covenants and conditions by it to be kept
and performed and that this Lease is made upon the condition of such
performance. The parties hereto hereby acknowledge that the purpose of Exhibit A
is to show the approximate location of the Premises in the "Building," as that
term is defined in Section 1.1.2, below, only, and such Exhibit is not meant to
constitute an agreement, representation or warranty as to the construction of
the Premises, the precise area thereof or the specific location of the "Common
Areas," as that term is defined in Section 1.1.3, below, or the elements thereof
or of the accessways to the Promises or the "Project," as that term is defined
in Section 1.1.2, below. Except as specifically set forth in Section 8.4 below,
Landlord shall not be obligated to provide or pay for any improvement work or
services related to the improvement of the Premises. Tenant also acknowledges
that neither Landlord nor any agent of Landlord has made any representation or
warranty regarding the condition of the Premises, the Building or the Project or
with respect to the suitability of any of the foregoing for the conduct of
Tenant's business, except as specifically set forth in this Lease and the Tenant
Work Letter. Tenant acknowledges that it is currently in possession of the
Premises and Tenant accepts the Premises in its current "AS IS" condition and
Tenant confirms that the Premises and the Building are in good and sanitary
order, condition and repair.
1.1.2 The Building and The Project. The Premises are a part of
the building set forth in Section 2.1 of the Summary (the "Building"). The
Building is part of an office project known as "Lakeshore Towers". The term
"Project", as used in this Lease, shall mean (i) the land on which the Project
is located which land is described in Exhibit B hereto, (ii) the Building, (iii)
the Common Areas, (iv) the other buildings located in the Project, and (v) at
Landlord's discretion, any additional real property, areas, land, buildings or
other improvements added thereto outside of the Project.
1.1.3 Common Areas. Tenant shall have the non-exclusive right to
use in common with Project tenants the Project Common Areas and the
non-exclusive right to use in common with other Building tenants the Building
this Lease. As Common Areas, subject to the rules and regulations referred to in
Article 5 of used herein those portions of the Project which are provided, from
time to time, for use in common by Landlord, Tenant and any other tenants of the
Project and such other portions of the Project designated by Landlord, in its
discretion, including certain areas designated for the exclusive use of certain
tenants, or to be shared by Landlord and certain tenants, are collectively
referred to herein as the "Common Areas". The Common Areas shall consist of the
"Project Common Areas" and the "Building Common Areas." The term "Project Common
Areas", as used in this Lease, shall mean (i) the portion of the Project
designated as such by Landlord and (ii) all common areas designated in that
certain Declaration of Covenants, Conditions and Restrictions and Reservation of
Easements for the Lakeshore Towers, dated October 17, 1989, recorded October 23,
1989, as Instrument No. 89569018 of the Official Records of Orange County,
California (the "CC&Rs"). The term "Building Common Areas", as used in this
Lease, shall mean the portions of the Common Areas located within the Building
designated as such by Landlord. The manner in which the Common Areas are
maintained and operated shall be at the sole discretion of Landlord, provided
that Landlord shall maintain and operate same in a manner consistent with that
of other first-class, high-rise office buildings in the John Wayne Airport area
which are comparable in size (containing at least 200,000 rentable square feet),
quality of construction, and services and amenities to the Building (the
"Comparable Buildings") and the use thereof shall be subject to such rules,
regulations and restrictions as Landlord may make from time to time. Landlord
reserves the right to close temporarily, make alterations or additions to, or
change the location of elements of the Project and the Common Areas.
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1.2 Verification of Rentable Square Feet and Usable Square Feet
of Premises, Building, and Project. For purposes of this Lease, "rentable square
feet" and "usable square feet" shall be calculated pursuant to "BOMA," as that
term is defined in Section 4.2.9, below. In the event that the rentable area of
the Premises, the Building and/or the Project shall hereafter change due to
subsequent alterations and/or other modifications to the Premises, the Building
and/or the Project, the rentable area of the Premises, the Building and/or the
Project, as the case may be, shall be appropriately adjusted as of the date of
such alteration and/or other modification, based upon the written verification
by Landlord's space planner of such revised rentable area. In the event of any
such adjustment to the rentable area of the Premises, the Building and/or the
Project, all amounts, percentages and figures appearing or referred to in this
Lease based upon such rentable area (including, without limitation, the amount
of the "Rent," as that term is defined in Article 4 of this Lease) shall be
modified in accordance with such determination.
ARTICLE 2
LEASE TERM
2.1 Lease Term. The terms and provisions of this Lease shall be
effective as of the date of this Lease. The term of this Lease (the "Lease
Term") shall be as set forth in Section 3.1 of the Summary and shall commence on
the date set forth in Section 3.2 of the Summary (the "Lease Commencement Date")
The term of this Lease shall terminate on the date set forth in Section 3.3 of
the Summary (the "Lease Expiration Date") unless this Lease is sooner terminated
as hereinafter provided. For purposes of this Lease, the term "Lease Year" shall
mean each consecutive twelve (12) month period during the Lease Term, commencing
on the Lease Commencement Date. For example, the first Lease Year will commence
on May 1, 2005 and end on April 30, 2006.
ARTICLE 3
BASE RENT
Tenant shall pay, without prior notice or demand, to Landlord or
Landlord's agent at the management, office of the Project, or, at Landlord's
option, at such other place as Landlord may from time to time designate in
writing, by a check for currency which, at the time of payment, is legal tender
for private or public debts in the United States of America, base rent ("Base
Rent") as set forth in Section 4 of the Summary, payable in equal monthly
installments as set forth in Section 4 of the Summary in advance on or before
the first day of each and every calendar month during the Lease Term, without
any setoff or deduction whatsoever. The Base Rent for June 2005 shall be paid at
the time of Tenant's execution of this Lease. If any Base Rent payment date
(including the Lease Commencement Date) falls on a day of the month other than
the first day of such month or if any payment of Base Rent is for a period which
is shorter than one month, the Base Rent for any fractional month shall accrue
on a daily basis for the period from the date such payment is due to the end of
such calendar month or to the end of this Lease Term at a rate per day which is
equal to 1/365 of the applicable annual Base Rent. All other payments or
adjustments required to be made under the terms of this Lease that require
proration on a time basis shall be prorated on the same basis.
ARTICLE 4
ADDITIONAL RENT
4.1 General Terms. In addition to paying the Base Rent
specified in Article 3 of this Lease, Tenant shall pay "Tenant's Share"
of the annual "Building Direct Expenses," as those terms are defined in
Sections 4.2.9 and 4.2.2 of this Lease, respectively, which are in excess of the
amount of Building Direct Expenses for the "Base Year," as that term is defined
in Section 4.2.1, below; provided, however, that in no event shall any decrease
in Building Direct Expenses for any "Expense Year," as that term is defined
in Section 4.2.6 below, below Building Direct Expenses for the Base Year
entitle Tenant to any decrease in Base Rent or any credit against sums due
under this Lease. Such payments by Tenant, together with any and all other
amounts payable by Tenant to Landlord pursuant to the terms of this Lease,
are hereinafter collectively referred to as the "Additional Rent", and the Base
Rent and the Additional Rent are herein collectively referred to as "Rent."
All amounts due under this Article 4 as Additional Rent shall be payable for
the same periods and in the same manner as the Base Rent; provided, however,
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[Quality Systems, Inc.]
<PAGE>
Additional Rent on account of Tenant's Share of Building Direct Expenses shall
not be due or payable during the first Lease Year. Without limitation on other
obligations of Tenant which survive the expiration of the Lease Term, the
obligations of Tenant to pay the Additional Rent provided for in this Article 4
shall survive the expiration of the Lease Term.
4.2 Definitions of Key Terms Relating to Additional Rent. As
used in this Article 4, the following terms shall have the meanings hereinafter
set forth:
4.2.1 Base Year. "Base Year" shall mean the period set forth in
Section 5 of the Summary.
4.2.2 Building Direct Expenses. "Building Direct Expenses" shall
mean "Building Operating Expenses" and "Building Tax Expenses", as those terms
are defined in Sections 4.2.3 and 4.2.4, below, respectively.
4.2.3 Building Operating Expenses. "Building Operating Expenses"
shall mean the portion of "Operating Expenses," as that term is defined in
Section 4.2.7 below, allocated to the tenants of the Building pursuant to the
terms of Section 4.3.1 below.
4.2.4 Building Tax Expenses. "Building Tax Expenses" shall mean
that portion of "Tax Expenses", as that term is defined in Section 4.2.8
below, allocated to the tenants of the Building pursuant to the terms of Section
4.3.1 below.
4.2.5 Direct Expenses. "Direct Expenses" shall mean "Operating
Expenses" and "Tax Expenses."
4.2.6 Expense Year. "Expense Year" shall mean each calendar year
in which any portion of the Lease Term falls, through and including the calendar
year in which the Lease Term expires, provided that Landlord, upon notice to
Tenant, may change the Expense Year from time to time to any other twelve (12)
consecutive month period, and, in the event of any such change. Tenant's Share
of Building Direct Expenses shall be equitably adjusted for any Expense Year
involved in any such change.
4.2.7 Operating Expenses.
4.2.7.1 Inclusions to Operating Expenses. "Operating
Expenses" shall mean all expenses, costs and amounts of every kind and nature
which Landlord pays during any Expense Year because of or in connection
with the ownership, management, maintenance, security, repair, replacement)
restoration or operation of the Project, or any portion thereof, subject to
the terms and provisions of Section 4.2.7. Without limiting the generality of
the foregoing, Operating Expenses shall specifically include any and all of the
following:
(i) the cost of supplying all utilities, the cost of
operating, repairing, maintaining, and renovating the utility,
telephone, mechanical, sanitary, storm drainage, and elevator
systems, and the cost of maintenance and service contracts in
connection therewith;
(ii) the cost of licenses, certificates, permits and
inspections and the cost of contesting any governmental enactments
which may affect Operating Expenses, and the costs incurred in
connection with any governmentally mandated transportation system
management program or similar program;
(iii) the cost of earthquake insurance and all other
insurance carried by Landlord in connection with the Project as
reasonably determined by Landlord (and Landlord represents that it
shall carry earthquake insurance during the Base Year);
(iv) the cost of landscaping, relamping, and all
supplies, tools, equipment and materials used in the operation,
repair and maintenance of the Project, or any portion thereof;
(v) the cost of non-capital (as determined pursuant
to generally accepted accounting principles) parking area repair,
restoration, and maintenance;
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LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
(vi) fees and other costs, including reasonable
management fees, consulting fees, legal fees and accounting fees, of
all contractors and consultants in connection with the management,
operation, maintenance and repair of the Project;
(vii) payments under any equipment rental agreements
and the fair rental value of any management office space;
(viii) subject to Section 4.2.7.2(vi) below, wages,
salaries and other compensation and benefits, including taxes levied
thereon, of all persons engaged in the operation, maintenance and
security of the Project;
(ix) operation, repair and maintenance of all systems
and equipment and components thereof of the Project;
(x) the cost of janitorial, alarm, security and other
services, replacement of wall and floor coverings, ceiling tiles and
fixtures in common areas, maintenance and replacement of curbs and
walkways, and repair to roofs and reroofing;
(xi) amortization (including interest on the
unamortized cost) over the useful life, determined in accordance
with generally accepted accounting principles, of the cost of
acquiring or the rental expense of personal property used in
the maintenance, operation and repair of the Project, or any
portion thereof;
(xii) the cost of capital improvements or other costs
incurred in connection with the Project (A) which are intended to
effect economies in the operation or maintenance of the Project, or
any portion thereof (but only to the extent of the annual cost
savings reasonably anticipated by Landlord), (B) that are required
to comply with present or anticipated reasonable conservation
programs, (C) which are replacements of nonstructural items located
in the Common Areas required to keep the Common Areas in good order
or condition, or (D) that are required under any governmental law or
regulation enacted after the date of this Lease; provided, however,
that any capital expenditure shall be amortized (including interest
on the amortized cost) over its useful life reasonably determined in
accordance with generally accepted accounting principles;
(xiii) costs, fees, charges or assessments imposed by,
or resulting from any mandate imposed on Landlord by, any federal,
state or local government for fire and police protection, trash
removal, community services, or other services which do not
constitute "Tax Expenses" as that term is defined in Section 4.2.8,
below; and
(xiv) payments under any easement, license, operating
agreement, declaration, restrictive covenant, or instrument
pertaining to the sharing of costs by the Building with oilier
buildings in the Project.
4.2.7.2 Exclusions to Operating Expenses. Notwithstanding
the provisions of Section 4.2.7.1 above, for purposes of this Lease, Operating
Expenses shall not, however, include:
(i) costs, including marketing costs, legal fees,
space planners' fees, advertising and promotional expenses, and
brokerage fees incurred in connection with the original
construction or development, or original or future leasing of
the Project, and costs, including permit, license and inspection
costs, incurred with respect to the installation of tenant
improvements made for new tenants initially occupying space in
the Project after the Lease Commencement Date or incurred in
renovating or otherwise improving, decorating, painting or
redecorating vacant space for tenants or other occupants of the
Project (excluding, however, such costs relating to any Common
Areas or parking facilities);
(ii) except as set forth in Sections 4.2.7.1 (xi),
(xii), and (xiii) above, depreciation, interest and principal
payments on mortgages and other debt
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LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
costs, if any, penalties and interest, costs of capital repairs and
alterations, and costs of capital improvements and equipment;
(iii) costs for which the Landlord is reimbursed by any
tenant or occupant of the Project or by insurance by its carrier or
any tenant's carrier or by anyone else, and electric power costs for
which any tenant directly contracts with the local public service
company;
(iv) any bad debt loss, rent loss, or reserves for bad
debts or rent loss;
(v) costs associated with the operation of the
business of the partnership or entity which constitutes the
Landlord, as the same arc distinguished from the costs of
operation of the Project (which shall specifically include, but not
be limited to, accounting costs associated with the operation
of the Project). Costs associated with the operation of the
business of the partnership or entity which constitutes the Landlord
include costs of partnership accounting and legal matters, costs of
defending any lawsuits with any mortgagee (except as the actions of
the Tenant may be in issue), costs of selling, syndicating,
financing, mortgaging or hypothecating any of the Landlord's
interest in the Project, and costs incurred in connection with any
disputes between Landlord and its employees, between Landlord and
Project management, or between Landlord and other tenants or
occupants, and Landlord's general corporate overhead and general
and administrative expenses;
(vi) the wages and benefits of any employee who does
not devote substantially all of his or her employed time to the
Project unless such wages and benefits are prorated to reflect time
spent on operating and managing the Project vis-a-vis time spent on
matters unrelated to operating and managing the Project; provided,
that in no event shall Operating Expenses for purposes of this Lease
include wages and/or benefits attributable to personnel above the
level of Project manager;
(vii) amounts paid as ground rental for the Project by
the Landlord;
(viii) except for a Project management fee to the extent
allowed pursuant to item (xiii), below, overhead and profit
increment paid to the Landlord or to subsidiaries or affiliates of
the Landlord for services in the Project to the extent the same
exceeds the costs of such services rendered by qualified,
first-class unaffiliated third parties on a competitive basis;
(ix) any compensation paid to clerks, attendants or
other persons in commercial concessions operated by the Landlord,
provided that any compensation paid to any concierge at the Project
shall be includable as an Operating Expense;
(x) rentals and other related expenses incurred in
leasing air conditioning systems, elevators or other equipment which
if purchased the cost of which would be excluded from Operating
Expenses as a capital cost, except equipment not affixed to the
Project which is used in providing janitorial or similar services
and, further excepting from this exclusion such equipment rented or
leased to remedy or ameliorate an emergency condition in the
Project;
(xi) all items and services for which Tenant or any
other tenant in the Project reimburses Landlord or which Landlord
provides selectively to one or more tenants (other than Tenant)
without reimbursement;
(xii) costs, other than those incurred in ordinary
maintenance and repair, for sculpture, paintings, fountains or other
objects of art;
(xiii) fees payable by Landlord for management of the
Project in excess of five percent (5%) (the "Management. Fee Cap")
of Landlord's gross
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LAKRSHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
rental revenues, adjusted and grossed up to reflect a one hundred
percent (100%) occupancy of the Building with all tenants paying
rent, including base rent, pass-throughs, and parking fees (but
excluding the cost of after hours services or utilities) from the
Project for any calendar year or portion thereof;
(xiv) any costs expressly excluded from Operating
Expenses elsewhere in this Lease;
(xv) rent for any office space occupied by Project
management personnel to the extent the size or rental rate of such
office space exceeds the size or fair market rental value of office
space occupied by management personnel of the Comparable Buildings
in the vicinity of the Building, with adjustment where appropriate
for the size of the applicable project;
(xvi) costs arising from the negligence or willful
misconduct of Landlord or its agents, employees, vendors,
contractors, or providers of materials or services;
(xvii) costs (A) incurred to comply with laws relating
to the removal of Hazardous Material (as defined at Section 23.6
below) which was in existence in the Building or on the Project
prior to the Lease Commencement Date, and was of such a nature that
a federal, State or municipal governmental authority, if it then had
knowledge of the presence of such Hazardous Material, in the state,
and under the conditions that it then existed in the Building or on
the Project, would have then required the removal of such Hazardous
Material or other remedial or containment action with respect
thereto; and (B) costs incurred to remove, remedy, contain, or treat
Hazardous Material, which hazardous material is brought into the
Building or onto the Project after the date hereof by Landlord or
any other tenant of the Project and is of such a nature, at that
time, that a federal, State or municipal governmental authority, if
it had then had knowledge of the presence of such Hazardous
Material, in the state, and under the conditions, that it then
exists in the Building or on the Project, would have then required
the removal of such Hazardous Material or other remedial or
containment action with respect thereto;
(xviii) costs arising from Landlord's charitable or
political contributions;
(xix) any gifts provided to any entity whatsoever,
including, but not limited to, Tenant, other tenants, employees,
vendors, contractors, prospective tenants and agents;
(xx) the cost of any magazine, newspaper, trade or
other subscriptions;
(xxi) any amount paid to Landlord or to subsidiaries or
affiliates of the Landlord for services in the Project to the extent
the same exceeds the cost of such services rendered by qualified,
first-class unaffiliated third parties on a competitive basis;
(xxii) costs arising from Landlord's failure to comply
with any applicable governmental laws or regulations in existence at
the time of the Lease Commencement Date;
(xxiii) costs relating to categories of expenses for the
Project parking areas which were not included in Operating Expenses
during the Base Year, except to the extent the Base Year is
retroactively adjusted to include such categories; and
(xxiv) any entertainment expenses and travel expenses of
Landlord, its employees, agents, partners and affiliates.
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LAKESHORE TOWERS BUILDING II
[Quality Systems, Inc.]
<PAGE>
If Landlord is not furnishing any particular work or service (the cost of
which, if performed by Landlord, would be included in Operating Expenses) to a
tenant who has undertaken to perform such work or service in lieu of the
performance thereof by Landlord, Operating Expenses shall be deemed to be
increased by an amount equal to the additional Operating Expenses which would
reasonably have been incurred during such period by Landlord if it had at its
own expense furnished such work or service to such tenant. If the Project is not
at least ninety-five percent (95%) occupied during all or a portion of the Base
Year or any Expense Year, Landlord shall make an appropriate adjustment to the
components of Operating Expenses for such year to determine the amount of
Operating Expenses that would have been incurred had the Project been
ninety-five percent (95%) occupied; and the amount so determined shall be deemed
to have been the amount of Operating Expenses for such year. Operating Expenses
for the Base Year shall not include market-wide labor-rate increases due to
extraordinary circumstances, including, but not limited to, boycotts and
strikes, and utility rate increases due to extraordinary circumstances
including, but not limited to, conservation surcharges, boycotts, embargoes or
other shortages, or amortized costs relating to capital improvements.
4.2.8 Taxes.
4.2.8.1 Tax Expenses. "Tax Expenses" shall mean all federal,
state, county, or local governmental or municipal taxes, fees, charges or other
impositions of every kind and nature, whether general, special, ordinary or
extraordinary (including, without limitation, real estate taxes, general and
special assessments, transit taxes, leasehold taxes or taxes based upon the
receipt of rent, including gross receipts or sales taxes applicable to the
receipt of rent, unless required to be paid by Tenant, personal property taxes
imposed upon the fixtures, machinery, equipment, apparatus, systems and
equipment, appurtenances, furniture and other personal property used in
connection with the Project, or any portion thereof), which shall be paid or
accrued during any Expense Year (without regard to any different fiscal year
used by such governmental or municipal authority) because of or in connection
with the ownership, leasing and operation of the Project, or any portion thereof
including the parking areas. Tax Expenses shall include, without limitation:
(i) any tax on the rent, right to rent or other
income from the Project, or any portion thereof, or as against the
business of leasing the Project, or any portion thereof;
(ii) any assessment, tax, fee, levy or charge in
addition to, or in substitution, partially or totally, of any
assessment, tax, fee, levy or charge previously included within the
definition of real property tax, it being acknowledged by Tenant and
Landlord that Proposition 13 was adopted by the voters of the State
of California in the June 1978 election ("Proposition 13") and that
assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such services as fire protection, street,
sidewalk and road maintenance, refuse removal and for other
governmental services formerly provided without charge to property
owners or occupants, and, in further recognition of the decrease in
the level and quality of governmental services and amenities as a
result of Proposition 13, Tax Expenses shall also include any
governmental or private assessments or the Project's contribution
towards a governmental or private cost-sharing agreement for the
purpose of augmenting or improving the quality of services and
amenities normally provided by governmental agencies;
(iii) any assessment, tax, fee, levy, or charge
allocable to or measured by the area of the Premises or the Rent
payable hereunder, including, without limitation, any business or
gross income tax or excise tax with respect to the receipt of such
rent, or upon or with respect to the possession, leasing, operating,
management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises, or any portion thereof;
(iv) any assessment, tax, fee, levy or charge, upon
this transaction or any document to which Tenant is a party,
creating or transferring an interest or an estate in the Premises;
and
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(v) all of the real estate taxes and assessments
imposed upon or with respect to the Building and Project. To the
extent such taxes are not currently known, Landlord shall reasonably
estimate the taxes and the Base Year Tax Expenses shall be
adjusted accordingly upon receipt of the actual tax adjustment
based upon such reassessment.
4.2.8.2 Other Costs. Any costs and expenses including,
without limitation, reasonable attorneys' and consultants' fees) incurred in
attempting to protest, reduce or minimize Tax Expenses shall be included in Tax
Expenses in the Expense Year such expenses are incurred. Tax refunds shall be
credited against Tax Expenses and refunded to Tenant regardless of when
received, based on the Expense Year to which the refund is applicable; provided,
however, in no event shall the amount to be refunded Tenant for any such Expense
Year exceed the total amount paid by Tenant as Additional Rent under this
Article 4 for such Expense Year. If Tax Expenses for any period during the Lease
Term or any extension thereof are increased after payment thereof for any
reason, including, without limitation, error or reassessment by applicable
governmental or municipal authorities, Tenant shall pay Landlord upon demand
Tenant's Share of any such increased Tax Expenses included by Landlord as
Building Tax Expenses pursuant to the terms of this Lease. Notwithstanding
anything to the contrary contained in this Section 4.2.8 (except as set forth in
Section 4.2.8.1, above), there shall be excluded from Tax Expenses (i) all
excess profits taxes, franchise taxes, gift taxes, capital stock taxes,
inheritance and succession taxes, estate taxes, federal and state income taxes,
and other taxes to the extent applicable to Landlord's general or net income (as
opposed to rents, receipts or income attributable to operations at the Project),
(ii) any items included as Operating Expenses, and (iii) any items paid by
Tenant under Section 4.5 of this Lease.
4.2.8.3 Base Taxes. The amount of Tax Expenses for the Base
Year attributable to the valuation of the Project, inclusive of tenant
improvements, shall be known as the "Base Taxes." If in any comparison year
subsequent to the Base Year the amount of Tax Expenses decreases below the
amount of Base Taxes for the Premises, then for purposes of all subsequent
comparison years, including the comparison year in which such decrease in Tax
Expenses occurred, the Base Taxes and therefore the Base Year shall be decreased
by an amount equal to the decrease in Tax Expenses.
4.2.9 Tenant's Share. "Tenant's Share" shall mean the percentages
set forth in Section 6 of The Summary. Tenant's Share is calculated by
multiplying the number of rentable square feet of the Premises as set forth in
Section 2 of the Summary, by 100, and dividing the applicable product by the
rentable square feet in the Building. The rentable square feet in the Premises
and Building is measured pursuant to the Building Owners and Managers
Association Standard Method for Measuring Floor Area in Office Buildings,
ANSI/BOMA Z65.1 - 1996 ("BOMA"), provided that the rentable square footage of
the Building shall include all of, and the rentable square footage of the
Premises therefore shall include a portion of, the square footage of the ground
floor Common Areas located within the Building and the Common Area and occupied
space of the portion of the Building or Project, dedicated to the service of the
Building. In the event either the rentable square feet of the Premises and/or
the total rentable square feet of the Building is remeasured, Tenant's Share for
the Premises shall be appropriately adjusted, and, as to the Expense Year in
which such change occurs, Tenant's Share for the Premises for such Expense Year
shall be determined on the basis of the number of days during such Expense Year
that each such Tenant's Share was in effect.
4.3 Allocation of Direct Expenses. The parties acknowledge that the
Building is a part of a multi-building project and that the costs and expenses
incurred in connection with the Project (i.e. the Direct Expenses) should be
shared between the tenants of the Building and the tenants of the other
buildings in the Project. Accordingly, as set forth in Section 4.2 above, Direct
Expenses (which consist of Operating Expenses and Tax Expenses) are determined
annually for the Project as a whole, and a portion of the Direct Expenses, which
portion shall be determined by Landlord in accordance with the CC&Rs, shall be
allocated to the tenants of the Building (as opposed to the tenants of any other
buildings in the Project) and such portion shall be the Building Direct Expenses
for purposes of this Lease (such allocation in accordance with the CC&Rs is
further described in Exhibit C hereto). Such portion of Direct Expenses
allocated to the tenants of the Building shall include all Direct Expenses
attributable solely to the Building and an equitable portion of the Direct
Expenses attributable to the Project as a whole.
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4.4 Calculation and Payment of Additional Rent. If for any Expense Year
ending or commencing within the Lease Term, the applicable Tenant's Share of
Building Direct Expenses for such Expense Year exceeds the applicable Tenant's
Share of Building Direct Expenses applicable to the Base Year for the Premises,
then Tenant shall pay to Landlord, in the manner set forth in Section 4.4.1,
below, and as Additional Rent, an amount equal to the excess (the "Excess).
4.4.1 Statement of Actual Building Direct Expenses and Payment by
Tenant. Landlord shall give to Tenant following the end of each Expense Year, a
statement (the "Statement") which shall state the Building Direct Expenses
incurred or accrued for such preceding Expense Year and which shall indicate the
amount of the Excess. Upon receipt of the Statement for each Expense Year
commencing or ending during the Lease Term, if an Excess is present, Tenant
shall pay, with its next installment of Base Rent due, the full amount of the
Excess for such Expense Year, less the amounts, if any, paid during such Expense
Year as "Estimated Excess," as that term is defined in Section 4.4.2, below, and
if Tenant paid more as Estimated Excess than the actual Excess, Tenant shall
receive a credit in the amount of Tenant's overpayment against Rent next due
under this Lease. The failure of Landlord to timely furnish the Statement for
any Expense Year shall not prejudice Landlord or Tenant from enforcing its
rights under this Article 4. Even though the Lease Term has expired and Tenant
has vacated the Premises, when the final determination is made of Tenant's Share
of Building Direct Expenses for the Expense Year in which this Lease terminates,
if an Excess is present, Tenant shall immediately pay to Landlord such amount,
and if Tenant paid more as Estimated Excess than the actual Excess, Landlord
shall, within thirty (30) days, deliver a check, payable to Tenant in the amount
of the overpayment. The provisions of this Section 4.4.1 shall survive the
expiration or earlier termination of the Lease Term.
4.4.2 Statement of Estimated Building Direct Expenses. In
addition, Landlord shall give Tenant a yearly expense estimate statement (the
"Estimate Statement") which shall set forth Landlord's reasonable estimate (the
"Estimate") of what the total amount of Building Direct Expenses for the
then-current Expense Year shall be and the estimated excess (the "Estimated
Excess") as calculated by comparing the Building Direct Expenses for such
Expense Year, which shall be based upon the Estimate, to the amount of Building
Direct Expenses for the Base Year. The failure of Landlord to timely furnish the
Estimate Statement for any Expense Year shall not preclude Landlord from
enforcing its rights to collect any Estimated Excess under this Article 4, nor
shall Landlord be prohibited from revising any Estimate Statement or Estimated
Excess theretofore delivered to the extent necessary. Thereafter, Tenant shall
pay, with its next installment of Base Rent due, a fraction of the Estimated
Excess for the then-current Expense Year (reduced by any amounts paid pursuant
to the last sentence of this Section 4.4.2). Such fraction shall have as its
numerator the number of months which have elapsed in such current Expense Year,
including the month of such payment, and twelve (12) as its denominator. Until a
new Estimate Statement is furnished (which Landlord shall have the right to
deliver to Tenant at any time), Tenant shall pay monthly, with the monthly Base
Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated
Excess set forth in the previous Estimate Statement delivered by Landlord to
Tenant.
4.5 Taxes and Other Charges for Which Tenant Is Directly Responsible.
4.5.1 Tenant shall be liable for and shall pay ten (10) days
before delinquency, taxes levied against Tenant's equipment, furniture, fixtures
and any other personal property located in or about the Premises. If any such
taxes on Tenant's equipment, furniture, fixtures and any other personal property
are levied against Landlord or Landlord's property or if the assessed value of
Landlord's property is increased by the inclusion therein of a value placed upon
such equipment, furniture, fixtures or any other personal property and if
Landlord pays the taxes based upon such increased assessment, which Landlord
shall have the right to do regardless of the validity thereof but only under
proper protest if requested by Tenant, Tenant shall upon demand repay to
Landlord the taxes so levied against Landlord or the proportion of such taxes
resulting from such increase in the assessment, as the case may be.
4.5.2 If the tenant improvements in the Premises, whether
installed and/or paid for by Landlord or Tenant and whether or not affixed to
the real properly so as to become a part thereof, are assessed for real property
tax purposes at a valuation higher than the valuation at which tenant
improvements conforming to Landlord's "building standard" in other space in the
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Building are assessed, then the Tax Expenses levied against Landlord or the
property by reason of such excess assessed valuation shall be deemed to be taxes
levied against personal property of Tenant and shall be governed by the
provisions of Section 4.5.1, above; provided that Landlord uniformly applies
such excess assessed valuation for (he same period uniformly to all tenants in
the Building.
4.5.3 Notwithstanding any contrary provision herein, Tenant shall
pay prior to delinquency any (i) rent tax or sales tax, service tax, transfer
tax or value added tax, or any other applicable tax on the rent or services
herein or otherwise respecting this Lease, (ii) taxes assessed upon or with
respect to the possession, leasing, operation, management, maintenance,
alteration, repair, use or occupancy by Tenant of the Premises or any portion of
the Project, including the Project parking facility, or (iii) taxes assessed
upon this transaction or any document to which Tenant is a party creating or
transferring an interest or an estate in the Premises.
4.6 Landlord's Books and Records. Within six (6) months after receipt
of a Statement by Tenant, if Tenant disputes the amount of Additional Rent set
forth in the Statement, an independent certified public accountant (which
accountant is a member of a nationally recognized accounting firm, has previous
experience in reviewing financial operating records of landlords of office
buildings, and is retained by Tenant on a non-contingency fee basis)(the "Tenant
Auditor"), designated and paid for by Tenant, may, alter reasonable notice to
Landlord and at reasonable times, inspect Landlord's records with respect to the
Statement at Landlord's offices, provided that Tenant is not then in default
under this Lease and Tenant has paid all amounts required to be paid under the
applicable Estimated Statement and Statement, as the case may be. In connection
with such inspection, Tenant and Tenant's agents must agree in advance to follow
Landlord's reasonable rules and procedures regarding inspections of Landlord's
records, and shall execute a commercially reasonable confidentiality agreement
regarding such inspection. Tenant's failure to dispute the amount of Additional
Rent set forth in any Statement within six (6) months following Tenant's receipt
of such Statement shall be deemed to be Tenant's approval of such Statement and
Tenant, thereafter, waives the right or ability to dispute the amounts set forth
in such Statement. If after such inspection, Tenant still disputes such
Additional Rent, a determination as to the proper amount shall be made, at
Tenant's expense, by an independent certified public accountant (the
"Accountant") selected by Landlord and subject to Tenant's reasonable approval;
provided that if such certification by the Accountant proves that Direct
Expenses were overstated by more than five percent (5%), then the cost of the
Accountant, and the cost of such determination certification, shall be paid for
by Landlord. Any reimbursement amounts determined to be owing by Landlord to
Tenant or by Tenant to Landlord shall be (i) in the case of amounts owing from
Tenant to Landlord, paid within thirty (30) days following such determination,
and (ii) in the case of amounts owing from Landlord to Tenant, credited against
the next payment of Rent due Landlord under the terms of this Lease, or if the
Lease Term has expired, paid to Tenant within thirty (30) days following such
determination, In no event shall this Section 4.6 be deemed to allow any review
of any of Landlord's records by any subtenant of Tenant. Tenant agrees that this
Section 4,6 shall be the sole method to be used by Tenant to dispute the amount
of any Direct Expenses payable or not payable by Tenant pursuant to the terms of
this Lease, and Tenant hereby waives any other rights at law or in equity
relating thereto.
4.7 Security Deposit.
4.7.1 Security Deposit. Upon execution of this Lease, Tenant
shall deposit or cause to be deposited with Landlord a cash sum in the amount
equal Twenty-Eight Thousand One Hundred Ninety and 60/100 Dollars ($28,190.60)
(the "Security Deposit"). Landlord shall hold the Security Deposit as security
for the performance of Tenant's obligations under this Lease. If Tenant defaults
on any provision of this Lease, Landlord may, after such notice as may be
required under this Lease and without prejudice to any other remedy it has,
apply all or a part of the Security Deposit to:
4.7.1.1 Any Rent or other sum in default; or
4.7.1.2 Any expense, loss, or damage that Landlord may
suffer because of Tenant's default.
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4.7.2 Landlord's Transfer of Security Deposit on Transfer of Real
Property. If Landlord disposes of its interests in the Premises, Landlord may
deliver or credit the Security Deposit to Landlord's successor-in-interest in
the Premises and thereupon be relieved of further responsibility with respect to
the Security Deposit.
4.7.3 Restoration of Security Deposit. If Landlord applies any
portion of the Security Deposit pursuant to Section 4.7.1 above, Tenant shall,
within thirty (30) days after demand by Landlord, deposit with Landlord an
amount sufficient to restore the Security Deposit to its original amount.
4.7.4 Interest on Security Deposit. Tenant is not entitled to any
interest on the Security Deposit.
4.7.5 Return of Security Deposit. If Tenant performs every
provision of this Lease to be performed by Tenant, the unused portion of the
Security Deposit shall be returned to Tenant or the last assignee of Tenant's
interest under this Lease within thirty (30) days following the expiration or
termination of the Lease Term.
ARTICLE 5
USE OF PREMISES
5.1 Permitted Use. Tenant shall use the Premises solely for the
Permitted Use set forth in Section 7 of the Summary and Tenant shall not use or
permit the Premises or the Project to be used for any other purpose or purposes
whatsoever without the prior written consent of Landlord, which maybe withheld
in Landlord's sole discretion.
5.2 Prohibited Uses. Tenant further covenants and agrees that Tenant
shall not use, or suffer or permit any person or persons to use, the Premises or
any part thereof for any use or purpose contrary to the provisions of the Rules
and Regulations set forth in Exhibit D, attached hereto, or in violation of the
laws of the United States of America, the State of California, or the
ordinances, regulations or requirements of the local municipal or county
governing body or other lawful authorities having jurisdiction over the Project
including, without limitation, any such laws, ordinances, regulations or
requirements relating to hazardous materials or substances, as those terms are
defined by applicable laws now or hereafter in effect. Tenant shall not do or
permit anything to be done in or about the Premises which will in any way
obstruct or interfere with the rights of other tenants or occupants of the
Building or Project, or injure or annoy them or use or allow the Premises to he
used for any improper, unlawful or objectionable purpose, nor shall Tenant
cause, maintain or permit any nuisance in, on or about the Premises. Tenant
shall comply with, and Tenant's rights and obligations under the Lease and
Tenant's use of the Premises shall be subject and subordinate to, all recorded
easements, covenants, conditions, and restrictions now or hereafter affecting
the Project.
ARTICLE 6
SERVICES AND UTILITIES
6.1 Standard Tenant Services. Landlord shall provide the following
services on all days (unless otherwise stated below) during the Lease Term.
6.1.1 Subject to limitations imposed by all governmental rules,
regulations and guidelines applicable thereto, Landlord shall provide heating,
ventilation and air conditioning ("HVAC") when necessary for normal comfort for
normal office use in the Premises from 8:00 A.M. to 6:00 P.M. Monday through
Friday, and on Saturdays from 8:00 A.M. to Twelve Noon (collectively, the
"Building Hours"), except for the date of observation of New Year's Day,
Independence Day, Labor Day, Memorial Day, Thanksgiving Day, Christmas Day and,
at Landlord's discretion, other locally or nationally recognized holidays
(collectively, the "Holidays).
6.1.2 Landlord shall provide adequate electrical wiring and
facilities for connection to Tenant's lighting fixtures and incidental use
equipment, provided that (i) the connected electrical load of the incidental use
equipment docs not. exceed an average of six (6) watts per usable square foot of
the Premises, and (ii) the connected electrical load of Tenant's
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lighting fixtures does not exceed an average of two (2) walls per usable square
foot of the Premises, which electrical usage shall be subject to applicable laws
and regulations, including Title 24. Tenant shall bear the cost of replacement
of lamps, starters and ballasts for non-Building standard lighting fixtures
within the Premises.
6.1.3 Landlord shall provide city water from the regular Building
outlets for drinking, lavatory and toilet purposes in the Building Common Areas.
6.1.4 Landlord shall provide janitorial services to the Premises
and window washing services in a manner consistent with Comparable Buildings.
6.1.5 Landlord shall provide nonexclusive, non-attended automatic
passenger elevator service during the Building Hours, shall have one elevator
available at all other times, including on the Holidays.
6.1.6 Landlord shall provide nonexclusive freight elevator service
subject to scheduling by Landlord.
Tenant shall cooperate fully with Landlord at all times and abide by all
regulations and requirements that Landlord may reasonably prescribe for the
proper functioning and protection of the HVAC, electrical, mechanical and
plumbing systems.
6.2 Overstandard Tenant Use.
6.2.1 Non-Electrical Usage. Tenant shall not, without Landlord's
prior written consent, use heat-generating machines, machines other than normal
fractional horsepower office machines, or equipment or lighting other than
Building standard lights in the Premises, which may affect the temperature
otherwise maintained by the air conditioning system or increase the water
normally furnished for the Premises by Landlord pursuant to the terms of Section
6.1 of this Lease. If Tenant uses water, heat or air conditioning in excess of
that supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall
pay to Landlord, upon billing, the actual cost of such excess consumption, the
cost of the installation, operation, and maintenance of equipment which is
installed in order to supply such excess consumption, and the cost of the
increased wear and tear on existing equipment caused by such excess consumption;
and Landlord may install devices to separately meter any increased use and in
such event Tenant shall pay the cost of such increased use directly to Landlord,
on demand, at the rates charged by the public utility company furnishing the
same, including the cost of such additional metering devices. If Tenant desires
to use HVAC during non-Building Hours, Tenant shall give Landlord such prior
notice, if any, as Landlord shall from time to time establish as appropriate, of
Tenant's desired use in order to supply HVAC, and Landlord shall supply HVAC to
the Premises. The cost of after-hours HVAC is currently Sixty Dollars ($60) per
hour, per floor. Such cost shall increase hereafter to the extent of increases
in the direct and indirect costs to Landlord of providing such HVAC services.
The cost of HVAC supplied by Landlord during non-Building Hours shall be paid by
Tenant as Additional Rent.
6.2.2 Electrical Usage. If in any month Tenant uses electricity
(not including any electricity consumed in connection with the operation of the
Building's main HVAC system) in excess of the "Electricity Usage Standard" (as
defined below), Tenant shall pay to Landlord, upon billing, Landlord's cost of
such excess consumption and the reasonable cost of the installation, operation,
and maintenance of equipment which is required to be installed to supply such
excess capacity and/or consumption to Tenant. For purposes hereof, the
"Electricity Usage Standard" shall be an average of five (5) watts per rentable
square foot of the Premises of actual consumption, on a monthly Business Hours
basis. Tenant's use of electricity shall not exceed the capacity of the feeders
to the Project or the risers or wiring installation (which capacity is eight (8)
watts per rentable square fool) and Tenant shall promptly discontinue any such
excess use promptly following receipt of notice of the same from Landlord. In
those cases where Landlord proposes to install equipment to be paid for by
Tenant or otherwise is proposing to require Tenant to pay for any cost related
to such excess consumption, Tenant may require Landlord, as a condition of such
charge by Landlord, to reasonably demonstrate that Landlord's actions and such
charges are consistent with the requirement of this Lease,
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