SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Soliciting Material Under Rule
|_| Confidential, For Use of the 14a-12
Commission Only (as permitted
by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
Quality Systems, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________________________
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
________________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
________________________________________________________________________________
5) Total fee paid:
________________________________________________________________________________
|_| Fee paid previously with preliminary materials:
________________________________________________________________________________
|_| Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
1) Amount previously paid:
________________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
________________________________________________________________________________
3) Filing Party:
________________________________________________________________________________
4) Date Filed:
________________________________________________________________________________
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QUALITY SYSTEMS INC.
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18191 Von Karman Avenue, Suite 450
Irvine, California 92612
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 21, 2005
To the Shareholders of Quality Systems, Inc.:
The Annual Meeting of Shareholders of Quality Systems, Inc. (the
"Company") will be held at the Hyatt Regency Hotel located at 17900 Jamboree
Road in Irvine, California, on September 21, 2005 at 1:00 p.m. Pacific Time, for
the following purposes:
1. to elect eight (8) persons to serve as directors of the Company
until the next annual meeting. The nominees for election to the
Board of Directors are named in the attached Proxy Statement, which
is a part of this Notice;
2. to approve the Company's 2005 Stock Option and Incentive Plan;
3. to ratify the appointment of Grant Thornton, LLP as independent
public accountants of the Company for the fiscal year ending March
31, 2006;
4. to approve the amendment to the Company's Articles of Incorporation
increasing the level of its authorized shares, and
5. to transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
Only shareholders of record at the close of business on July 27, 2005, are
entitled to notice of and to vote at the Annual Meeting and at any adjournments
of the Annual Meeting. Your vote is very important. If you have any questions or
need assistance in voting your shares, please call the firm assisting the
Company in the solicitation of proxies:
MacKenzie Partners, Inc.
105 Madison Avenue
New York, New York 10016
Telephone: (212) 929-5500
All shareholders are cordially invited to attend the Annual Meeting in
person. Whether or not you plan to attend the Annual Meeting, please sign the
enclosed WHITE PROXY CARD and return it in the enclosed addressed envelope. Your
promptness in returning the WHITE PROXY CARD will assist in the expeditious and
orderly processing of the proxy and will assure that you are represented at the
Annual Meeting. If you return your WHITE PROXY CARD, you may nevertheless attend
the Annual Meeting and vote your shares in person.
By Order of the Board of Directors,
QUALITY SYSTEMS, INC.
Irvine, California /s/ Paul Holt
July 29, 2005 Corporate Secretary
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QUALITY SYSTEMS INC.
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18191 Von Karman Avenue, Suite 450
Irvine, California 92612
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ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 21, 2005
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PROXY STATEMENT
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SOLICITATION OF PROXIES
The accompanying proxy is solicited by the Board of Directors (the
"Board") of Quality Systems, Inc. (the "Company") for use at the Company's
Annual Meeting of Shareholders to be held at the Hyatt Regency Hotel in Irvine,
California, located at 17900 Jamboree Road, Irvine, California, on September 21,
2005 at 1:00 p.m. Pacific Time, and at any and all adjournments thereof. All
shares represented by each properly executed and unrevoked proxy received in
advance of the Annual Meeting will be voted in the manner specified therein.
Any shareholder has the power to revoke his or her proxy at any time
before it is voted. A proxy may be revoked by delivering a written notice of
revocation to the Secretary of the Company, by submitting prior to or at the
Annual Meeting a later dated proxy executed by the person executing the prior
proxy, or by attendance at the Annual Meeting and voting in person by the person
executing the proxy.
Any shareholder, who would like to vote in person at the Annual Meeting
and owns shares in street name, should inform his/her broker bank of such plans
and request a legal proxy from the broker. Such shareholders will need to bring
the legal proxy with them to the Annual Meeting along with a valid picture
identification such as a driver's license or passport in addition to
documentation indicating share ownership. Such shareholders who do not receive
the legal proxy in time, should bring with them to the Annual Meeting their most
recent brokerage account statement showing that they owned Quality Systems, Inc.
stock as of the record date. Upon submission of proper identification and
ownership documentation, the Company will be able to verify ownership of its
Common Stock and admit the shareholder to the Annual Meeting; however, such
shareholder will not be able to vote his/her shares at the Annual Meeting
without a legal proxy. Shareholders are advised that if they own shares in
street name and request a legal proxy, any previously executed proxy will be
revoked, and such shareholder's vote will not be counted unless he/she appears
at the Annual Meeting and votes in person.
This proxy statement, the accompanying WHITE PROXY CARD and the Company's
Annual Report are being mailed to the Company's shareholders on or about August
15, 2005. The cost of soliciting proxies will be borne by the Company. The
solicitation will be made by mail and expenses will include reimbursement paid
to brokerage firms and others for their expenses in forwarding solicitation
material regarding the Annual Meeting to beneficial owners of the Company's
Common Stock. Further solicitation of proxies may be made by telephone or oral
communications with some shareholders. Such
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further solicitations would be made by the Company's regular employees who will
not receive additional compensation for the solicitation. Additionally, the
Company has engaged the firm of MacKenzie Partners, Inc. to assist in the
solicitation of proxies. Under the term of its agreement, the services of
MacKenzie Partners, Inc. include the distribution of materials to
securityholders, providing information to securityholders (including direct
contact with securityholders) from the materials prepared by the Company,
analysis of beneficial ownership of the Company and providing such other
advisory services as may be requested from time to time by the Company. The
Company estimates that its payment to MacKenzie Partners, Inc. will be
approximately $75,000 plus expenses. Although no precise estimate can be made at
the present time, the Company currently estimates that the total expenditures
relating to the proxy solicitation incurred by the Company will be approximately
$100,000.
All share amounts set forth in this Proxy Statement have been adjusted to
give effect to a 2 for 1 stock split effective March 28, 2005 and payable to
shareholders of record as of March 4, 2005.
OUTSTANDING SHARES AND VOTING RIGHTS
Only holders of record of the 13,124,860 shares of the Company's Common
Stock outstanding at the close of business on July 27, 2005, are entitled to
notice of and to vote at the Annual Meeting or any adjournment thereof. A
majority of the outstanding shares, represented in person or by proxy, will
constitute a quorum for the transaction of business. All proxies delivered to
the Company will be counted in determining the presence of a quorum, including
those providing for abstention or withholding of authority and those delivered
by brokers voting without beneficial owner instruction and exercising a non-vote
on certain matters.
With respect to Proposal No. 1, the eight nominees for director receiving
the highest number of affirmative votes will be elected. If additional persons
are nominated for election as directors, the proxy holders set forth herein
intend to vote all proxies received by them in accordance with the instructions
set forth in such proxies and, if cumulative voting is invoked as described
below, proportionately according to the votes cast and not withheld in the
proxies received and held by the proxy holders at the time such proxies are to
be voted.
Approval of any of Proposals Nos. 2 and 3 requires a vote that satisfies
two criteria: (i) the affirmative vote of a majority of common stock present or
represented by proxy and voting on the proposal and (ii) the affirmative vote of
a majority of the quorum as referenced above. For purposes of these proposals,
abstentions and broker non-votes will not affect the outcome under clause (i),
which recognizes only actual votes for or against the proposal. Abstentions and
broker non-votes may affect the outcome under clause (ii) because abstentions
and broker non-votes are counted for purposes of determining the quorum and have
the effect of a vote against the proposal. Approval of Proposal No. 4 requires
the affirmative vote of a majority of the outstanding shares of common stock
whether or not present or represented by proxy at the Annual Meeting. For
purposes of Proposal No. 4, abstentions and broker non-votes will have the same
effect as votes against Proposal No. 4.
Each shareholder will be entitled to one vote, in person or by proxy, for
each share of Common Stock held of record on the record date, except that all
shareholders have cumulative voting rights and in the event any shareholder
gives notice at the Annual Meeting, prior to the voting, of an intention to
cumulate his, her or its votes in the election of directors, then all
shareholders entitled to vote at the Annual Meeting may cumulate their votes in
the election of directors. Cumulative voting means that a shareholder has the
right to give any one candidate whose name has been properly placed in
nomination prior to the voting a number of votes equal to the number of
directors to be elected multiplied by the number of shares such shareholder
would otherwise be entitled to vote, or to distribute such votes on the same
principle among as many properly nominated candidates (up to the number of
persons to be elected) as the shareholder may wish. The proxy being solicited by
the Board confers upon the proxy holders the
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authority to cumulate votes at the instruction and discretion of the Board. In
the event cumulative voting is invoked, the Board has instructed and directed
the proxy holders to cast the cumulated votes among nominees proportionately
according to the votes cast and not withheld in the proxies received and held by
the proxy holders at the time such proxies are to be voted.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of July 27, 2005 by (i)
each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's current directors
and nominees for director, (iii) each of the Named Executive Officers (as
hereinafter defined), and (iv) all current directors and Named Executive
Officers of the Company as a group:
Number of Shares of Common Stock Percent of Common Stock
Name of Beneficial Owner(1) Beneficially Owned(2)(4)(5) Beneficially Owned(3)(4)
--------------------------- --------------------------- ------------------------
Janet Razin and Sheldon Razin 2,666,440 20.30%
Ahmed Hussein 2,315,800 17.63%
Louis Silverman 47,172 *
Patrick Cline 46,500 *
Jonathan Javitt 16,074 *
William V. Botts 12,000 *
Maurice J. DeWald 12,000 *
Vincent J. Love 12,000 *
Steven T. Plochocki 12,000 *
Paul Holt 6,000 *
Gregory Flynn 2,310 *
All directors and Named Executive Officers as a group
(11 persons, including those named above) 5,148,296 38.85%
* Less than 1%.
1. Unless otherwise indicated, the address is c/o Quality Systems, Inc.,
18191 Von Karman Avenue, Suite 450, Irvine, California 92612.
2. Unless otherwise indicated, to the Company's knowledge, the persons named
in the table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws where
applicable.
3. Applicable percentage ownership is based on 13,124,860 shares of Common
Stock outstanding as of July 27, 2005. Any securities not outstanding but
subject to options exercisable as of July 27, 2005 or exercisable within
60 days after such date are deemed to be outstanding for the purpose of
computing the percentage of outstanding Common Stock beneficially owned by
the person holding such options but are not deemed to be outstanding for
the purpose of computing the percentage of Common Stock beneficially owned
by any other person.
4. Includes shares of Common Stock subject to stock options which were
exercisable as of July 27, 2005 or exercisable within 60 days after July
27, 2005, and are, respectively, as follows: Mr. Razin, 12,000 shares; Mr.
Hussein, 12,000 shares; Mr. Silverman, 29,972 shares; Mr. Cline, 10,000
shares; Mr. Flynn, 2,250 shares; Mr. Holt, 2,000 shares; Mr. Botts, 12,000
shares; Mr. DeWald, 12,000 shares; Mr. Javitt, 12,000 shares; Mr. Love,
12,000 shares; Mr. Plochocki, 12,000 shares; and all directors and Named
Executive Officers as a group, 128,222 shares.
5. All share amounts set forth in this Proxy Statement have been adjusted to
give effect to a 2 for 1 stock split effective March 28, 2005 and payable
to shareholders of record as of March 4, 2005.
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ELECTION OF DIRECTORS
(Proposal No. 1)
Directors are elected at each Annual Meeting of Shareholders and hold
office until the next Annual Meeting and their respective successors are duly
elected and qualified. Since May 25, 2005, the full Board of Directors has
consisted of nine directors. On July 28, 2005, the Board approved an amendment
to the Company's Bylaws to set the size of the Board at eight persons effective
as of the expiration of the current term of the Board and the election of
directors at the 2005 Annual Shareholders' Meeting. Certain information with
respect to the eight nominees who will be presented at the Annual Meeting by the
Board of Directors for election as directors is set forth below. Although it is
anticipated that each nominee will be available to serve as a director, should
any nominee become unavailable to serve, the proxies will be voted for such
other person as may be or has been designated by the Company's Board of
Directors.
Unless the authority to vote for directors has been withheld in the proxy,
the persons named in the enclosed proxy intend to vote at the Annual Meeting for
the election of the nominees presented below. However, discretionary authority
to cumulate votes represented by proxies and to cast such votes for the nominees
named below is solicited by the Board because, in the event one or more of the
Company's shareholders demand that cumulative voting apply to the election of
the directors, the Board has instructed and directed the proxy holders named in
the enclosed proxy to cumulate votes proportionately according to the votes cast
and not withheld in the proxies received and held by the proxy holders at the
time such proxies are to be voted.
In the election of directors, assuming a quorum is present, the eight
nominees receiving the highest number of votes cast at the meeting will be
elected directors. Proxies specifying "Withhold Authority" will be counted for
purposes of determining whether a quorum is present, as will proxies delivered
by brokers voting without beneficial owner instruction and exercising a non-vote
on certain matters.
Based on definitions of independence established by The Nasdaq Stock
Market, Inc. ("Nasdaq") as well as under guidelines established in the Company's
Bylaws, Messrs. Botts, DeWald, Javitt, Love, Plochocki, and Razin qualify for
consideration as an independent director. Messrs. Cline and Silverman, members
of the Company's management team, are considered non-independent directors.
The Nasdaq independence definition includes a series of objective tests,
such as that the director is not an employee of the Company and has not engaged
in various types of business dealings with the Company. In addition, as further
required by Nasdaq rules, the Board has made a subjective determination as to
each independent director that no relationships exist which, in the opinion of
the Board, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director. In making these determinations, the
directors reviewed and discussed information provided by the directors and the
Company with regard to each director's business and personal activities as they
may relate to the Company and the Company's management. The independent members
of the Board of Directors will meet periodically in executive session without
management. These meetings have occurred (no members of management were on the
Board during the past fiscal year and during the period until May 25, 2005) and
they will occur at least once per year in the future.
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YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" EACH OF THE
NOMINEES NAMED BELOW:
William V. Botts (69) was a director of Summit Designs from 1996 to 2000.
He served as Chairman and Chief Executive Officer of Summit Designs from July
1999 to April 2000 when the company merged with a larger private company and
became publicly traded on Nasdaq as Innovada which he then served as its
director through July 2002. Since 1993 he has been engaged as an independent
consultant to business in areas related to problem solving, operations,
strategic planning, mergers and/or acquisitions. He has held numerous other past
and present directorship and chairmanship positions with privately held
companies.
Patrick B. Cline (44) currently serves as President of the Company's
NextGen Healthcare Information Systems Division. He served as the Company's
interim Chief Executive Officer for the April - July 2000 period. Mr. Cline was
a co-founder of Clinitec; a company acquired by Quality Systems, Inc. in 1996,
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. Mr. Cline
was appointed a director of the Company by the Board on May 25, 2005.
Maurice J. DeWald (65) is and has been since 1992 the Chief Executive
Officer of Verity Financial Group, Inc., a financial advisory firm. He is a
director of Advanced Materials Group, Inc. and Mizuho Corporate Bank of
California. He was an audit partner/managing partner with the international
accounting firm KPMG, LLP and was with that firm from 1962 to 1991. He holds a
B.B.A. from the University of Notre Dame and has a California C.P.A.
professional certification.
Jonathan Javitt (48) is the Co-Founder of Health Directions, LLC and has
served as its Vice Chairman since 1998. Prior to his current position he was
Co-Founder & Chief Scientific Officer of Active Health Management from 1999 to
2004. Additionally, Dr. Javitt was Co-Founder & Director of Coderyte, Inc. from
1999 to 2004 and Founder & Chairman of Certitude, Inc from 1994 to 1997. Between
2003 and 2005 he served as chair of the Health Subcommittee of the President's
Information Technology Advisory Committee, White House Office of Science and
Technology Policy. He was previously Vice Chairman/Chief Science Officer of
eMedx (later Active Health) from June 1998 to April 2004. He has held senior
executive positions with United Health Care (UNH) from 1997 to 1998 and First
Consulting Group (FCGI) from 2004 to 2005. He holds an A.B. from Princeton
University, obtained his M.D. from Cornell University, and holds a Masters
Degree in Public Health from Harvard University.
Vincent J. Love (64) is the managing partner of Kramer, Love & Cutler,
LLP, a financial consulting group. He was employed by the accounting firm Ernst
& Young from 1967 to 1994, and served as a partner of that firm from 1979 to
1994. He is a member of Counsel, the governing body, of the American Institute
of Certified Public Accountants and an honorary member of the Executive
Committee of the American Arbitration Association. He achieved the rank of
Captain in the U.S. Army, has a B.B.A. from the City College of New York, and is
a New York, Ohio, and Connecticut C.P.A.
Steven T. Plochocki (53) joined Trinity Hospice, a national hospice
provider, as Chief Executive Officer and board member in October 2004. Prior to
joining Trinity Hospice, he was Chief Executive Officer of InSight, a national
provider of diagnostic imaging services from November 1999 to August
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2004. Previously he was Chief Executive Officer of Centratex Support Services,
Inc., a support services company for the healthcare industry and had previously
held other senior level positions with healthcare industry firms. He holds B.A.
in Journalism and Public Relations from Wayne State University and a Master's
degree in Business Management from Central Michigan University.
Sheldon Razin (67) is the founder of the Company and has served as its
Chairman of the Board since the Company's inception in 1974. He served as the
Company's Chief Executive Officer from 1974 until April 2000. Since its
inception until April 2000, he has also served as the Company's President,
except for the period from August 1990 to August 1991. Additionally, Mr. Razin
served as Treasurer from the Company's inception until October 1982. Prior to
founding the Company, he held various technical and managerial positions with
Rockwell International Corporation and was a founder of the Company's
predecessor, Quality Systems, a sole proprietorship engaged in the development
of software for commercial and space applications and in management consulting
work. Mr. Razin holds a B.S. degree in Mathematics from the Massachusetts
Institute of Technology.
Louis E. Silverman (46) 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. Mr. Silverman was appointed a director of the Company by the Board on
May 25, 2005.
BOARD OF DIRECTORS MEETINGS AND RELATED MATTERS
The Company's Bylaws require that at least a majority of the members of
the Board shall be independent directors. The Bylaws state that 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
subsidiary of the Company in excess of $60,000 during the current or
any of the past three fiscal years, other than for 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:
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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
(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.
During the fiscal year ended March 31, 2005, the Board held 12 meetings.
There were no actions taken by unanimous written consent. No director standing
for re-election to the Board attended less than 75% of the aggregate of all
meetings of the Board and all meetings of committees of the Board upon which he
served.
This year's Board nominees no longer include Mr. Ahmed Hussein, a current
member of the Board. The Company recognizes that with his current holdings of
approximately 17.6% of the Company's shares, it is likely that Mr. Hussein could
secure himself a seat on the Board by invoking cumulative voting. Nevertheless,
in conducting its review and analysis, the Company's Nominating Committee and
its Board took note of a variety of matters that weighed against Mr. Hussein's
renomination including, among other things, his actions as a member of the Board
and his recently filed Schedule 13D in which he makes numerous allegations with
which the Company disagrees. All of the Company's Board members other than Mr.
Hussein believe that Board actions referenced by Mr. Hussein have been
considered and voted upon in concert with the Board's business judgment, the
Company's Bylaws and applicable law.
On July 7, 2005, Mr. Hussein filed a Schedule 13D with the Securities and
Exchange Commission and sent a written notice to the Company informing the
Company that, among other things, he may cumulate his votes and may seek to
elect one or more of two independent director nominees (in addition to himself)
at the Annual Meeting.
In light of Mr. Hussein's schedule 13D filing, on July 18, 2005 the Board
formed a Special Committee. Among other things, the Special Committee has been
delegated all powers of the Board in connection with the solicitation and voting
of proxies at the annual meeting. The Special Committee consists of the
following directors: William Botts, Patrick Cline, Maurice DeWald, Jonathan
Javitt, Vincent Love, Steven Plochocki, Sheldon Razin, and Lou Silverman.
Additionally, Mr. Hussein declined to complete the Company's 2005
Director's Questionnaire. Therefore, this Proxy Statement was prepared without
the benefit of any additional information that may have been included if his
Questionnaire had been completed and returned to the Company.
The Board has an Audit Committee which since September 21, 2004 has
consisted of Messrs. DeWald, Love, and Botts. The Audit Committee is comprised
entirely of "independent" (as defined in Rule 4200(a)(15) of the Nasdaq listing
standards) directors and operates under a written charter adopted by the Board.
The duties of the Audit Committee include meeting with the independent public
accountants of the Company to review the scope of the annual audit and to review
the quarterly and annual financial statements of the Company before the
statements are released to the Company's
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shareholders. The Audit Committee also evaluates the independent public
accountants' performance and makes recommendations to the Board as to whether
the independent public accounting firm should be retained by the Company for the
ensuing fiscal year. In addition, the Audit Committee reviews the Company's
internal accounting and financial controls and reporting systems practices.
During the fiscal year ended March 31, 2005, the Audit Committee held seven
meetings. The Audit Committee's current charter, adopted January 29, 2004, is
included as Appendix A to the Company's 2004 Proxy Statement. The Audit
Committee and Board have confirmed that the Audit Committee does and will
continue to include at least three independent members. The Audit Committee and
the Board have confirmed that Mr. DeWald meets applicable Nasdaq listing
standards for designation as an "Audit Committee Financial Expert" and being for
being "independent."
The Board has a Nominating Committee which since September 21, 2004 has
consisted of Messrs. Plochocki, Javitt, and Love. The Nominating Committee is
responsible for identifying and recommending to the Board direct nominee
candidates and is composed entirely of independent directors. The Nominating
Committee will consider candidate nominees for election as director who are
recommended by shareholders. Recommendations should be sent to the Secretary of
the Company and should include the candidate's name and qualifications and a
statement from the candidate that he or she consents to being named in the Proxy
Statement and will serve as a director if elected. In order for any candidate to
be considered by the Nominating Committee and, if nominated, to be included in
the Proxy Statement, such recommendation must be received by the Secretary not
less than 150 days prior to the anniversary date of the Company's most recent
annual meeting of shareholders
The Nominating Committee believes that it is desirable that directors
possess an understanding of the Company's business environment and have the
knowledge, skills, expertise and such diversity of experience that the Board's
ability to manage and direct the affairs and business of the Company is
enhanced. Additional considerations may include an individual's capacity to
enhance the ability of committees of the Board to fulfill their duties and/or
satisfy any independence requirements imposed by law, regulation or listing
requirements.
The Nominating Committee may receive suggestions from current Board
members, Company executive officers or other sources, which may be either
unsolicited or in response to requests from the Nominating Committee for such
candidates. The Nominating Committee may also, from time to time, engage firms
that specialize in identifying director candidates.
Once a person has been identified by the Nominating Committee as a
potential candidate, the Nominating Committee may collect and review publicly
available information regarding the person to assess whether the person should
be considered further. If the Nominating Committee determines that the candidate
warrants further consideration, the Chairman or another member of the Nominating
Committee may contact the person. Generally, if the person expresses a
willingness to be considered and to serve on the Board, the Nominating Committee
may request information from the candidate, review the person's accomplishments
and qualifications and may conduct one or more interviews with the candidate.
The Nominating Committee may consider all such information in light of
information regarding any other candidates that the Nominating Committee might
be evaluating for nomination to the Board. Nominating Committee members may
contact one or more references provided by the candidate or may contact other
members of the business community or other persons that may have greater
first-hand knowledge of the candidate's accomplishments. With the nominee's
consent, the Nominating Committee may also engage an outside firm to conduct
background checks on candidates as part of the nominee evaluation process. The
Nominating Committee's evaluation process does not vary based on the source of
the recommendation, though in the case of a shareholder nominee, the Nominating
Committee and/or Board may take into consideration the number of shares held by
the recommending shareholder and the length of time that such shares have been
held.
10
In compiling the Board slate appearing in this Proxy Statement, nominee
referrals as well as nominee recommendations were received from existing
directors and members of management - both solicited and unsolicited. No paid
consultants were engaged by the Company, the Board or any of its committees for
the purposes of identifying qualified, interested Board candidates.
During the fiscal year ended March 31, 2005 the Nominating Committee held
two meetings. The Nominating Committee's current charter, while not posted on
the Company's website, is included as Appendix B to the Company's 2004 Proxy
Statement.
The Board has a Compensation Committee which since September 21, 2004 has
consisted of Messrs. Botts, DeWald, and Javitt. The Compensation Committee is
composed entirely of independent directors, and is 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
the Company's compensation plans applicable to both senior management and the
Board (including committees thereof). The Compensation Committee establishes
compensation policies applicable to the Company's executive officers. During the
fiscal year ended March 31, 2005, the Compensation Committee held nine meetings.
The Board has a Transaction Committee which since September 21, 2004 has
consisted of Messrs. Javitt, Botts, and Plochocki. The Transaction Committee is
responsible for considering and making recommendations to the Company's Board
with respect to all proposals involving (i) a change in control of the Company
or (ii) the purchase or sale of assets constituting more than 10% of the
Company's total assets. The Transaction Committee is composed entirely of
independent directors. During the fiscal year ended March 31, 2005, the
Transaction Committee held five meetings.
Under the Company's Bylaws, 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 ("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. The Lead Director
shall assist the Board in assuring compliance with the Company's 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 Board, and or 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.
Directors of the Company who are also employees of the Company are not
compensated for their services as directors or committee members. Under the
terms of the Company's Director Compensation Program, all non-employee directors
of the Company shall receive a retainer of $24,000 per year, plus a fee of
$2,000 per meeting of the Board attended. Directors who serve on a committee of
the Board shall receive a fee of $1,000 per committee meeting attended. Board
members traveling cross country to attend a Board meeting or committee meeting
shall receive an additional fee of $1,000. In addition to the cash remuneration
above, each newly elected nonemployee director shall receive 12,000 options to
purchase Common Stock of the Company upon election to the Board. For purposes of
the Director Compensation Program, all nonemployee directors elected at the
September 21, 2004, shareholder's meeting were deemed newly elected. Thereafter,
each nonemployee director reelected to the Board shall receive 10,000 options to
purchase Common Stock of the Company upon each annual reelection date. The
options are
11
priced at the fair market value of the Company's Common Stock on the date of
grant, fully vest in three months from the date of grant, and expire seven years
from the date of grant.
Interests of Participants
Each of the Company's directors is eligible to participate in the 2005
Stock Option and Incentive Plan. The names, occupations and business addresses
of each director is set forth below. Also included below is information
concerning all securities of the Company purchased or sold by each director
within the past two years, the dates on which they were purchased or sold and
the amount purchased or sold on each such date.
-----------------------------------------------------------------------------------------------------------------------
Name Occupation and Business Address Purchases of Common Stock: Sales of Common Stock:
# of shares (date) # of shares (date)
-----------------------------------------------------------------------------------------------------------------------
William Botts Consultant,
37 Desert Highlands Dr., -- --
Henderson, NV 89052
-----------------------------------------------------------------------------------------------------------------------
Patrick Cline President, NextGen
Healthcare Information
Systems Division, 795 28,000 (10/28/03)
Horsham Road
Horsham, Pennsylvania 19044 8,500 (11/08/04) 35,650 (10/31/03)
-----------------------------------------------------------------------------------------------------------------------
Maurice DeWald President,
Verity Financial Group, Inc.,
19200 Von Karman Ave., -- --
Suite 400,
Irvine, CA 92612
-----------------------------------------------------------------------------------------------------------------------
Ahmed Hussein (retired)
Ahmed Hussein Hilton World Residence
1191 Corniche El Nil 9,000 (8/12/04) --
Suite 301
Cairo, Egypt
-----------------------------------------------------------------------------------------------------------------------
Jonathan Javitt, M.D. Chairman and CEO, Health Directions,
1700 Pennsylvania Ave.,
Suite 400, 4,000 (6/17/05) --
Washington, D.C. 20006
-----------------------------------------------------------------------------------------------------------------------
Vincent Love Partner, Kramer Love & Cutler, LLP,
675 Third Ave., -- --
New York, NY 10017
-----------------------------------------------------------------------------------------------------------------------
Steven Plochocki Chief Executive Officer,
Trinity Hospice, Inc.,
14180 Dallas Parkway, Suite 800, -- --
Dallas, TX 75254
-----------------------------------------------------------------------------------------------------------------------
100,000 (11/11/03)
Sheldon Razin Founder, Chairman of the Board, 100,000 (11/13/03)
Quality Systems, Inc., 64,000 (6/10/04) 50,000 (11/28/03)
18191 Von Karman Ave., Suite 450, 200,000 (11/16/04)
Irvine, CA 92612 32,000 (12/03/04)
-----------------------------------------------------------------------------------------------------------------------
12
-----------------------------------------------------------------------------------------------------------------------
60,200 (11/4/03) 60,200 (11/4/03)
Louis Silverman (1) Chief Executive Officer and President, 17,218 (11/5/03) 17,218 (11/5/03)
Quality Systems, Inc., 5,000 (11/12/03) 5,000 (11/12/03)
18191 Von Karman Ave., Suite 450, 1,810 (11/13/03) 1,810 (11/13/03)
Irvine, CA 92612 10,000 (8/2/04) 10,000 (8/2/04)
2,344 (8/9/04) 2,344 (8/9/04)
5,988 (8/10/04) 5,988 (8/10/04)
174 (8/11/04) 174 (8/11/04)
1,494 (8/12/04) 1,494 (8/12/04)
2,020 (8/16/04) 2,020 (8/16/04)
7,980 (8/17/04) 7,980 (8/17/04)
10,000 (8/23/04) 10,000 (8/23/04)
5,600 (9/7/04) 5,600 (9/7/04)
8,820 (9/8/04) 8,820 (9/8/04)
5,580 (9/9/04) 5,580 (9/9/04)
10,000 (9/13/04) 10,000 (9/13/04)
10,000 (9/20/04) 10,000 (9/20/04)
800 (9/29/04) 800 (9/29/04)
200 (9/30/04) 200 (9/30/04)
9,000 (10/1/04) 9,000 (10/1/04)
10,000 (10/4/04) 10,000 (10/4/04)
2,020 (10/18/04) 2,020 (10/18/04)
1,000 (10/19/04) 1,000 (10/19/04)
2,980 (10/21/04) 2,980 (10/21/04)
14,000 (10/22/04) 14,000 (10/22/04)
4,000 (10/25/04) 4,000 (10/25/04)
6,000 (10/27/04) 6,000 (10/27/04)
7,000 (11/1/04) 7,000 (11/1/04)
1,486 (11/2/04) 1,486 (11/2/04)
1,514 (11/2/04) 1,514 (11/2/04)
4,000 (11/8/04) 4,000 (11/8/04)
6,000 (11/9/04) 6,000 (11/9/04)
6,000 (11/15/04) 6,000 (11/15/04)
4,000 (11/16/04) 4,000 (11/16/04)
10,000 (11/22/04) 10,000 (11/22/04)
10,000 (11/29/04) 10,000 (11/29/04)
6,152 (12/6/04) 6,152 (12/6/04)
2,206 (12/6/04) 2,206 (12/6/04)
1,642 (12/7/04) 1,642 (12/7/04)
200 (12/17/04) 200 (12/17/04)
4,300 (12/27/04) 4,300 (12/27/04)
-----------------------------------------------------------------------------------------------------------------------
13
-----------------------------------------------------------------------------------------------------------------------
13,512 (12/28/04) 13,512 (12/28/04)
388 (12/28/04) 388 (12/28/04)
10,398 (12/29/04) 10,398 (12/29/04)
1,202 (12/30/04) 1,202 (12/30/04)
10,000 (1/3/05) 10,000 (1/3/05)
20,000 (1/18/05) 20,000 (1/18/05)
2,200 (1/24/05) 2,200 (1/24/05)
2,000 (1/25/05) 2,000 (1/25/05)
-----------------------------------------------------------------------------------------------------------------------
(1) All sales by Mr. Silverman during 2004 and 2005 were made pursuant to a
10b5-1 trading plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No director or executive officer of the Company is known by the Company to
serve as an officer, director or member of a compensation committee of any other
entity for which an executive officer or director thereof is also a member of
the Company's Board.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain compensation information for the
three fiscal years ended March 31, 2005, 2004, and 2003, respectively, by the
Chief Executive Officer and the other highest paid executive officers of the
Company (up to four) serving as such at the end of the 2005 fiscal year whose
aggregate total annual salary and bonus for such year exceeded $100,000 (the
"Named Executive Officers").
14
Summary Compensation Table
--------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Awards
------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options Compensation ($)(1)
--------------------------------------------------------------------------------------------------------------------
Louis Silverman
Chief Executive Officer and 2005 289,042 144,521 85,000 2,113
President 2004 278,500 139,250 -- 2,000
2003 262,937 103,602 -- 2,000
--------------------------------------------------------------------------------------------------------------------
Patrick Cline
President, NextGen Healthcare 2005 303,245 280,110 125,000 2,929
Information Systems Division 2004 257,500 196,500 18,000 2,000
2003 243,287 118,250 -- 2,000
--------------------------------------------------------------------------------------------------------------------
Gregory Flynn
Executive Vice President, 2005 202,167 20,217 38,750 4,155
General Manager of QSI Division 2004 187,500 18,810 10,000 4,063
2003 180,000 -- -- 1,800
--------------------------------------------------------------------------------------------------------------------
Paul Holt
Chief Financial Officer 2005 142,051 64,570 33,500 1,962
2004 119,378 28,541 -- 1,479
2003 101,438 27,250 -- 1,197
--------------------------------------------------------------------------------------------------------------------
----------
(1) This column reflects amounts attributable to Company contributions to the
Company's Deferred Compensation Plan and/or 401k plan.
15
Option /SAR Grants in Last Fiscal Year
The following table provides information with respect to option grants
during fiscal 2005 to the Named Executive Officers.
----------------------------------------------------------------------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates of
Number of Percent of Stock Price Appreciation
Securities Total Options for Option Term (#)*
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted (#) Fiscal Year (%) ($/Share) Date 5% 10%
----------------------------------------------------------------------------------------------------------------------
Louis Silverman 85,000 9.58% $38.675 2/10/2012 $1,338,292 3,118,789
----------------------------------------------------------------------------------------------------------------------
Patrick Cline 40,000 4.51% $23.335 6/9/2009 $ 257,881 569,850
----------------------------------------------------------------------------------------------------------------------
Patrick Cline 85,000 9.58% $38.675 2/10/2012 $1,338,292 3,118,789
----------------------------------------------------------------------------------------------------------------------
Gregory Flynn 9,000 1.01% $23.710 9/2/2009 $ 58,956 130,277
----------------------------------------------------------------------------------------------------------------------
Gregory Flynn 29,750 3.35% $38.675 2/10/2012 $ 468,402 1,091,576
----------------------------------------------------------------------------------------------------------------------
Paul Holt 8,000 0.90% $23.710 9/2/2009 $ 52,405 115,802
----------------------------------------------------------------------------------------------------------------------
Paul Holt 25,500 2.87% $38.675 2/10/2012 $ 401,488 935,637
----------------------------------------------------------------------------------------------------------------------
Aggregated Option/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/SAR Values
The following table provides information on option exercises in fiscal
2005 by the Named Executive Officers and unexercised options held by each of
them at the close of such fiscal year. No Named Executive Officer exercised any
stock appreciation rights during fiscal 2005 or held any stock appreciation
rights at the end of such fiscal year. The value of unexercised in the money
options was calculated using the closing share price on the last trading day of
the fiscal year ($42.34).
------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at Fiscal
Shares at March 31, 2005(#) Year-End ($)
Acquired on Value -----------------------------------------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------
Louis Silverman 254,200 $5,645,481 0 114,972 0 1,385,871
------------------------------------------------------------------------------------------------------------------------
Patrick Cline 8,500 $ 172,830 0 142,500 0 1,685,840
------------------------------------------------------------------------------------------------------------------------
Gregory Flynn 2,500 $ 50,313 0 46,250 0 536,279
------------------------------------------------------------------------------------------------------------------------
Paul Holt 13,000 $ 293,103 0 33,500 0 242,498
------------------------------------------------------------------------------------------------------------------------
* Calculations assume that the fair market value on the date of grant
appreciates at the indicated rate, compounded annually for the entire term of
the options, and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.
Stock price appreciation of 5% and 10% is assumed pursuant to the rules of
the Securities and Exchange Commission. The Company cannot provide assurance
that the actual stock price will appreciate over the option term at the assumed
levels or at any other defined level
16
Equity Compensation Plan Information
The following table sets forth information about the Company's common
stock that may be issued upon the exercise of options under all of our equity
compensation plans as of March 31, 2005.
----------------------------------------------------------------------------------------------------------------------------
Number of securities remaining
Number of securities to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, (excluding securities reflected
warrants and rights warrants and rights in column a)
Plan Category (a) (b) (c)
----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders 1,084,722 $27.77 138,150
----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 0 0 0
----------------------------------------------------------------------------------------------------------------------------
Total 1,084,722 $27.77 138,150
----------------------------------------------------------------------------------------------------------------------------
Employment Contracts and Change of Control Arrangements
Mr. Silverman has an Employment Agreement ("Agreement") with the Company
which details the terms of his employment as the Company's Chief Executive
Officer. The Agreement granted Mr. Silverman a total of 248,520 options which
vest equally over a four year period commencing with the effective date of the
Agreement (July 20, 2000). At the time the Agreement was entered into, Mr.
Silverman was 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.
All share amounts set forth in this Proxy Statement have been adjusted to
give effect to a 2 for 1 stock split effective March 28, 2005 and payable to
shareholders of record as of March 4, 2005.
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 granted stock options. 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) vesting of an
additional 25% of all unvested stock options. 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% of 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; 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 Ahmed Hussein or
Sheldon Razin 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.
17
For options other than those discussed above, the Board, as the
administrator of the Company's 1989 Stock Option Plan and 1998 Stock Option
Plan, has the discretion to accelerate any outstanding options held by the Named
Executive Officers and employees in the event of an acquisition of the Company
by a merger or asset sale in which the outstanding options under each such plan
are not to be assumed by the successor corporation or substituted with options
to purchase shares of such corporation.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The Company applies a consistent philosophy to compensation for all
employees, including senior management. This philosophy is based on the premise
that the achievements of the Company result from the coordinated efforts of all
individuals working toward common objectives. The Company strives to achieve
those objectives through teamwork that is focused on meeting the expectations of
customers and shareholders.
Compensation Philosophy
The Company's compensation program for executive officers is based on the
same principles applicable to compensation decisions for all employees of the
Company:
o The Company pays competitively. The Company is committed to
providing a pay program that helps attract and retain highly
qualified people in the industry.
o The Company believes that employees should understand the
performance evaluation and pay administration process. The process
of assessing performance is as follows:
1. At the beginning of the performance cycle, the Chief Executive
Officer or other evaluating manager sets objectives and key
goals.
2. The evaluating manager gives the employee ongoing feedback on
performance.
3. At the end of the performance cycle, the manager objectively
and subjectively evaluates the accomplishment of
objectives/key goals.
4. The evaluating manager communicates evaluation results to the
employee.
Compensation Vehicles
The Company has historically used a compensation program that consists of
multiple elements. These elements include some or all of the following:
o Salary. The Company sets base salary for its employees at levels
required to attract, retain, and motivate highly talented
individuals at all levels in the organization.
o Bonus. The Company utilizes incentive compensation plans for
selected employees to reward achievement of key objectives and
goals.
18
o Equity Incentives. If/when utilized, Equity Incentives can be
utilized to provide additional incentives to selected employees to
work to maximize shareholder value. Any Equity Grants are made by
the Board.
COMPENSATION COMMITTEE
William Botts, Chairman
Maurice DeWald Jonathan Javitt
AUDIT COMMITTEE REPORT
The Audit Committee reports to and acts on behalf of the Board in
providing oversight to the financial management, independent auditors, and
financial reporting procedures of the Company. The Company's management is
responsible for preparing the Company's financial statements and the independent
auditors are responsible for auditing those statements. In this context, the
Audit Committee has reviewed and discussed the audited financial statements
contained in the 2005 Annual Report on Form 10-K with management and the
independent auditors.
The Audit Committee has discussed with the independent auditors the
matters required to be discussed by the Statement on Auditing Standards No. 61
("Communication with Audit Committees"), as amended. The Audit Committee has
received the written disclosures and the letter from the independent auditors
required by Independence Standards Board Standard No. 1 ("Independence
Discussions with Audit Committees"), as amended, and has discussed with the
independent auditors their independence. In concluding that the auditors are
independent, the Committee considered, among other factors, whether the
non-audit services provided by Grant Thornton, LLP were compatible with
maintaining their independence.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the year ended March
31, 2005, for filing with the Securities and Exchange Commission.
The Audit Committee has recommended the appointment of Grant Thornton, LLP
to serve as the Company's independent auditors for the year ending March 31,
2006.
AUDIT COMMITTEE
Maurice DeWald, Chairman
William Botts Vincent Love
19
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Securities Exchange Act of 1934, as amended,
the directors and officers of the Company and any person who owns more than ten
percent of the Company's Common Stock are required to report their initial
ownership of the Company's Common Stock and any subsequent changes in that
ownership to the Securities and Exchange Commission ("SEC") and Nasdaq.
Officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all forms they file in
accordance with Section 16(a).
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during the fiscal year
ended March 31, 2005, all of its officers, directors and greater than 10%
shareholders complied with all filing requirements applicable to such persons
with the exception of Ahmed Hussein who failed to file timely a Form 4 related
to a grant of 7,000 options received on February 11, 2005. Mr. Hussein's Form 4
concerning such grant was subsequently filed with the SEC on July 29, 2005.
20
FIVE-YEAR PERFORMANCE COMPARISON
The following graph compares the cumulative total returns of the
Company's Common Stock, the Total Return Index for The Nasdaq Stock Market, and
the Nasdaq Computer & Data Processing Services Stock Index over the five-year
period ended March 31, 2005 assuming $100 was invested on April 1, 2000 with all
dividends, if any, reinvested.
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG QUALITY SYSTEMS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX
Cumulative Total Return
-------------------------------------------------------------
3/00 3/01 3/02 3/03 3/04 3/05
QUALITY SYSTEMS, INC. 100.00 72.13 99.87 167.28 297.90 577.30
NASDAQ STOCK MARKET (U.S.) 100.00 47.20 41.66 22.38 38.67 37.64
NASDAQ COMPUTER & DATA PROCESSING 100.00 32.47 32.30 24.83 35.04 35.09
$100 invested on 3/31/00 in stock or index including reinvestment of
dividends. Fiscal year ending March 31.
The last trade price of the Company's Common Stock on each of March 31,
2001, 2002, 2003, 2004 and 2005 was published by Nasdaq and, accordingly for the
periods ended March 31, 2001, 2002, 2003, 2004 and 2005 the reported last trade
price was utilized to compute the total cumulative return for the Company's
Common Stock for the respective periods then ended.
21
CERTAIN TRANSACTIONS
David Razin, who is Vice President EDI Services at the Company, is the son
of Sheldon Razin, Chairman of the Board. David Razin earned $164,300 in salary
and bonus during the fiscal year ended March 31, 2005. Kim Cline, Vice President
of Client Services, at the Company's NextGen Healthcare Information System
subsidiary, is the sister of Patrick Cline, President of the NextGen Healthcare
Information System Division. Kim Cline earned $147,684 in salary and a bonus
during the fiscal year ended March 31, 2005 and was awarded 37,000 stock options
during the same period.
COMMUNICATIONS WITH DIRECTORS
The Board has established a process to receive communications from
shareholders. Shareholders and other interested parties may contact any member
(or all members) of the Board, or the independent directors as a group, any
Board committee or any Chair of any such committee by mail or electronically. To
communicate with the Board, any individual directors, any group or committee of
directors, correspondence should be addressed to the Board or any such
individual directors, group or committee of directors by either name or title.
All such correspondence should be sent "c/o Corporate Secretary" at 18191 Von
Karman, Suite 450, Irvine, California 92612. To communicate with any of our
directors electronically, a shareholder should send an email to the Company's
Secretary: pholt@qsii.com.
All communications received as set forth in the preceding paragraph will
be opened by the Corporate Secretary for the sole purpose of determining whether
the contents represent a message to our directors. Any contents that are not in
the nature of advertising, promotions of a product or service, patently
offensive material or matters deemed inappropriate for the Board will be
forwarded promptly to the addressee. In the case of communications to the Board,
any group or committee of directors, the Company's Secretary will make
sufficient copies (or forward such information in the case of e-mail) of the
contents to send to each director who is a member of the group or committee to
which the envelope or e-mail is addressed.
It is the Company's policy that its directors are invited and encouraged
to attend the 2005 Annual Meeting. All of our director nominees were in
attendance at the 2004 Annual Meeting.
22
APPROVAL
OF
2005 STOCK OPTION AND INCENTIVE PLAN
(Proposal No. 2)
On May 25, 2005 the Board adopted, subject to the approval of the
shareholders, the Company's 2005 Stock Option and Incentive Plan ("Plan") to
promote the future success of the Company by providing an incentive for
officers, employees and directors of, and consultants and advisors to, the
Company and its Related Entities to acquire a proprietary interest in the
success of the Company, to remain in the service of the Company and/or related
entities, and to render superior performance during such service.
The following is a general summary of the Plan which is qualified in its
entirety by reference to the full text of the Plan, which is attached to this
Proxy Statement as Exhibit A. Defined terms used in connection with this
Proposal 2 and not otherwise defined herein shall have such meanings as are set
forth in the Plan.
Types of Grants Under the Plan
Awards may be made under the Plan including: (i) stock options, including
Incentive Stock Options and non-qualified stock options, (ii) stock appreciation
rights, (iii) restricted stock, (iv) unrestricted stock, (v) restricted stock
units, (vi) performance shares, (vii) performance units (including performance
options), and other stock-based Awards described in the Plan.
Awards and Award Agreements
Each Award granted under the Plan shall be evidenced by an Award Agreement
which shall contain such provisions as the Board in its discretion deems
necessary or desirable.
Plan Administration
The Compensation Committee (the "Committee") advises the Board concerning
the administration of the Plan. The Committee may recommend to the Board for
Board approval: (i) the manner in which the Plan and any Award Agreement is
construed, interpreted and implemented, (ii) amendments and rescission of rules
and regulations relating to the Plan, including rules governing its own
operations, (iii) determinations deemed necessary or advisable in administering
the Plan (including defining and calculating Performance Goals and certifying
that such Performance Goals have been met), (iv) the correction of any defect,
supplying any omission and reconciling any inconsistency in the Plan, (v)
amendments to the Plan reflecting changes in applicable law or regulations, (vi)
whether, to what extent and under what circumstances Awards may be settled or
exercised in cash, shares of Common Stock, other securities, other Awards or
other property, or canceled, forfeited or suspended and the method or methods by
which Awards may be settled, canceled, forfeited or suspended, and (vii)
whether, and to what extent and under what circumstances cash, shares of Common
Stock, other securities, other Awards or other property and other amounts
payable with respect to an Award shall be deferred either automatically or at
the election of the holder thereof or of the Board.
Total Shares Available
A total of 1,200,000 shares of Common Stock may be transferred pursuant to
Awards granted under the Plan. With respect to a stock appreciation right, both
shares of Common Stock issued pursuant
23
to the Award and shares of Common Stock representing the exercise price of the
Award shall be treated as being unavailable for other Awards or other issuances
pursuant to the Plan unless the stock appreciation right is forfeited,
terminated or cancelled without the delivery of shares of Common Stock. Any
shares (as opposed to options) of Common Stock subject to Awards shall be
counted against the numerical limits of the Plan as two shares for every share
subject thereto.
Adjustments
The number of shares of Common Stock covered by each outstanding Award,
the number or amount of shares or units available for Awards, the number or
amount of shares or units that may be subject to Awards to any one Grantee, the
price per share of Common Stock or units covered by each such outstanding Award
and any other calculation relating to shares of Common Stock available for
Awards or under outstanding Awards, shall be proportionately adjusted, in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, for any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, recapitalization, combination or
reclassification of the Common Stock or similar transaction, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company or to reflect any distributions
to holders of Common Stock other than regular cash dividends; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration."
Repricing
Except as may be adjusted under the Plan, no Award granted under the Plan
shall have its exercise price modified or "repriced" without first obtaining
shareholder approval.
Stock Options, Stock Appreciation Rights and Additional Options
Options Generally. The Board may grant stock options, including (i)
Incentive Stock Options and (ii) nonqualified stock options, to purchase shares
of Common Stock from the Company.
Incentive Stock Options. With respect to any Incentive Stock Option or
stock appreciation right granted in connection with an Incentive Stock Option
(i) the exercise price shall be at least 100% of the Fair Market Value of a
share of Common Stock on the date the option is granted and (ii) the exercise
period shall not be for longer than ten (10) years after the date of the grant.
To the extent that the aggregate Fair Market Value of the shares of Common Stock
with respect to which Incentive Stock Options and stock appreciation rights
granted in connection with Incentive Stock Options granted under the Plan and
all other plans of the Company are first exercisable by any Grantee during any
calendar year shall exceed the maximum limit (currently, $100,000), if any,
imposed from time to time under Section 422 of the Code, such options and rights
shall be treated as nonqualified stock options. To the extent required under
Section 422 of the Code, an Incentive Stock Option may not be granted under the
Plan to an individual who, at the time the option is granted, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of his or her employer corporation or of its parent or subsidiary
corporations unless (i) at the time such Incentive Stock Option is granted the
exercise price is at least 110% of the Fair Market Value of the shares subject
thereto, and (ii) the Incentive Stock Option by its terms is not exercisable
after the expiration of five (5) years from the date granted. Incentive Stock
Options are governed by other provisions of Section 422 of the Code.
Stock Appreciation Rights. The Board may grant stock appreciation rights
to such Key Persons, in such amounts and subject to such terms and conditions
(including the attainment of Performance Goals), as the Board shall determine in
its discretion, subject to the provisions of the Plan. Stock appreciation rights
may be granted in connection with all or any part of, or independently of, any
stock option granted under the Plan. A stock appreciation right may be granted
at or after the time of grant of such option. The Grantee of a stock
appreciation right shall have the right, subject to the terms of the Plan and
the applicable Award Agreement, to receive from the Company an amount equal to
(i) the excess of the Fair Market Value of a share of Common Stock on the date
of exercise of the stock appreciation right over (ii) the exercise price of such
right as set forth in the Award Agreement (if the
24
stock appreciation right is granted in connection with a stock option, then the
exercise price of the option), multiplied by (iii) the number of shares with
respect to which the stock appreciation right is exercised. Payment to the
Grantee upon exercise of a stock appreciation right shall be made in cash or in
shares of Common Stock (valued at their Fair Market Value on the date of
exercise of the stock appreciation right) or both, as the Board shall determine
in its discretion.
Exercise Price. Each Award Agreement with respect to a stock option or
stock appreciation right shall set forth the exercise price, which shall be
determined by the Committee in its discretion.
Exercise Periods and Manner of Exercise. Each Award Agreement with respect
to a stock option or stock appreciation right shall set forth the periods during
which the Award evidenced thereby shall be exercisable, and, if applicable, the
conditions which must be satisfied (including the attainment of Performance
Goals) in order for the Award evidenced thereby to be exercisable, whether in
whole or in part. Such periods and conditions shall be determined by the Board
in its discretion; provided, however, that no stock option or stock appreciation
right shall be exercisable more than ten (10) years after the date the Award is
issued. Unless the applicable Award Agreement otherwise provides, a stock option
or stock appreciation right may be exercised from time to time as to all or part
of the shares as to which such Award is then exercisable. A stock appreciation
right granted in connection with an option may be exercised at any time when,
and to the same extent that, the related option may be exercised.
Payment of Exercise Price. Any written notice of exercise of a stock
option shall be accompanied by payment of the exercise price for the shares
being purchased. Such payment shall be made (i) in cash, or (ii) to the extent
specified in the Award Agreement or not otherwise prohibited by the Board in its
discretion (A) by delivery of shares of Common Stock having a Fair Market Value
equal to all or part of the exercise price and cash for any remaining portion of
the exercise price, (B) by cashless exercise procedure through a broker-dealer,
and (C) to the extent permitted by law, by such other method not otherwise
prohibited by the Board including, without limitation, a "net exercise."
Termination of Employment, Death, Disability. Except to the extent
otherwise provided under the Plan, or in the applicable Award Agreement, all
unvested stock options and stock appreciation rights to the extent not
theretofore exercised shall terminate immediately upon (i) the Grantee's
Termination of Employment at Grantee's election for any reason or (ii) Grantee's
Termination of Employment by the Company for Cause. Except to the extent
otherwise provided in the applicable Award Agreement, upon the Termination of
Employment of a Grantee at the election of the Company or a Related Entity
(other than as provided in the Plan) the Grantee may exercise any outstanding
stock option or stock appreciation right on the following terms and conditions:
(i) exercise may be made only to the extent that the Grantee was entitled to
exercise the Award on the date of the Termination of Employment; and (ii)
exercise must occur within three (3) months after the Termination of Employment
but in no event after the expiration date of the Award as set forth in the Award
Agreement. At such time as the Company adopts a policy of retirement and during
the continued effectiveness of such policy, except to the extent otherwise
provided in the applicable Award Agreement, upon the Termination of Employment
of a Grantee by reason of the Grantee's Retirement, the Grantee may exercise any
outstanding stock option or stock appreciation right on the following terms and
conditions: (i) exercise may be made only to the extent that the Grantee was
entitled to exercise the Award on the date of Retirement; and (ii) exercise must
occur within three (3) years after Retirement but in no event after the
expiration date of the Award as set forth in the Award Agreement. Except to the
extent otherwise provided in the applicable Award Agreement, upon the
termination of Employment of a Grantee by reason of Disability the Grantee may
exercise any outstanding stock option or stock appreciation right on the
following terms and conditions: (i) exercise may be made only to the extent that
the Grantee was entitled to exercise the Award on the date of Termination of
Employment; and (ii) exercise must occur no later than six (6) months after the
Termination of Employment but in no event after the expiration date of the Award
as set forth in the
25
Award Agreement. Except to the extent otherwise provided in the applicable Award
Agreement, if a Grantee dies during the period in which the Grantee's stock
options or stock appreciation rights are exercisable, whether pursuant to their
terms or pursuant to paragraph (b), (c) or (d) above, any outstanding stock
option or stock appreciation right shall be exercisable on the following terms
and conditions: (i) exercise may be made only to the extent that the Grantee was
entitled to exercise the Award on the date of death; and (ii) exercise must
occur no later than six (6) months after the date of the Grantee's death.
Restricted Stock and Unrestricted Stock
Grants. The Board may grant restricted and unrestricted shares of Common
Stock to such Key Persons, in such amounts and subject to such terms and
conditions (including the attainment of Performance Goals), as the Board shall
determine in its discretion, subject to the provisions of the Plan.
Rights as Shareholder. The Company may issue in the Grantee's name shares
of Common Stock covered by an Award of restricted stock or unrestricted stock.
Upon the issuance of such shares, the Grantee shall have the rights of a
shareholder with respect to the restricted stock or unrestricted stock, subject
to certain transfer restrictions, Company's repurchase rights and Board imposed
restrictions.
Nontransferable. Shares of restricted stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in this Plan or the applicable Award Agreement. The Board
at any time may waive or amend the transfer restrictions or other condition of
an Award of restricted stock.
Termination of Employment. Except to the extent otherwise provided in the
applicable Award Agreement or unless otherwise determined by the Board, in the
event of the Grantee's Termination of Employment for any reason, shares of
restricted stock that remain subject to transfer restrictions as of the date of
such termination (and therefore are unvested) shall be forfeited and canceled.
Restricted Stock Units
Grants. The Board may grant Awards of restricted stock units to such Key
Persons, in such amounts and subject to such terms and conditions (including the
attainment of Performance Goals), as the Board shall determine in its
discretion, subject to the provisions of the Plan.
Termination of Employment. Except to the extent otherwise provided in the
applicable Award Agreement or unless otherwise determined by the Board, in the
event of the Grantee's Termination of Employment for any reason, restricted
stock units that have not vested shall be forfeited and canceled.
Performance Shares, Performance Options and Performance Units
Grants. The Board may grant performance shares in the form of actual
shares of Common Stock, performance options or share units over an identical
number of shares of Common Stock, to such Key Persons, in such amounts subject
to the attainment of such Performance Goals and satisfaction of such other terms
and conditions as the Board shall determine in its discretion, subject to the
provisions of the Plan. The Performance Goals and the length of the performance
period applicable to any Award of performance shares, performance options or
performance units shall be determined by the Board. The Board shall determine in
its discretion whether performance shares granted in the form of share units
shall be paid in cash, Common Stock, or a combination of cash and Common Stock.
Nontransferable. Performance shares may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in this Plan or the applicable Award
26
Agreement. The Board at the time of grant shall specify the date or dates (which
may depend upon or be related to the attainment of Performance Goals) and other
conditions on which the non-transferability of the performance shares shall
lapse. The Board at any time may waive or amend the transfer restrictions or
other condition of an Award of performance shares.
Termination of Employment. Except to the extent otherwise provided in the
applicable Award Agreement or unless otherwise determined by the Board, in the
event of the Grantee's Termination of Employment for any reason, performance
shares and performance share units that remain subject to transfer restrictions
as of the date of such termination (and therefore shall not have vested) shall
be forfeited and canceled.
Deferred Stock Units
Deferred stock units consist of a restricted stock, restricted stock unit,
performance share or performance unit Award that the Board in its discretion
permits to be paid out in installments or on a deferred basis, in accordance
with rules and procedures established by the Board. Deferred stock units remain
subject to the claims of the Company's general creditors until distributed to
the Grantee. Deferred stock units shall be subject to the annual Section 162(m)
limits applicable to the underlying restricted stock, restricted stock unit,
performance share or performance unit Award as forth in the Plan.
Other Stock-Based Awards
The Board may grant other types of stock-based Awards to such Key Persons,
in such amounts and subject to such terms and conditions, as the Board shall in
its discretion determine, subject to the provisions of the Plan. Such Awards may
entail the transfer of actual shares of Common Stock, or payment in cash or
otherwise of amounts based on the value of shares of Common Stock.
Dividend Equivalent Rights
The Board may in its discretion include in the Award Agreement with
respect to any Award a dividend equivalent right entitling the Grantee to
receive amounts equal to the ordinary dividends that would be paid, during the
time such Award is outstanding and unexercised, on the shares of Common Stock
covered by such Award if such shares were then outstanding. In the event such a
provision is included in an Award Agreement, the Board shall determine whether
such payments shall be made in cash, in shares of Common Stock or in another
form, whether they shall be conditioned upon the exercise or vesting of, or the
attainment or satisfaction of terms and conditions applicable to, the Award to
which they relate, the time or times at which they shall be made, and such other
terms and conditions as the Board shall deem appropriate.
Awards under the Plan shall be subject to the limits and other
requirements of Section 162(m) of the Code.
Director Stock Options
Eligibility. Subject to the specific requirements, terms and conditions as
adopted from time to time by the Board in its discretion all voting directors of
the Company who are not employees of the Company ("Non-Employee Directors")
shall receive nonqualified stock options pursuant to the conditions of the Plan.
Exercise Price and Period. Unless the Board in its discretion determines
otherwise, the per share exercise price for each stock option granted shall be
100% of the Fair Market Value of a share of Common Stock on the date the stock
option is granted. Each stock option shall vest, become exercisable
27
and possess a term in accordance with the policy then in place and as adopted by
the Board, provided, however, that (i) if the Non-Employee Director's service on
the Board is terminated as a result of not being reelected to the Board, then
such stock option shall continue to exercisable until the earlier to occur of
(A) the expiration of the remaining term of the option or (B) three (3) years
from the date Board service terminated, and (ii) no stock option may have a term
in excess of ten (10) years.
New Plan Benefits
As stated above, the Board has the authority to determine the amounts,
terms and grant dates of options to be granted to eligible employees, directors
and consultants under the Plan. To date, no such determinations have been made
and, as a result, it is not possible to state such information. Since no options
were granted under the Plan to the officers and directors of the Company during
the fiscal year ended March 31, 2005 no determination can be made concerning
benefits which would have been received by such individuals had the Plan been in
place during such period. To date, no options or other grants of any kind have
been granted under the Plan.
The Company is reviewing but has not yet determined the number of
employees that will be eligible to participate in the Plan. The Company further
estimates that all of its employee and non-employee directors will be eligible
to participate in the Plan.
Required Vote
The affirmative vote of a majority of the shares of Common Stock present
in person or by proxy at the Annual Meeting and entitled to vote on the proposal
to approve the Plan is required to approve the Plan.
Recommendation of the Board of Directors
THE BOARD RECOMENDS THAT SHAREHOLDERS VOTE `FOR' APPROVAL OF THE PLAN.
PROXIES AND VOTING INSTRUCTIONS WILL BE VOTED IN FAVOR OF THE APPROVAL OF THE
PLAN UNLESS THE SHAREHOLDER SPECIFIES OTHERWISE.
28
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
(Proposal No. 3)
The Board of Directors has appointed the firm of Grant Thornton, LLP
("Grant Thornton") as its independent public accountants for the fiscal year
ended March 31, 2006, subject to ratification by the holders of a majority of
the shares represented either in person or by proxy at the Annual Meeting. In
the event that the shareholders do not ratify the selection of Grant Thornton as
the Company's independent public accountants, the selection of another
independent public accounting firm will be considered by the Board of Directors.
Representatives of Grant Thornton are expected to attend the Annual
Meeting and will be available to respond to appropriate questions. The
representatives of Grant Thornton also will have the opportunity to make a
formal statement, if they so desire.
AUDIT AND NON-AUDIT FEES
The following table sets forth the aggregate fees billed to the Company by
Grant Thornton, LLP for the fiscal years ended March 31, 2005 and 2004.
-------------------------------------------------------------
2005 2004
-------------------------------------------------------------
Audit fees $941,000 $250,000
-------------------------------------------------------------
Audit-related fees $ 0 $ 0
-------------------------------------------------------------
Tax fees $ 7,000 $ 11,000
-------------------------------------------------------------
All other fees $ 6,000 $ 34,000
-------------------------------------------------------------
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of
Independent Auditor
The Audit Committee's policy is to preapprove all auditing services and
permitted non-audit services (including the fees and terms thereof) to be
performed for the Company by its independent auditor, subject to the de minimis
exceptions for non-audit services described in Section 10A(i)(1)(B) of the
Securities Exchange Act of 1934 which are approved by the Audit Committee prior
to the completion of the audit.
Required Vote
The affirmative vote of a majority of the shares of Common Stock present
in person or by proxy at the Annual Meeting and entitled to vote on the proposal
to ratify the Company's independent public accountants is required for its
approval.
29
Recommendation of the Board of Directors
Although we are not required to do so, we believe that it is appropriate
to request that shareholders ratify the appointment of Grant Thornton. If
shareholders do not ratify the appointment, the Audit Committee will investigate
the reasons for the shareholders' rejection and the Board will reconsider the
appointment.
THE BOARD RECOMENDS THAT SHAREHOLDERS VOTE `FOR' THE RATIFICATION OF THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS. PROXIES AND VOTING INSTRUCTIONS WILL
BE VOTED IN FAVOR OF SUCH RATIFICATION UNLESS THE SHAREHOLDER SPECIFIES
OTHERWISE.
30
APPROVAL
OF
AMENDMENT TO ARTICLES OF INCORPORATION
(Proposal No. 4)
Description of the Proposed Amendment
The Board has approved a proposed amendment to the Company's Articles of
Incorporation to increase the number of shares of common stock that the Company
is authorized to issue from 20 million to 50 million and has directed that the
proposed amendment be presented to the Company's shareholders for consideration
and approval.
The Company proposes to amend the third Article of its Articles of
Incorporation to read 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 up to fifty
Million (50,000,000), and each such share
shall have a par value of one cent ($.01).
Purposes and Effects of the Proposal
As of July 27, 2005, the Company had 13,124,860 shares of common stock
outstanding, shares of common stock reserved for issuance upon the exercise of
outstanding employee and director options, and shares of common stock reserved
for issuance upon the exercise of options that may be granted under the
Company's 1998 Stock Option Plan (the "1998 Plan"). In addition, if the
Company's shareholders approve the Company's 2005 Stock Option and Incentive
Plan (the "2005 Plan") at the 2005 Annual Shareholders' Meeting, additional
shares of common stock will be reserved for issuance upon stock grants and the
exercise of options that may be granted under such Plan. Because the Company's
Articles of Incorporation currently authorizes the issuance of only 20,000,000
shares of common stock, if all of our option holders and future option and stock
grantees under the 1998 Plan and the 2005 Plan were to exercise their options
and/or vest in their respective grants of stock, the Company would have only
4,467,243 shares of authorized and unissued common stock under the terms of its
Articles of Incorporation.
Accordingly, the principal purpose of the proposed amendment is to
increase the number of authorized shares of the Company's common stock so that
it has enough authorized and unissued shares available to give the Company
greater flexibility in considering and planning for future business needs,
although the Company presently has no plans, agreements or commitments to issue
any of the additional authorized shares of common stock (other than issuing
shares of common stock pursuant to stock options and/or employee compensation
plans). The authorization of the additional shares of the Company's common stock
sought by this proposal would not have any immediately dilutive effect on the
proportionate voting power or other rights of the Company's existing
shareholders, but to the extent that the additional authorized shares of common
stock are issued in the future, they may decrease the Company's existing
shareholders' percentage equity ownership and, depending on the price at which
they are issued, could be dilutive to the Company's existing shareholders.
31
The proposed amendment would also increase the number of shares of common
stock available for stock dividends or distributions, stock splits in the form
of stock dividends, employee and officer compensation plans and other general
corporate purposes.
The additional authorized shares provided for by the proposed amendment
will be a part of the existing class of common stock and, if and when issued,
will have the same rights and privileges as the shares of common stock presently
issued and outstanding. Holders of common stock are not entitled to preemptive
rights.
Approval of this proposal will also permit the Board to issue additional
shares of common stock without further shareholder approval and upon such terms
and at such times as it may determine unless required by applicable law,
regulatory agencies, the rules of Nasdaq, or any stock exchange on which the
Company's securities may then be listed.
Although the Company is not proposing to increase its authorized shares of
Common Stock in order to impede a change of control of the Company and the
Company is not aware of any current efforts to acquire control of the Company,
an increase in the authorized number of shares of common stock could make more
difficult, and thereby discourage, attempts to acquire control of the Company,
even though the Company's shareholders may deem such an acquisition to be
desirable. An issuance of shares of common stock could dilute the ownership
interest and voting power of the Company's shareholders who are seeking control
of the Company. Shares of common stock could be issued in a private placement to
one or more persons or organizations sympathetic to management and opposed to
any takeover bid, or under other circumstances that could make more difficult,
and thereby discourage, attempts to acquire control of the Company. To the
extent that it impedes any such attempts, the proposed amendment may serve to
perpetuate management. The Company presently does not expect to use unissued
common stock for this purpose. In addition, the Company's Board is not aware of
any proposal to effect a change in control or takeover of the Company.
The Board has concluded that the potential benefits of the amendment to
the Company and its shareholders outweigh the possible disadvantages.
Effective Date of Proposed Amendment
If the proposed amendment to the Company's Articles of Incorporation is
adopted by its shareholders at the 2005 Annual Shareholders' Meeting, the
amendment will become effective and the number of authorized shares will be
increased upon filing of the amendment with the Secretary of State of California
which is anticipated to take place shortly thereafter.
Required Vote
The affirmative vote of the holders of a majority of the outstanding
shares of common stock entitled to vote at the annual meeting is required for
approval of the proposed amendment to the Company's Articles of Incorporation.
Recommendation of the Board of Directors
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE 'FOR' APPROVAL OF THE PROPOSAL
TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE THE AUTHORIZED NUMBER OF
SHARES OF THE COMPANY'S COMMON STOCK.
32
ANNUAL REPORT
The Company's Annual Report containing audited financial statements for
the fiscal years ended March 31, 2005 and 2004 accompanies this Proxy Statement.
Such report is not incorporated herein and is not deemed to be a part of this
proxy solicitation material.
PROPOSALS OF SHAREHOLDERS
Pursuant to Rule 14a-8 of the Securities and Exchange Commission,
proposals by shareholders which are intended for inclusion in the Company's
proxy statement and proxy and to be presented at the Company's next Annual
Meeting must be received by the Company by April 18, 2006, in order to be
considered for inclusion in the Company's proxy materials. Such proposals should
be addressed to the Company's Secretary and may be included in next year's proxy
materials if they comply with certain rules and regulations of the Securities
and Exchange Commission governing shareholder proposals. For all other proposals
by shareholders (including nominees for director) to be timely, a Shareholders'
Notice must be delivered to, or mailed and received at, the principal executive
offices of the Company not less than sixty days (60) nor more than one hundred
twenty 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 days (70) notice or 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 (10th) 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. The Shareholder Notice must
also comply with certain other requirements set forth in the Company's Bylaws, a
copy of which may be obtained by written request delivered to the Company's
Secretary.
OTHER MATTERS
The Board knows of no other matters which will be acted upon at the Annual
Meeting. If any other matters are presented properly for action at the Annual
Meeting or at any adjournment thereof, it is intended that the proxy will be
voted with respect thereto by the proxy holders in accordance with the
instructions and at the discretion of the Board.
By Order of the Board of Directors,
QUALITY SYSTEMS, INC.
/s/ Paul Holt
Corporate Secretary
Irvine, California
July 29, 2005
SHAREHOLDERS MAY OBTAIN FREE OF CHARGE A COPY OF THE COMPANY'S ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2005, (WITHOUT EXHIBITS) AS FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION BY WRITING TO: INVESTOR RELATIONS,
QUALITY SYSTEMS, INC., 18191 VON KARMAN AVENUE, SUITE 450, IRVINE, CALIFORNIA
92612 OR CALLING (949) 255-2600.
33
Exhibit A
QUALITY SYSTEMS, INC.
2005 STOCK OPTION
AND
INCENTIVE PLAN
ARTICLE I
GENERAL
1.1 Purpose. The purpose of the Quality Systems, Inc. 2005 Stock Option
and Incentive Plan (the "Plan") is to promote the future success of Quality
Systems, Inc. (the "Company") by providing an incentive for officers, employees
and directors of, and consultants and advisors to, the Company and its Related
Entities to acquire a proprietary interest in the success of the Company, to
remain in the service of the Company and/or Related Entities, and to render
superior performance during such service.
1.2 Definitions of Certain Terms.
(a) "Award" means an award under the Plan as described in Section
1.5 and Article II.
(b) "Award Agreement" means a written agreement entered into between
the Company and a Grantee in connection with an Award.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause." Termination of Employment by the Company for "Cause"
means, with respect to a Grantee and an Award, (i) except as provided
otherwise in the applicable Award Agreement or as provided in clause (ii)
below, Termination of Employment of the Grantee by the Company (A) upon
Grantee's failure to substantially perform Grantee's duties with the
Company or a Related Entity (other than any such failure resulting from
death or Disability), (B) upon Grantee's failure to substantially follow
and comply with the specific and lawful directives of the Board or any
officer of the Company or a Related Entity to whom Grantee directly or
indirectly reports, (C) upon the Board's determination of Grantee's
commission of an act of fraud or dishonesty resulting in actual economic,
financial or reputational injury to the Company or a Related Entity, (D)
upon the Board's determination of Grantee's engagement in illegal conduct,
gross misconduct or an act of moral turpitude, involving economic,
financial or reputational injury to the Company or a Related Entity, or
(E) upon Grantee's material violation of any material written policy,
guideline, code, handbook or similar document governing the conduct of
directors, officers or employees of the Company or its Related Entities
resulting in actual economic, financial or reputational injury to the
Company or Related Entity; or (ii) in the case of directors, officers or
employees who at the time of the Termination of Employment (A) are
entitled to the benefits of a change in control,
1
employment or similar agreement entered into by the Company or a Related
Entity or (B) are subject to an existing Company policy or agreement, that
defines or addresses termination for cause, termination for cause as
defined and/or determined pursuant to such agreement.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Committee" means a compensation committee appointed by the
Board in accordance with Section 1.3(a) of the Plan.
(g) "Common Stock" means the common stock of the Company.
(h) "Disability" means, with respect to a Grantee and an Award, (i)
except as provided in the applicable Award Agreement or as provided in
clause (ii) below, "disability" as defined in (i) the long-term disability
plan in which Grantee is participating; or (ii) in the case of directors,
officers or employees who at the time of the Termination of Employment are
entitled to the benefits of a change in control, employment or similar
agreement entered into by the Company or a Related Entity that defines or
addresses termination because of disability, "disability" as defined in
such agreement; or (iii) if neither (i) nor (ii) apply, then such a plan
in which any of the officers of the Company may be participating; or (iv)
if (i), (ii) and (iii) do not apply, then as defined in Section 22(e)(3)
of the Code. Notwithstanding the foregoing, in the case of an Incentive
Stock Option, the term "Disability" for purposes of the preceding sentence
shall have the meaning given to it by Section 422 (c)(6) of the Code and
(B) to the extent an Award is subject to the provisions of Section 409A of
the Code and if in order for compensation provided under any Award to
avoid the imposition of taxes under Section 409A of the Code, a different
definition of "disabled" is required by Section 409A, then a Grantee shall
be determined to have suffered a Disability only if such Grantee is
"disabled" within the meaning of Section 409A of the Code.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) The "Fair Market Value" of a share of Common Stock on any date
shall be (i) the closing sale price per share of Common Stock during
normal trading hours on the national securities exchange, association or
other market on which the Common Stock is principally traded for such date
or the last preceding date on which there was a sale of such Common Stock
on such exchange, association or market, or (ii) if the shares of Common
Stock are then traded in an over-the-counter market, the average of the
closing bid and asked prices for the shares of Common Stock during normal
trading hours in such over-the-counter market for such date or the last
preceding date on which there was a sale of such Common Stock in such
market, or (iii) if the shares of Common Stock are not then listed on a
national securities exchange, association or other market or traded in an
over-the-counter market, such value as the Board on advice of the
Committee and in the Board's discretion shall determine.
(k) "Grantee" means a person who receives an Award.
2
(l) "Incentive Stock Option" means, subject to Section 2.3(f), a
stock option that is intended to qualify for special federal income tax
treatment pursuant to Sections 421 and 422 of the Code (or a successor
provision thereof) and which is so designated in the applicable Award
Agreement. Under no circumstances shall any stock option that is not
specifically designated as an Incentive Stock Option be considered an
Incentive Stock Option.
(m) "Key Executive" means a Key Person who, on the last day of the
Company's taxable year, is either (i) the chief executive officer of the
Company or acting in such capacity, or (ii) among the four highest
compensated officers (other than the chief executive officer).
(n) "Key Persons" means then acting or prospective directors,
officers and employees of the Company or of a Related Entity, and then
acting or prospective consultants and advisors to the Company or a Related
Entity.
(o) "Non-Employee Director" has the meaning given to it in Section
2.12.
(p) "Performance Goals" means the objective goal(s) (or combined
goal(s)) adopted by the Committee in its discretion to be applicable to a
Key Executive with respect to an Award; such Performance Goals applicable
to an Award may provide for a targeted or measured level or levels of
achievement or change using any objective performance standard, including,
but not limited to (and by way of example only): (i) revenue, (ii)
earnings per share, (iii) net income, (iv) return on assets, (v) return on
equity, (vi) stock price, (vii) economic profit or shareholder value
added, (viii) total shareholder return, (ix) EBIT, and (x) EBITDA. Such
measures may be defined and calculated in such objective manner and detail
as the Committee in its discretion may determine, including whether such
measures shall be calculated before or after income taxes or other items,
the degree or manner in which various items shall be included or excluded
from such measures, whether total assets or certain categories of assets
shall be used, whether such measures shall be applied to the Company on a
consolidated basis or to certain Related Entities of the Company or to
certain divisions, operating units or business lines of the Company or a
Related Entity, the weighting that shall be given to various measures if
combined goals are used, and the periods and dates during or on which such
measures shall be calculated. The Performance Goals may differ from Key
Executive to Key Executive and from Award to Award. A Performance Goal is
objective if a third party having knowledge of the relevant facts could
determine whether the Performance Goal is met.
(q) "Person," whether or not capitalized, means any natural person,
any corporation, partnership, limited liability company, trust or legal or
contractual entity or joint undertaking and any governmental authority.
(r) "Related Entity" means any corporation, partnership, limited
liability company or other entity that is an "affiliate" of the Company
within the meaning of Rule 12b-2 under the Exchange Act.
3
(s) "Retirement" means, with respect to a Grantee and an Award,
except as otherwise provided in the applicable Award Agreement, the
Grantee's Termination of Employment with the Company or a Related Entity
for a reason other than for Cause and that at the time of the Termination
of Employment the Grantee has satisfied the criteria for retirement in
accordance with the Company's employment policies if and when adopted by
the Company.
(t) "Rule 16b-3" means Rule 16b-3 under the Exchange Act.
(u) A Grantee shall be deemed to have a "Termination of Employment"
upon ceasing employment with the Company or any Related Entity (or, in the
case of a Grantee who is not an employee, upon ceasing association with
the Company or any Related Entity as a director, consultant, advisor or
otherwise), provided, however, it shall not be considered a Termination of
Employment of a Grantee if the Grantee ceases employment or association
with the Company or a Related Entity but continues or immediately
commences employment or association with a majority-owned Related Entity
or the Company.
1.3 Administration.
(a) The Committee. If such is required to assure compliance under
Section 162(m), different Committees with respect to different groups of
Key Persons may administer the Plan in accordance with this Section
1.3(a).
(i) Section 162(m). To the extent the Award is intended to
qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the Plan shall be administered by a
Committee of two or more "outside directors" within the meaning of
Section 162(m) of the Code.
(ii) Other Administration. Other than as provided above, the
Plan shall be administered by (A) the Board through recommendations
of the Compensation Committee as set forth herein, or (B) upon
election and delegation by the Board, a Compensation Committee
(including any successor thereto) of the Board which it may elect to
act upon in its sole and absolute discretion, provided such
Compensation Committee shall consist of not less than two
independent directors.
(b) Authority. The Committee shall advise the Board concerning the
administration of the Plan and the Board's actions which may be taken
pursuant to the Plan. The Committee shall have the authority to recommend
to the Board for Board approval: (i) the manner in which the Plan and any
Award Agreement is construed, interpreted and implemented, (iii)
amendments and rescission of rules and regulations relating to the Plan,
including rules governing its own operations, (iv) determinations deemed
necessary or advisable in administering the Plan (including defining and
calculating Performance Goals and certifying that such Performance Goals
have been met), (v) the correction of any defect, supplying any omission
and reconciling any inconsistency in the Plan, (vi) amending the Plan to
reflect changes in applicable law or regulations, (vii) whether, to what
extent and under what circumstances Awards may be settled or exercised in
cash, shares of Common Stock, other securities, other Awards or other
property, or canceled, forfeited or suspended and the method or methods by
which Awards may be
4
settled, canceled, forfeited or suspended (including, but not limited to,
canceling an Award in exchange for a cash payment (or securities with an
equivalent value) equal to the difference between the Fair Market Value of
a share of Common Stock on the date of grant and the Fair Market Value of
a share of Common Stock on the date of cancellation, and, if no such
difference exists, canceling an Award without a payment in cash or
securities), and (viii) whether, and to what extent and under what
circumstances cash, shares of Common Stock, other securities, other Awards
or other property and other amounts payable with respect to an Award shall
be deferred either automatically or at the election of the holder thereof
or of the Board.
(c) Voting. Actions of the Committee shall be taken by the vote of a
majority of its members. Any action may be taken by a written instrument
signed by all of the Committee members, and action so taken shall be fully
as effective as if it had been taken by a vote at a meeting.
(d) Binding Determinations. The determination of the Board on all
matters relating to the Plan or any Award Agreement shall be final,
binding and conclusive.
(e) Exculpation. No member of the Board or the Committee or any
officer, employee or agent of the Company or any of its Related Entities
(each such person a "Covered Person") shall have any liability to any
person (including, without limitation, any Grantee) for any action taken
or omitted to be taken or any determination made in good faith with
respect to the Plan or any Award. Each Covered Person shall be indemnified
and held harmless by the Company against and from any loss, cost,
liability or expense (including attorneys' fees) that may be imposed upon
or incurred by such Covered Person in connection with or resulting from
any action, suit or proceeding to which such Covered Person may be a party
or in which such Covered Person may be involved by reason of any action
taken or omitted to be taken under the Plan and against and from any and
all amounts paid by such Covered Person, with the Company's approval, in
settlement thereof, or paid by such Covered Person in satisfaction of any
judgment in any such action, suit or proceeding against such Covered
Person; provided that the Company shall have the right, at its own
expense, to assume and defend any such action, suit or proceeding and,
once the Company gives notice of its intent to assume the defense, the
Company shall have sole control over such defense with counsel of the
Company's choice subject to approval of the Covered Person (not to be
unreasonably withheld). The foregoing right of indemnification shall not
be available to a Covered Person to the extent that a court of competent
jurisdiction in a final judgment or other final adjudication, in either
case, not subject to further appeal, determines that the acts or omissions
of such Covered Person giving rise to the indemnification claim resulted
from such Covered Person's bad faith, fraud or willful criminal act or
omission. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which Covered Persons may be
entitled under the Company's Articles of Incorporation or Bylaws, in each
case as amended from time to time, as a matter of law, or otherwise, or
any other power that the Company may have to indemnify such persons or
hold them harmless pursuant to an indemnification agreement or otherwise
(in which case, any
5
conflict between the indemnification agreement or such other Board
approved agreement shall be resolved in favor of the indemnification
agreement or such other agreement).
(f) Experts. In making any determination or in taking or not taking
any action under this Plan, the Committee or the Board, as the case may
be, may obtain and rely upon the advice of experts, including professional
and financial advisors and consultants to the Committee or the Company. No
director, officer, employee or agent of the Company shall be liable for
any such action or determination taken or made or omitted in good faith
reliance on such advice.
(g) Board. Subject to the provisions of Sections 1.3(a)(i) and
1.7(b), but notwithstanding any other provision herein to the contrary (i)
until the Board shall appoint the members of the Committee, the Plan shall
be administered by the Board, and (ii) the Board may, in its sole
discretion, at any time and from time to time, (A) grant Awards, (B)
require that the Committee's authority shall be limited to making
recommendations to the Board concerning the granting and administration of
the Plan and Awards hereunder, or (C) resolve to administer the Plan
directly. In any of the foregoing events, the Board shall have all of the
authority and responsibility granted to the Committee herein.
Notwithstanding the foregoing, at any time during which the Board shall
administer the granting of Awards, any Awards to the Chief Executive
Officer and other executive officers of the Company shall be made by the
Board meeting in executive session consisting entirely of independent
directors (as defined in Rule 4350 of the Nasdaq Marketplace Rules).
1.4 Persons Eligible for Awards. Awards under the Plan may be made to such
Key Persons as the Committee shall select and recommended to the Board.
1.5 Types of Awards Under the Plan. Awards may be made under the Plan
including: (i) stock options, including Incentive Stock Options and
non-qualified stock options, (ii) stock appreciation rights, (iii) restricted
stock, (iv) unrestricted stock, (v) restricted stock units, (vi) performance
shares, (vii) performance units (including performance options), and other
stock-based Awards, as set forth in Article II.
1.6 Shares Available for or Subject to Awards.
(a) Total Shares Available. The total number of shares of Common
Stock that may be transferred pursuant to Awards granted under the Plan
shall not exceed 1,200,000 shares. All of such shares shall be authorized
for issuance pursuant to incentive stock options under Section 2.3 or for
other Awards under Article II. Such shares may be authorized but unissued
Common Stock. Any stock certificate evidencing shares issued pursuant to
the Plan shall bear a legend setting forth such restrictions on
transferability as may apply to such shares pursuant to the Plan. Such
legend shall be caused to be removed by the Company's Chief Financial
Officer and Chief Executive Officer upon their joint written determination
that the conditions warranting the inclusion of such legend are no longer
applicable. If any Award is forfeited or otherwise terminates or is
canceled without the delivery of shares of Common Stock, then the shares
covered by such forfeited, terminated or canceled Award shall again become
available for transfer
6
pursuant to Awards granted or to be granted under this Plan. However, if
any Award or shares of Common Stock issued or issuable under Awards are
tendered or withheld as payment for the exercise price of an Award, the
shares of Common Stock may not be reused or reissued or otherwise be
treated as being available for Awards or issuance pursuant to the Plan.
With respect to a stock appreciation right, both shares of Common Stock
issued pursuant to the Award and shares of Common Stock representing the
exercise price of the Award shall be treated as being unavailable for
other Awards or other issuances pursuant to the Plan unless the stock
appreciation right is forfeited, terminated or cancelled without the
delivery of shares of Common Stock. Any shares of Common Stock delivered
by the Company, any shares of Common Stock with respect to which Awards
are made by the Company and any shares of Common Stock with respect to
which the Company becomes obligated to make Awards, through the assumption
of, or in substitution for, outstanding awards previously granted by an
acquired entity, shall not be counted against the shares available for
Awards under this Plan.
(b) Treatment of Certain Awards. Any shares of Common Stock subject
to Awards shall be counted against the numerical limits of this Section
1.6 as two shares for every share subject thereto. For example, if an
Award of restricted shares or performance shares (or any Award involving
the receipt of actual "hard" shares of the Company) is made in the amount
of 10,000 shares, then 20,000 shares shall be deducted from the then
existing balance of authorized and unissued shares (originally set at
1,200,000 in Section 1.6(a), above) available for future issuances under
the Plan.
(c) Adjustments. The number of shares of Common Stock covered by
each outstanding Award, the number or amount of shares or units available
for Awards under Section 1.6(a) or otherwise, the number or amount of
shares or units that may be subject to Awards to any one Grantee under
Section 1.7(b) or otherwise, the price per share of Common Stock or units
covered by each such outstanding Award and any other calculation relating
to shares of Common Stock available for Awards or under outstanding Awards
(including Awards under Section 2.13) shall be proportionately adjusted,
in order to prevent dilution or enlargement of the benefits or potential
benefits intended to be made available under the Plan, for any increase or
decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, recapitalization,
combination or reclassification of the Common Stock or similar
transaction, or any other increase or decrease in the number of issued
shares of Common Stock effected without receipt of consideration by the
Company or to reflect any distributions to holders of Common Stock
(including rights offerings) other than regular cash dividends; provided,
however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of
consideration." Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an Award. After any adjustment made pursuant to
this paragraph, the number of shares subject to each outstanding Award
shall be rounded to the nearest whole number.
7
(d) Grants Exceeding Allotted Shares. If the shares of Common Stock
covered by an Award exceeds, as of the date of grant, the number of shares
of Common Stock which may be issued under the Plan without additional
shareholder approval, such Award shall be void.
1.7 Regulatory Considerations.
(e) General. To the extent that the Board determines it desirable
for any Award to be given any particular tax, accounting, legal or
regulatory treatment, the Award may be made by the Board, subject to any
necessary restrictions, conditions or other terms or otherwise in such
manner as is necessary to obtain the desired treatment.
(f) Code Section 162(m) Provisions. For purposes of qualifying any
compensation attributable to a grant of an Award to a Key Executive as
"performance-based compensation" within the meaning of Section 162(m) of
the Code:
(i) The compensation shall either:
(A) Be attributable solely to (I) Incentive Stock
Options, (II) nonqualified stock options with a per share
exercise price equal to at least 100% of the Fair Market Value
of a share of Common Stock on the date the option is granted,
and/or (III) stock appreciation rights for which the amount of
compensation is based solely on an increase in the value of
the shares of Common Stock of the Company after the date of
grant of the Award; or
(B) To the extent subsection (A) above is not
applicable, be based upon the achievement of Performance Goals
established by the Committee in writing not later than 90 days
after the commencement of the period of service to which the
Performance Goal relates, provided that the outcome is
substantially uncertain at the time the Committee actually
establishes the Performance Goal and less than 25% of the
period of service to which the Performance Goal relates has
elapsed at such time;
(ii) The Committee described in Section 1.3(a)(i) of this Plan
shall grant the Award and establish any applicable Performance
Goals;
(iii) With respect to any Award of stock options and/or stock
appreciation rights described in Section 1.7(b)(i)(A) above (subject
to Section 1.6(b)), no Key Executive shall be granted, in any fiscal
year, stock options, or stock appreciation rights to purchase (or
obtain the benefits of the equivalent of) more than 200,000 shares
of Common Stock (the "Annual Share Limit"); provided, however, that
in connection with his or her initial service, the Key Executive may
be granted stock options, or stock appreciation rights to purchase
up to an additional 300,000 (the "Initial Service Limit") shares of
Common Stock of the Company which do not count against the Annual
Share Limit; and provided, further, that if a stock option, or stock
appreciation right is cancelled in the same fiscal year of the
Company in which it was granted (other than in
8
connection with a transaction described in Section 1.6(c)), the
cancelled stock option, or stock appreciation right will be counted
against the Annual Share Limit for such fiscal year (for this
purpose, if the exercise price of a stock option is reduced, the
transaction will be treated as a cancellation of the stock option
and grant of a new stock option). The foregoing Annual Share Limit
and Initial Service Limit shall be adjusted proportionately in
connection with any change in the Company's capitalization as
described in Section 1.6(c). All provisions of this Section
1.7(b)(iii) will also apply to grants of full value shares,
including restricted stock, restricted units and performance shares,
except that the maximum grants will be fifty percent (50%) of the
maximums shown above applicable to stock options and stock
appreciation rights.
(iv) No Key Executive shall be paid, in any fiscal year, more
than $2,000,000 in cash performance units (which are a separate
vehicle from performance shares); and
(v) Prior to payment of the compensation, the Committee
described in Section 1.3(a)(i) certifies that any applicable
Performance Goals and any other material terms of the Award were in
fact satisfied.
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Awards and Award Agreements. Each Award granted under the Plan shall
be evidenced by an Award Agreement which shall contain such provisions as the
Board in its discretion deems necessary or desirable. Such provisions may
include (but are not limited to) restrictions on the Grantee's right to transfer
the shares of Common Stock issuable pursuant to the Award, a requirement that
the Grantee become a party to an agreement restricting transfer or allowing
repurchase of any shares of Common Stock acquired pursuant to the Award, a
requirement that the Grantee acknowledge that such shares are acquired for
investment purposes only, and a right of first refusal exercisable by the
Company in the event that the Grantee wishes to transfer any such shares. The
Board may grant Awards in tandem or in connection with or independently of or in
substitution for any other Award or Awards granted under this Plan or any award
granted under any other plan of the Company. Payments or transfers to be made by
the Company upon the grant, exercise or payment of an Award may be made in such
form as the Board shall determine, including cash, shares of Common Stock or
other securities (or proceeds from the sale thereof), other Awards (by surrender
or cancellation thereof or otherwise) or other property and may be made in a
single payment or transfer, in installments or on a deferred basis. The Board
may determine that a Grantee shall have no rights with respect to an Award
unless such Grantee accepts the Award within such period as the Board shall
specify by executing an Award Agreement in such form as the Board shall
determine and, if the Board shall so require, makes payment to the Company in
such amount as the Board may determine. Loans to executive officers of the
Company may not be extended, guaranteed or arranged by the Company in violation
of Section 402 of the Sarbanes-Oxley Act of 2002, Regulation O of the Board of
Governors of the Federal Reserve System or any other applicable law or
regulation.
9
2.2 No Rights as a Shareholder. No Grantee of an Award (or other person
having rights pursuant to such Award) shall have any of the rights of a
shareholder of the Company with respect to shares subject to such Award until
the transfer of such shares to such person. Except as otherwise provided in
Section 1.6(c), no adjustment shall be made for dividends, distributions or
other rights (whether ordinary or extraordinary, and whether in cash, securities
or other property) for which the record date is prior to the date such shares
are issued.
2.3 Grant of Stock Options, Stock Appreciation Rights and Additional
Options.
(a) Grant of Stock Options. The Board may grant stock options,
including Incentive Stock Options and nonqualified stock options, to
purchase shares of Common Stock from the Company, to such Key Persons, in
such amounts and subject to such terms and conditions (including the
attainment of Performance Goals), as the Board shall determine in its
discretion, subject to the provisions of the Plan.
(b) Grant of Stock Appreciation Rights. The Board may grant stock
appreciation rights to such Key Persons, in such amounts and subject to
such terms and conditions (including the attainment of Performance Goals),
as the Board shall determine in its discretion, subject to the provisions
of the Plan. Stock appreciation rights may be granted in connection with
all or any part of, or independently of, any stock option granted under
the Plan. A stock appreciation right may be granted at or after the time
of grant of such option.
(c) Stock Appreciation Rights. The Grantee of a stock appreciation
right shall have the right, subject to the terms of the Plan and the
applicable Award Agreement, to receive from the Company an amount equal to
(i) the excess of the Fair Market Value of a share of Common Stock on the
date of exercise of the stock appreciation right over (ii) the exercise
price of such right as set forth in the Award Agreement (if the stock
appreciation right is granted in connection with a stock option, then the
exercise price of the option), multiplied by (iii) the number of shares
with respect to which the stock appreciation right is exercised. Payment
to the Grantee upon exercise of a stock appreciation right shall be made
in cash or in shares of Common Stock (valued at their Fair Market Value on
the date of exercise of the stock appreciation right) or both, as the
Board shall determine in its discretion. Upon the exercise of a stock
appreciation right granted in connection with a stock option, the number
of shares subject to the option shall be correspondingly reduced by the
number of shares with respect to which the stock appreciation right is
exercised. Upon the exercise of a stock option in connection with which a
stock appreciation right has been granted, the number of shares subject to
the stock appreciation right shall be reduced correspondingly by the
number of shares with respect to which the option is exercised.
(d) Exercise Price. Each Award Agreement with respect to a stock
option or stock appreciation right shall set forth the exercise price,
which shall be determined by the Committee in its discretion, except that
no stock option or stock appreciation right may be granted with an
exercise price below the fair market value of the Company's common stock
on the date of grant.
10
(e) Exercise Periods. Each Award Agreement with respect to a stock
option or stock appreciation right shall set forth the periods during
which the Award evidenced thereby shall be exercisable, and, if
applicable, the conditions which must be satisfied (including the
attainment of Performance Goals) in order for the Award evidenced thereby
to be exercisable, whether in whole or in part. Such periods and
conditions shall be determined by the Board in its discretion; provided,
however, that no stock option or stock appreciation right shall be
exercisable more than ten (10) years after the date the Award is issued.
(f) Incentive Stock Options. Notwithstanding Section 2.3(d) and (e),
with respect to any Incentive Stock Option or stock appreciation right
granted in connection with an Incentive Stock Option (i) the exercise
price shall be at least 100% of the Fair Market Value of a share of Common
Stock on the date the option is granted (except as permitted in connection
with the assumption or issuance of options in a transaction to which
Section 424(a) of the Code applies) and (ii) the exercise period shall not
be for longer than ten (10) years after the date of the grant. To the
extent that the aggregate Fair Market Value (determined as of the time the
option is granted) of the shares of Common Stock with respect to which
Incentive Stock Options and stock appreciation rights granted in
connection with Incentive Stock Options granted under this Plan and all
other plans of the Company are first exercisable by any Grantee during any
calendar year shall exceed the maximum limit (currently, $100,000), if
any, imposed from time to time under Section 422 of the Code, such options
and rights shall be treated as nonqualified stock options. For purposes of
this Section 2.3(f), Incentive Stock Options shall be taken into account
in the order in which they were granted.
(g) Ten Percent Owners. Notwithstanding the provisions of Sections
2.3(d), (e) and (f), to the extent required under Section 422 of the Code,
an Incentive Stock Option may not be granted under the Plan to an
individual who, at the time the option is granted, owns stock possessing
more than 10% of the total combined voting power of all classes of stock
of his or her employer corporation or of its parent or subsidiary
corporations (as such ownership may be determined for purposes of Section
422(b)(6) of the Code) unless (i) at the time such Incentive Stock Option
is granted the exercise price is at least 110% of the Fair Market Value of
the shares subject thereto, and (ii) the Incentive Stock Option by its
terms is not exercisable after the expiration of five (5) years from the
date granted.
(h) Repricing Requires Shareholder Approval. No Award granted
hereunder shall have its exercise price modified or "repriced" without
first obtaining shareholder approval.
2.4 Exercise of Stock Options and Stock Appreciation Rights. Each stock
option or stock appreciation right granted under the Plan shall be exercisable
as follows:
(a) Exercise Period. A stock option or stock appreciation right
shall become and cease to be exercisable at such time or times as
determined by the Board and set forth in the Award Agreement.
11
(b) Manner of Exercise. Unless the applicable Award Agreement
otherwise provides, a stock option or stock appreciation right may be
exercised from time to time as to all or part of the shares as to which
such Award is then exercisable (but, in any event, only for whole shares).
A stock appreciation right granted in connection with an option may be
exercised at any time when, and to the same extent that, the related
option may be exercised. A stock option or stock appreciation right shall
be exercised by written notice to the Company, on such form and in such
manner as the Board shall prescribe.
(c) Payment of Exercise Price. Any written notice of exercise of a
stock option shall be accompanied by payment of the exercise price for the
shares being purchased. Such payment shall be made (i) in cash (by
certified check or as otherwise permitted by the Board), or (ii) (A) by
delivery of shares of Common Stock (which, if acquired pursuant to the
exercise of a stock option or under an Award made under this Plan or any
other compensatory plan of the Company, were acquired at least six (6)
months prior to the option exercise date) having a Fair Market Value
(determined as of the exercise date) equal to all or part of the exercise
price and cash for any remaining portion of the exercise price, (B) by
cashless exercise procedure through a broker-dealer, and (C) to the extent
permitted by law, by such other method not otherwise prohibited by the
Board including, without limitation, a "net exercise."
(d) Delivery of Shares. Promptly after receiving payment of the full
exercise price, or after receiving notice of the exercise of a stock
appreciation right for which payment by the Company will be made partly or
entirely in shares of Common Stock, the Company shall, subject to the
provisions of Section 3.3 (relating to certain restrictions), transfer to
the Grantee or to such other person as may then have the right to exercise
the Award, the shares of Common Stock for which the Award has been
exercised and to which the Grantee is entitled. If the method of payment
employed upon option exercise so requires, and if applicable law permits,
a Grantee may direct the Company to deliver the shares to the Grantee's
broker-dealer.
2.5 Termination of Employment.
(a) Termination of Employment by Grantee for any Reason or By the
Company for Cause. Except to the extent otherwise provided in paragraphs
(b), (c), (d) and (e) below or in the applicable Award Agreement, all
unvested stock options and stock appreciation rights to the extent not
theretofore exercised shall terminate immediately upon (i) the Grantee's
Termination of Employment at Grantee's election for any reason or (ii)
Grantee's Termination of Employment by the Company for Cause.
(b) At Election of Company or a Related Entity. Except to the extent
otherwise provided in the applicable Award Agreement, upon the Termination
of Employment of a Grantee at the election of the Company or a Related
Entity (other than in circumstances governed by paragraph (a) above or
paragraphs (c), (d) or (e) below) the Grantee may exercise any outstanding
stock option or stock appreciation right on the following terms and
conditions: (i) exercise may be made only to the extent that the Grantee
was entitled to exercise the Award on the date of the Termination of
Employment; and (ii) exercise must occur within three (3) months after the
Termination
12
of Employment but in no event after the expiration date of the Award as
set forth in the Award Agreement.
(c) Retirement. At such time as the Company adopts a policy of
retirement and during the continued effectiveness of such policy, except
to the extent otherwise provided in the applicable Award Agreement, upon
the Termination of Employment of a Grantee by reason of the Grantee's
Retirement, the Grantee may exercise any outstanding stock option or stock
appreciation right on the following terms and conditions: (i) exercise may
be made only to the extent that the Grantee was entitled to exercise the
Award on the date of Retirement; and (ii) exercise must occur within three
(3) years after Retirement but in no event after the expiration date of
the Award as set forth in the Award Agreement.
(d) Disability. Except to the extent otherwise provided in the
applicable Award Agreement, upon the termination of Employment of a
Grantee by reason of Disability the Grantee may exercise any outstanding
stock option or stock appreciation right on the following terms and
conditions: (i) exercise may be made only to the extent that the Grantee
was entitled to exercise the Award on the date of Termination of
Employment; and (ii) exercise must occur no later than six (6) months
after the Termination of Employment but in no event after the expiration
date of the Award as set forth in the Award Agreement.
(e) Death. Except to the extent otherwise provided in the applicable
Award Agreement, if a Grantee dies during the period in which the
Grantee's stock options or stock appreciation rights are exercisable,
whether pursuant to their terms or pursuant to paragraph (b), (c) or (d)
above, any outstanding stock option or stock appreciation right shall be
exercisable on the following terms and conditions: (i) exercise may be
made only to the extent that the Grantee was entitled to exercise the
Award on the date of death; and (ii) exercise must occur no later than six
(6) months after the date of the Grantee's death. Any such exercise of an
Award following a Grantee's death shall be made only by the Grantee's
executor or administrator, unless the Grantee's will specifically disposes
of such Award, in which case such exercise shall be made only by the
recipient of such specific disposition. If a Grantee's executor (or
administrator) or the recipient of a specific disposition under the
Grantee's will shall be entitled to exercise any Award pursuant to the
preceding sentence, such executor (or administrator) or recipient shall be
bound by all the terms and conditions of the Plan and the applicable Award
Agreement which would have applied to the Grantee.
2.6 Grant of Restricted Stock and Unrestricted Stock.
(a) Grant of Restricted Stock. The Board may grant restricted shares
of Common Stock to such Key Persons, in such amounts and subject to such
terms and conditions (including the attainment of Performance Goals), as
the Board shall determine in its discretion, subject to the provisions of
the Plan.
(b) Grant of Unrestricted Stock. The Board may grant unrestricted
shares of Common Stock to such Key Persons, in such amounts and subject to
such terms and
13
conditions as the Board shall determine in its discretion, subject to the
provisions of the Plan.
(c) Rights as Shareholder. The Company may issue in the Grantee's
name shares of Common Stock covered by an Award of restricted stock or
unrestricted stock. Upon the issuance of such shares, the Grantee shall
have the rights of a shareholder with respect to the restricted stock or
unrestricted stock, subject to the transfer restrictions and the Company's
repurchase rights described in paragraphs (d) and (e) below and to such
other restrictions and conditions as the Board in its discretion may
include in the applicable Award Agreement.
(d) Company to Hold Certificates. Unless the Board shall otherwise
determine, any certificate issued evidencing shares of restricted stock
shall remain in the possession of the Company until such shares are free
of any restrictions specified in the Plan or the applicable Award
Agreement.
(e) Nontransferable. Shares of restricted stock may not be sold,
assigned, transferred, pledged or otherwise encumbered or disposed of
except as specifically provided in this Plan or the applicable Award
Agreement. The Board at the time of grant shall specify the date or dates
(which may depend upon or be related to the attainment of Performance
Goals) and other conditions on which the non-transferability of the
restricted stock shall lapse. Unless the applicable Award Agreement
provides otherwise, additional shares of Common Stock or other property
distributed to the Grantee in respect of shares of restricted stock, as
dividends or otherwise, shall be subject to the same restrictions
applicable to such restricted stock. The Board at any time may waive or
amend the transfer restrictions or other condition of an Award of
restricted stock.
(f) Termination of Employment. Except to the extent otherwise
provided in the applicable Award Agreement or unless otherwise determined
by the Board, in the event of the Grantee's Termination of Employment for
any reason, shares of restricted stock that remain subject to transfer
restrictions as of the date of such termination (and therefore are
unvested) shall be forfeited and canceled.
2.7 Grant of Restricted Stock Units.
(a) Grant of Restricted Stock Units. The Board may grant Awards of
restricted stock units to such Key Persons, in such amounts and subject to
such terms and conditions (including the attainment of Performance Goals),
as the Board shall determine in its discretion, subject to the provisions
of the Plan.
(b) Vesting. The Board, at the time of grant, shall specify the date
or dates on which the restricted stock units shall become vested and other
conditions to vesting (including the attainment of Performance Goals).
(c) Termination of Employment. Except to the extent otherwise
provided in the applicable Award Agreement or unless otherwise determined
by the Board, in the event of the Grantee's Termination of Employment for
any reason, restricted stock units that have not vested shall be forfeited
and canceled.
14
2.8 Grant of Performance Shares, Performance Options and Performance Share
Units.
(a) Grant of Performance Shares, Options Share Units and Cash
Performance Units. The Board may grant performance shares in the form of
actual shares of Common Stock, performance options or share units over an
identical number of shares of Common Stock, to such Key Persons, in such
amounts (which may depend on the extent to which Performance Goals are
attained), subject to the attainment of such Performance Goals and
satisfaction of such other terms and conditions (which may include the
occurrence of specified dates), as the Board shall determine in its
discretion, subject to the provisions of the Plan. The Board may also
grant cash performance units, which are cash awards subject to performance
goal attainment, but which are denominated only in cash, not in stock. The
Performance Goals and the length of the performance period applicable to
any Award of performance shares, performance options, share units or
performance units shall be determined by the Board. The Board shall
determine in its discretion whether performance shares granted in the form
of share units shall be paid in cash, Common Stock, or a combination of
cash and Common Stock.
(b) Company to Hold Certificates. Unless the Board shall otherwise
determine, any certificate issued evidencing performance shares shall
remain in the possession of the Company until such performance shares are
earned and are free of any restrictions specified in the Plan or the
applicable Award Agreement.
(c) Nontransferable. Performance shares may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in this Plan or the applicable Award Agreement. The
Board at the time of grant shall specify the date or dates (which may
depend upon or be related to the attainment of Performance Goals) and
other conditions on which the non-transferability of the performance
shares shall lapse. Unless the applicable Award Agreement provides
otherwise, additional shares of Common Stock or other property distributed
to the Grantee in respect of performance shares, as dividends or
otherwise, shall be subject to the same restrictions applicable to such
performance shares. The Board at any time may waive or amend the transfer
restrictions or other condition of an Award of performance shares.
(d) Termination of Employment. Except to the extent otherwise
provided in the applicable Award Agreement or unless otherwise determined
by the Board, in the event of the Grantee's Termination of Employment for
any reason, performance shares and performance share units or cash
performance units that remain subject to transfer restrictions as of the
date of such termination (and therefore shall not have vested) shall be
forfeited and canceled.
2.9 Grant of Dividend Equivalent Rights. The Board may in its discretion
include in the Award Agreement with respect to any share denominated Award a
dividend equivalent right entitling the Grantee to receive amounts equal to the
ordinary dividends that would be paid, during the time such Award is outstanding
and unexercised, on the shares of Common Stock covered by such Award if such
shares were then outstanding. In the event such a provision is included in an
Award Agreement, the Board shall determine whether such payments shall be
15
made in cash, in shares of Common Stock or in another form, whether they shall
be conditioned upon the exercise or vesting of, or the attainment or
satisfaction of terms and conditions applicable to, the Award to which they
relate, the time or times at which they shall be made, and such other terms and
conditions as the Board shall deem appropriate.
2.10 Deferred Stock Units.
(a) Description. Deferred stock units shall consist of a restricted
stock, restricted stock unit, performance share or share unit Award that
the Board in its discretion permits to be paid out in installments or on a
deferred basis, in accordance with rules and procedures established by the
Board. Deferred stock units shall remain subject to the claims of the
Company's general creditors until distributed to the Grantee. Cash
Performance Units may be deferred, but shall remain subject to the claims
of the Company's general creditors until distributed to the Grantee.
(b) 162(m) Limits. Deferred stock units and deferred cash
performance units shall be subject to the annual Section 162(m) limits
applicable to the underlying restricted stock, restricted stock unit,
performance share or share unit or cash performance unit Award as forth in
Section 1.7(b).
2.11 Other Stock-Based Awards. The Board may grant other types of
stock-based Awards to such Key Persons, in such amounts and subject to such
terms and conditions, as the Board shall in its discretion determine, subject to
the provisions of the Plan. Such Awards may entail the transfer of actual shares
of Common Stock, or payment in cash or otherwise of amounts based on the value
of shares of Common Stock.
2.12 Director Stock Options.
(a) Eligibility. Subject to the specific requirements, terms and
conditions as adopted from time to time by the Board in its discretion (i)
all voting directors of the Company who are not employees of the Company
("Non-Employee Directors") shall receive stock options pursuant to the
conditions of this Section 2.12.
(b) Grant of Director Stock Options. Each Non-Employee Director may
be granted stock options to purchase shares of Common Stock of the
Company.
(c) Exercise Price. Notwithstanding Section 2.3(d), until and unless
the Board in its discretion determines otherwise, the per share exercise
price for each stock option granted under this Section 2.13 shall be 100%
of the Fair Market Value of a share of Common Stock on the date the stock
option is granted.
(d) Exercise Period. Each stock option granted under this Section
2.12 shall vest, become exercisable and possess a term in accordance with
the policy then in place and as adopted by the Board, provided, however,
that (i) if the Non-Employee Director's service on the Board is terminated
as a result of not being renominated or reelected to the Board, then such
stock option shall continue to exercisable until the earlier to occur of
(A) the expiration of the remaining term of the option or (B) three (3)
years from the date
16
Board service terminated, and (ii) no stock option may have a term in
excess of ten (10) years.
(e) Non-statutory Options. Stock options granted under this Section
2.12 will constitute nonqualified stock options.
(f) Other Stock Option Terms Applicable. Except as set forth in this
Section 2.12, all stock options granted under this Section 2.12 will be
subject to and benefited by the terms and conditions (including Section
3.7) of the Plan applicable to other stock options granted under the Plan.
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards.
(a) Board Authority to Amend Plan. The Board in its discretion may
at any time suspend, discontinue, revise or amend the Plan in any respect
whatsoever, except that any such amendment (other than an amendment
pursuant to paragraphs (d), (e) or (f) of this Section 3.1 or an amendment
to effect an assumption or other action consistent with Section 3.7) that
materially impairs the rights or materially increases the obligations of a
Grantee under an outstanding Award shall be effective with respect to such
Grantee and Award only with the consent of the Grantee (or, upon the
Grantee's death, the Grantee's executor (or administrator) or the
recipient of a specific disposition under the Grantee's will).
(b) Shareholder Approval. Shareholder approval of any amendment
shall be obtained to the extent necessary to comply with Section 422 of
the Code (relating to Incentive Stock Options) or any other applicable
law, regulation or rule (including the rules of self-regulatory
organizations). As set forth in Section 2.3(h), shareholder approval shall
be required for any "repricing" of a previously granted Award hereunder.
(c) Board Authority to Amend Awards. Subject to Section 2.3(h) which
requires shareholder approval for any "repricing" of an Award granted
hereunder, the Board in its discretion may at any time, whether before or
after the grant, expiration, exercise, vesting or maturity of or lapse of
restriction on an Award or the Termination of Employment of a Grantee,
amend any outstanding Award or Award Agreement, including an amendment
which would accelerate the time or times at which the Award becomes
unrestricted or may be exercised, or waive or amend any goals,
restrictions or conditions set forth in the Award Agreement. However, any
such amendment (other than an amendment pursuant to paragraphs (d), (e) or
(f) of this Section 3.1 or an amendment to effect an action consistent
with Section 3.7) that materially impairs the rights or materially
increases the obligations of a Grantee under an outstanding Award shall be
made only with the consent of the Grantee (or, upon the Grantee's death,
the Grantee's executor (or administrator) or the recipient of a specific
disposition under the Grantee's will). For purposes of the Plan, any
action of the Board that alters or affects the tax
17
treatment of any Award shall not be considered to materially impair any
rights of any Grantee.
(d) Regulatory Changes Generally. Notwithstanding anything to the
contrary in this Plan, the Board shall have full discretion to amend the
Plan or an outstanding Award or Award Agreement to the extent necessary to
preserve any tax, accounting, legal or regulatory treatment with respect
to any Award and any outstanding Award Agreement shall be deemed to be so
amended to the same extent, without obtaining the consent of any Grantee
(or, after the Grantee's death, the Grantee's executor (or administrator)
or the recipient of a specific disposition under the Grantee's will)
provided that such amendment does not adversely affect a Grantee's rights
under the Plan or such Award and Award Agreement.
(e) Section 409A Changes. Notwithstanding anything to the contrary
in this Plan, the Board shall have full discretion to amend the Plan or
any outstanding Award or Award Agreement to the extent necessary to avoid
the imposition of any tax under Section 409A of the Code. Any such
amendments to the Plan, an Award or an Award Agreement may be adopted
without obtaining the consent of any Grantee (or, after the Grantee's
death, the Grantee's executor (or administrator) or the recipient of a
specific disposition under the Grantee's will), regardless of whether such
amendment adversely affects a Grantee's rights under the Plan or such
Award or Award Agreement.
(f) Other Tax Changes. In the event that changes are made to Section
83(b), 162(m), 422 or other applicable provision of the Code the Board
may, subject to Sections 3.1(a), (b) and (c), make any adjustments it
determines in its discretion to be appropriate with respect to the Plan or
any Award or Award Agreement.
3.2 Tax Withholding.
(a) Tax Withholdings. As a condition to the receipt of any shares of
Common Stock pursuant to any Award or the lifting of restrictions on any
Award, or in connection with any other event that gives rise to a federal
or other governmental tax withholding obligation on the part of the
Company relating to an Award (including, without limitation, FICA tax),
the Company shall be entitled to require that the Grantee remit to the
Company an amount sufficient in the opinion of the Company to satisfy such
withholding obligation.
(b) Withholding Shares. If the event giving rise to the withholding
obligation is a transfer of shares of Common Stock, then, unless otherwise
provided in the applicable Award Agreement, the Grantee may satisfy only
the minimum statutory withholding obligation imposed under paragraph (a)
by electing to have the Company withhold shares of Common Stock having a
Fair Market Value equal to the amount of tax to be withheld. For this
purpose, Fair Market Value shall be determined as of the date on which the
amount of tax to be withheld is determined (and any fractional share
amount shall be settled in cash).
18
3.3 Restrictions.
(a) Required Consents. If the Board shall at any time determine that
any consent (as hereinafter defined) is necessary or desirable as a
condition of, or in connection with, the granting of any Award, the
issuance or purchase of shares of Common Stock or other rights thereunder,
or the taking of any other action thereunder (a "Plan Action"), then no
such Plan Action shall be taken, in whole or in part, unless and until
such consent shall have been effected or obtained to the full satisfaction
of the Board.
(b) Definition. The term "consent" as used herein with respect to
any action referred to in paragraph (a) means (i) any and all listings,
registrations or qualifications in respect thereof upon any securities
exchange or under any federal, state or local law, rule or regulation,
(ii) any and all written agreements and representations by the Grantee
with respect to the disposition of shares, or with respect to any other
matter, which the Board shall deem necessary or desirable to comply with
the terms of any such listing, registration or qualification or to obtain
an exemption from the requirement that any such listing, qualification or
registration be made, (iii) any and all consents, clearances and approvals
in respect of a Plan Action by any governmental or other regulatory
bodies, and (iv) any and all consents or authorizations required to comply
with, or required to be obtained under, applicable local law or otherwise
required by the Board. Nothing herein shall require the Company to list,
register or qualify the shares of Common Stock on any securities exchange.
3.4 Nonassignability.
(a) Nonassignability. No Award or right granted to any person under
the Plan shall be assignable or transferable other than by will or by the
laws of descent and distribution, and all such Awards and rights shall be
exercisable during the life of the Grantee only by the Grantee or the
Grantee's legal representative and any such attempted assignment, transfer
or exercise in contravention of this Section 3.4 shall be void.
Notwithstanding the foregoing, the Board may in its discretion permit the
donative transfer of any Award under the Plan (other than an Incentive
Stock Option) by the Grantee (including to a trust or similar instrument),
subject to such terms and conditions as may be established by the Board.
(b) Cashless Exercises Permitted. The restrictions on exercise and
transfer in paragraph (a) above shall not be deemed to prohibit "cashless
exercise" procedures with parties who provide financing for the purpose of
(or who otherwise facilitate) the exercise of Awards consistent with
applicable legal restrictions and Rule 16b-3 and as otherwise permitted by
Section 2.4(c).
3.5 Requirement of Notification of Election Under Section 83(b) of the
Code. If a Grantee, in connection with the acquisition of shares of Common Stock
under the Plan, is permitted under the terms of the Award Agreement to make the
election permitted under Section 83(b) of the Code (i.e., an election to include
in gross income in the year of transfer the amounts specified in Section 83(b)
of the Code notwithstanding the continuing transfer
19
restrictions) and the Grantee makes such an election, the Grantee shall notify
the Company of such election within ten (10) days of filing notice of the
election with the Internal Revenue Service, in addition to any filing and
notification required pursuant to regulations issued under Section 83(b) of the
Code.
3.6 Requirement of Notification Upon Disqualifying Disposition Under
Section 421(b) of the Code. If any Grantee shall make any disposition of shares
of Common Stock issued pursuant to the exercise of an Incentive Stock Option
under the circumstances described in Section 421(b) of the Code (relating to
certain disqualifying dispositions), such Grantee shall notify the Company of
such disposition within ten (10) days thereof.
3.7 Change in Control.
(a) Definition. A "Change in Control" means the occurrence of any
one of the following events:
(i) any Person (as defined in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the Beneficial Owner (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing in excess of fifty percent (50%) or more
of the combined voting power of the Company's then outstanding
securities ("Company Voting Securities"); provided, however, that
the event described in this clause (i) shall not be deemed a Change
in Control by virtue of any of the following acquisitions: (A) by
the Company or any corporation controlled by the Company, (B) by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company, (C) by any
underwriter temporarily holding securities pursuant to an offering
of such securities, (D) pursuant to a Non-Qualifying Transaction (as
defined in clause (iii) below), (E) pursuant to any acquisition by
Grantee or any group of persons including Grantee (or any entity
controlled by Grantee or any group of persons including Grantee),
(F) a transaction (other than one described in clause (iii) below)
in which outstanding Company Voting Securities are acquired from the
Company, if a majority of the Continuing Directors (as defined in
clause (ii) below) approve a resolution providing expressly that the
acquisition pursuant to this subclause (F) does not constitute a
Change in Control under this clause (F), or (G) any increase in the
ownership position of a person of the outstanding Company Voting
Securities as a result of an acquisition of common stock of the
Company by the Company which, by reducing the number of shares of
common stock of the Company outstanding, increases the proportionate
number of shares beneficially owned by such person to in excess of
fifty percent (50%) or more of the outstanding Company Voting
Securities, provided, however, that if a person shall become the
beneficial owner of in excess of fifty percent (50%) or more of the
outstanding Company Voting Securities by reason of a share
acquisition by the Company as described above and shall, after such
share acquisition by the Company, become the beneficial owner of any
additional shares of common stock of the Company, then such
acquisition shall constitute a Change in Control;
20
(ii) the consummation of a merger, consolidation, statutory
share exchange or similar form of corporate transaction involving
the Company or any of its subsidiaries that requires the approval of
the Company's shareholders, whether for such transaction or the
issuance of securities in the transaction (a "Business
Combination"), unless immediately following such Business
Combination: (A) more than 50% of the total voting power of (x) the
corporation resulting from such Business Combination (the "Surviving
Corporation"), or (y) if applicable, the ultimate parent corporation
that directly or indirectly has beneficial ownership of at least 95%
of the voting securities eligible to elect directors of the
Surviving Corporation (the "Parent Corporation"), is represented by
Company Voting Securities that were outstanding immediately prior to
such Business Combination (or, if applicable, is represented by
shares into which such Company Voting Securities were converted
pursuant to such Business Combination), and such voting power among
the holders thereof is in substantially the same proportion as the
voting power of such Company Voting Securities among the holders
thereof immediately prior to the Business Combination, (B) no person
(other than any employee benefit plan (or related trust) sponsored
or maintained by the Surviving Corporation or the Parent
Corporation), is or becomes the beneficial owner, directly or
indirectly, of in excess of fifty percent (50%) or more of the total
voting power of the outstanding voting securities eligible to elect
directors of the Parent Corporation (or, if there is no Parent
Corporation, the Surviving Corporation) and (C) at least a majority
of the members of the board of directors of the Parent Corporation
(or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Combination are
Continuing Directors (any Business Combination which satisfies all
of the criteria specified in subclauses (A), (B) and (C) above shall
be deemed to be a "Non-Qualifying Transaction"); provided, however,
that if Continuing Directors constitute a majority of the Board
immediately following the occurrence of a Business Combination, then
a majority of Continuing Directors in office prior to the
Consummation of the Business Combination may approve a resolution
providing expressly that such Business Combination does not
constitute a Change in Control under this clause (ii) for any and
all purposes of the Plan.
(iii) the shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company;
(iv) the consummation of an agreement (or agreements)
providing for the sale or disposition by the Company of all or
substantially all of the Company's assets other than a sale or
disposition which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent 50% or more of the combined voting power of the Company or
such surviving entity outstanding immediately after such sale or
disposition; or
(v) in the case of directors, officers or employees who are
entitled to the benefits of a change in control agreement or similar
provisions within an agreement entered into by the Company or a
Related Entity that defines or addresses change of control, "change
of control" as defined in such agreement
21
(b) Effect of Change in Control. Upon the occurrence of a Change in
Control specified in paragraph (a)(i) above and immediately prior to the
occurrence of a Change in Control specified in paragraph (a)(ii), (a)(iii)
or (a)(iv) above, Awards shall Fully Vest (as defined in paragraph (c)
below). If, within two (2) years after the occurrence of a Change in
Control a Termination of Employment occurs with respect to any Grantee for
any reason other than Cause, Disability, death or Retirement, Grantee
shall be entitled to exercise Awards at any time thereafter until the
earlier of (i) the date twelve (12) months after the date of Termination
of Employment and (ii) the expiration date in the applicable Award
Agreement.
(c) Fully Vest. The following shall occur if Awards "Fully Vest":
(i) any stock options and stock appreciation rights granted under the Plan
shall become fully vested and immediately exercisable, (ii) any restricted
stock, restricted stock units, performance shares, performance units and
other stock-based Awards granted under the Plan will become fully vested
and matured, any restrictions applicable to such Awards shall lapse and
such Awards denominated in stock will be immediately paid out, and (iii)
any Performance Goals applicable to Awards will be deemed to be fully
satisfied; provided that (A) any Performance Goals whose performance
period has not yet lapsed shall be calculated based on the higher of (x)
the target value of the Awards as established by the Board and (y) the
value of the Awards calculated under the terms of the Awards based on the
average performance through the end of the fiscal quarter immediately
prior to the effective date of the Change of Control (continued pro forma
through the end of the performance period if necessary for purposes of
determining whether the Performance Goal would have been met), and (B) if
the Award has a performance period greater than one (1) year, the amount
of the Award payable to the Grantee will be pro rated, based on a
fraction, the numerator of which is the number of fiscal quarters
completed from the beginning of the performance period until the effective
date of the Change of Control and the denominator is the total number of
fiscal quarters in the performance period.
(d) Section 409A. To the extent it is necessary for the term "change
of control" to be defined in order for compensation provided under any
Award to avoid the imposition of taxes under Section 409A of the Code,
then the term "change in control," only insofar as it applies to any such
Award and its treatment under Section 409A, shall be defined as so
required, rather than as provided in Section 3.7(a), and the terms of
Sections 3.7(b) through (c) shall be applied and interpreted with respect
to such Section 409A mandated definition in such manner as the Board in
its discretion determines to be equitable and reflect the intention of
Sections 3.7(a) through (c).
(e) No Conflict with Other Agreements. The foregoing definition of
"change of control" is applicable only to the matters contemplated by and
set forth in this Plan and any Award agreement pursuant to this Plan, and
shall not be controlling with respect to any other agreement between the
Company and any third party.
3.8 No Right to Employment. Nothing in the Plan or in any Award Agreement
shall confer upon any Grantee the right to continue in the employ of or
association with the Company
22
or any Related Entity or affect any right which the Company or Related Entity
may have to terminate such employment or association at any time (with or
without cause).
3.9 Nature of Payments. Unless the Board determines at any time in its
discretion, any and all grants of Awards and issuances of shares of Common Stock
under the Plan shall constitute a special incentive payment to the Grantee and
shall not be taken into account in computing the amount of salary or
compensation of the Grantee for the purpose of determining any benefits under
any pension, retirement, profit-sharing, bonus, life insurance or other benefit
plan of the Company or under any agreement with the Grantee, unless such plan or
agreement specifically provides otherwise.
3.10 Non-Uniform Determinations. The Board's determinations under the Plan
need not be uniform and may be made by it selectively among persons who receive,
or are eligible to receive, Awards (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Board shall be
entitled, among other things, to make non-uniform and selective determinations,
and to enter into non-uniform and selective Award Agreements, as to the persons
to receive Awards under the Plan, and the terms and provisions of Awards under
the Plan.
3.11 Other Payments or Awards. Nothing contained in the Plan shall be
deemed in any way to limit or restrict the Company from making any award or
payment to any person under any other plan, arrangement or understanding,
whether now existing or hereafter in effect.
3.12 Interpretation. The section headings contained herein are for the
purpose of convenience only and are not intended to define or limit the contents
of the sections. As used in the Plan, "include," "includes," and "including" are
deemed to be followed by "without limitation" whether or not they are followed
by such words or words of like import; except as the context requires, the
singular includes the plural and visa versa; and references to any agreement or
other document are references to such agreement or document as amended or
supplemented from time to time. Any determination, interpretation or similar act
to be made by the Board shall be made in the discretion of the Board, whether or
not the applicable provisions of the Plan specifically refer to the Board's
discretion.
3.13 Effective Date and Term of Plan. Unless sooner terminated by the
Board, the Plan, including the provisions respecting the grant of Incentive
Stock Options, shall terminate on the tenth anniversary of the adoption of the
Plan by the Board; provided that the Plan shall continue to govern outstanding
Awards until such Awards have been satisfied or terminated. All Awards made
under the Plan prior to its termination shall remain in effect until such Awards
have been satisfied or terminated in accordance with the terms and provisions of
the Plan and the applicable Award Agreements.
3.14 Governing Law. All rights and obligations under the Plan shall be
construed and interpreted in accordance with the laws of the State of
California, without giving effect to principles of conflict of laws.
3.15 Severability; Entire Agreement. If any of the provisions of this Plan
or any Award Agreement is finally held to be invalid, illegal or unenforceable
(whether in whole or in
23
part), such provision shall be deemed modified to the extent, but only to the
extent, of such invalidity, illegality or unenforceability and the remaining
provisions shall not be affected thereby; provided, that if any of such
provisions is finally held to be invalid, illegal, or unenforceable because it
exceeds the maximum scope determined to be acceptable to permit such provision
to be enforceable, such provision shall be deemed to be modified to the minimum
extent necessary to modify such scope in order to make such provision
enforceable hereunder. The Plan and any Award Agreements contain the entire
agreement of the parties with respect to the subject matter thereof and
supersede all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral, with respect to the subject matter thereof.
3.16 No Third Party Beneficiaries. Except as expressly provided therein,
neither the Plan nor any Award Agreement shall confer on any person other than
the Company and the grantee of any Award any rights or remedies thereunder.
3.17 Successors and Assigns. The terms of this Plan shall be binding upon
and inure to the benefit of the Company and its successors and assigns.
3.18 Waiver of Claims. Each Grantee of an Award recognizes and agrees that
prior to being recommended by the Committee to the Board to receive an Award he
or she has no right to any benefits hereunder. Accordingly, in consideration of
the Grantee's receipt of any Award hereunder, he or she expressly waives any
right to contest the amount of any Award, the terms of any Award Agreement, any
determination, action or omission hereunder or under any Award Agreement by the
Committee, the Company or the Board, or any amendment to the Plan or any Award
Agreement (other than an amendment to this Plan or an Award Agreement to which
his or her consent is expressly required by the express terms of the Plan or an
Award Agreement).
24
QUALITY SYSTEMS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Lou Silverman and Paul Holt, and each of them,
individually, as attorneys and proxies, with full power of substitution, to vote
all shares of Common Stock of any class of Quality Systems, Inc. ("QSI") held of
record by the undersigned as of July 27, 2005, at the Annual Meeting of
Shareholders of QSI to be held at Hyatt Regency Irvine, 17900 Jamboree Avenue,
Irvine, California, on September 21, 2005 at 1:00 p.m. local time, and at all
adjournments thereof, (the "Annual Meeting") upon the following matters, which
are described in QSI's Proxy Statement for the Annual Meeting.
Please mark your votes as in this example. |X|
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1. ELECTION OF FOR WITHOLD
DIRECTORS: all nominees listed at AUTHORITY
NOMINEES: left to vote to vote for all
(except as marked nominees at left
to the contrary |_|
below)
|_|
William V. Botts
Patrick Cline
Maurice J. DeWald
Jonathan Javitt
Vincent J. Love
Steven T. Plochocki
Sheldon Razin
Louis Silverman
Instructions: To withhold authority to vote for any individual nominee, line
through or otherwise strike out the nominee's name to the left.
--------------------------------------------------------------------------------
2. For approval of the 2005 Stock Option and Incentive Plan.
FOR AGAINST ABSTAIN
|_| |_| |_|
--------------------------------------------------------------------------------
3. For ratification of Grant Thornton, LLP as QSI's independent public
accountants.
FOR AGAINST ABSTAIN
|_| |_| |_|
--------------------------------------------------------------------------------
4. For approval of the amendment to the Articles of the Incorporation
increasing the authorized level of shares.
FOR AGAINST ABSTAIN
|_| |_| |_|
--------------------------------------------------------------------------------
(Continued and to be Signed on Reverse Side)
In accordance with the discretion and at the instruction of the Board of
Directors, the proxy holder is authorized to act upon all matters incident to
the conduct of the meeting and upon other matters that properly come before the
meeting subject to the conditions of the QSI Proxy Statement concerning the
Annual Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED SHAREHOLDER. IF ANY NOMINEE NAMED ABOVE DECLINES OR IS UNABLE TO
SERVE AS A DIRECTOR, THE PERSONS NAMED AS PROXIES SHALL HAVE THE AUTHORITY TO
VOTE FOR ANY OTHER PERSON WHO MAY BE NOMINATED AT THE INSTUCTION AND DISCRETION
OF THE BOARD OF DIRECTORS.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
SHAREHOLDER ON THE REVERSE SIDE OF THIS PROXY. WHERE NO DIRECTION IS GIVEN, SUCH
SHARES WILL BE VOTED "FOR" THE ELECTION OF THE DIRECTORS NAMED ON THE REVERSE
SIDE OF THIS PROXY AND "FOR" PROPOSALS 2, 3 AND 4. THIS PROXY CONFERS
DISCRETIONARY AUTHORITY TO CUMULATE VOTES FOR ANY OR ALL OF THE NOMINEES FOR
ELECTION OF DIRECTORS FOR WHICH AUTHORITY TO VOTE HAS NOT BEEN WITHHELD SUBJECT
TO THE CONDITIONS OF THE QSI PROXY STATEMENT CONCERNING THE ANNUAL MEETING.
DATED_____________________, 2005
________________________________
________________________________
SIGNATURE(S)
NOTE: Please sign exactly as
your name appears herein. If the
stock is registered in the name
of two or more persons, each
should sign. Executors,
administrators, trustees,
guardians, attorneys and
corporate officers should add
their titles.
PLEASE SIGN, DATE, AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE.