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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
QUALITY SYSTEMS, INC.
(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):
|X| 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:
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2. Aggregate number of securities to which transaction applies:
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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):
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4. Proposed maximum aggregate value of transaction:
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5. Total fee paid:
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|_| Fees 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.
18191 Von Karman Avenue, Suite 450
Irvine, California 92612
----------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 21, 2004
To the Shareholders of Quality Systems, Inc.:
The Annual Meeting of Shareholders of Quality Systems, Inc. (the
"Company") will be held at the Marriott Hotel located at 18000 Von Karman Ave in
Irvine, California , on September 21, 2004 at 1:00 P.M. Pacific Time, for the
following purposes:
1. To elect seven (7) 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 ratify the appointment of Grant Thornton, LLP as independent
public accountants of the Company for the fiscal year ending March
31, 2005.
3. 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, 2004, are
entitled to notice of and to vote at the Annual Meeting and at any adjournments
of the Annual Meeting.
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 proxy and return it in the enclosed addressed envelope. Your promptness
in returning the proxy 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 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.
/s/ Paul Holt
Corporate Secretary
Irvine, California
July 27, 2004
QUALITY SYSTEMS, INC.
18191 Von Karman Avenue, Suite 450
Irvine, California 92612
----------------------
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 21, 2004
----------------------
PROXY STATEMENT
----------------------
SOLICITATION OF PROXIES
The accompanying proxy is solicited by the Board of Directors of Quality
Systems, Inc. (the "Company") for use at the Company's Annual Meeting of
Shareholders to be held at the Marriott Hotel in Irvine, California located at
18000 Von Karman Ave, Irvine, California , on September 21, 2004 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 and 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 proxy card and the Company's Annual
Report are being mailed to the Company's shareholders on or about August 16,
2004. 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 further solicitations
-1-
would be made by the Company's regular employees who will not receive additional
compensation for the solicitation.
OUTSTANDING SHARES AND VOTING RIGHTS
Only holders of record of the 6,364,354 shares of the Company's Common
Stock outstanding at the close of business on July 27, 2004, are entitled to
notice of and to vote at the Annual Meeting or any adjournment thereof. A
majority of the 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. The seven nominees for director receiving the highest number of
affirmative votes will be elected; votes withheld and votes against a nominee
have no practical effect. If additional persons are nominated for election as
directors, the proxy holders set forth herein intend to vote all proxies
received by them at the instruction and discretion of the Board of Directors.
The Board reserves the right to determine a priority among its nominees,
including the right to not allocate votes to one or more of the nominees,
depending upon the manner in which the Board believes other votes will be cast
and such other factors as the Board may deem appropriate in its discretion. The
Board has not yet determined the order of priority in which it will cast its
cumulative votes disproportionately among its nominees if the Board elects to
cumulate its votes on a disproportional basis.
In matters other than election of directors, assuming that a quorum is
present, the affirmative votes of a majority of the shares represented and
voting at a meeting (which shares voting affirmatively also constitute at least
a majority of the required quorum) is required for approval. Abstentions will
have the same practical effect as a negative vote but broker non-votes will not
be counted for any purpose in determining whether a matter has been approved.
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 or her 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 of Directors
confers upon the proxy holders the authority to cumulate votes at the
instruction and discretion of the Board of Directors .
-2-
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, 2004 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) Beneficially Owned(3)(4)
------------------------- ------------------ -------------------
Janet Razin and Sheldon Razin 1,427,220 22.43%
Ahmed Hussein 1,151,900 18.09%
Arbor Capital(5) 409,600 6.44%
Lou Silverman 135,701 2.09%
Frank C. Meyer 29,700 *
Patrick Cline 14,000 *
Paul Holt 5,750 *
Dale M. Hanson 6,000 *
Mohammed Tawfick El-Bardai 4,000 *
William E. Small 4,000 *
Emad Zikry 3,500 *
Greg Flynn 30 *
William V. Botts(6) 0 *
Maurice J. DeWald(6) 0 *
Jonathan Javitt(6) 0 *
Vincent J. Love(6) 0 *
Steven T. Plochocki(6) 0 *
All directors and Named Executive Officers as a group 2,781,801 42.71%
( 11 persons, including those named above)
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* 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 6,364,354 shares of Common
Stock outstanding as of July 27, 2004. Any securities not outstanding but
subject to options exercisable as of July 27, 2004 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, 2004 or exercisable within 60 days after July
27, 2004, and are, respectively, as follows: Mr. Hussein, 4,500 shares;
Mr. Silverman, 127,101 shares; Mr. Meyer, 4,500 shares; Mr. Hanson, 3,500
shares; Mr. Small, 4,000 shares; Mr. Holt, 5,750;and all directors and
Named Executive Officers as a group, 149,351 shares.
5. As reflected in the Schedule 13F filed with the Securities and Exchange
Commission on March 31, 2004. The address for Arbor Capital is 1 Financial
Plaza, Suite 1000, Minneapolis, MN 55402-1813.
6. Non-incumbent director nominees.
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ELECTION OF DIRECTORS
(Proposal No. 1)
Directors are elected at each Annual Meeting of Shareholders and hold
office until their respective successors are duly elected and qualified. The
full Board of Directors consists of seven directors. Certain information with
respect to the seven 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 any or all
of the nominees named below is solicited by the Board of Directors because, in
the event nominations are made in opposition to the nominees of the Board of
Directors, it is the intention of the persons named in the enclosed proxy to
cumulate votes represented by proxies in accordance with their the instruction
of the Board for individual nominees in order to attempt to elect to the Board
as many of the nominees named herein as possible.
In the election of directors, assuming a quorum is present, the seven
nominees receiving the highest number of votes cast at the meeting will be
elected directors. As a result, proxies voted to "Withhold Authority" and broker
non-votes will have no practical effect upon the election of directors, although
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 National
Association of Securities Dealers ("NASD"), each of the proposed nominees
qualifies for consideration as an independent director. Under guidelines
established in the Company's Bylaws, each of the proposed nominees with the
exception of Sheldon Razin meets the Company's criteria established for
consideration as an independent director.
No members of Company management served on the Board of Directors during
Fiscal year(s) 2001, 2002, 2003, and 2004, and no members of management have
been nominated by the Board of Directors to serve as a director for Fiscal Year
2005.
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.
-4-
Maurice J. DeWald (64) is and has been since 1992 the Chief Executive Officer of
Verity Financial Group, Inc., a financial advisory business. He has also been a
director of Advanced Materials Group, Inc. since 1998. He was an audit
partner/managing partner with the national accounting firm KPMG, LLP and
employed 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.
Ahmed Hussein (63) is, and has been since 1997, the Director of National
Investment Company, Cairo, Egypt. Mr. Hussein founded National Investment
Company in 1996 and has served as a member of its Board of Directors since its
inception. Mr. Hussein served as a Senior Vice President of Dean Witter from
1993 to 1996. Mr. Hussein is a director of the following publicly held Egyptian
companies: Nasr City Co., Simo Paper Co., and Nobria Agriculture.
Jonathan Javitt (47) is currently the Executive Vice President/Office of the
Chairman of First Consulting Group, a prominent healthcare information
technology consulting firm. Prior to joining this firm in April 2004, he was
Vice Chairman/Chief Science Officer of eMedx (later Active Health) from June
1998 to April 2004. Previously, he held senior executive positions with other
healthcare industry organizations. He is an M.D. and holds a Masters Degree in
Public Health.
Vincent J. Love (63) is a managing partner in the firm 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 achieved the rank of Captain in the U.S. Army, has a B.B.A. from the
City College of New York, and has a New York, Ohio, and Connecticut C.P.A.
professional certification.
Steven T. Plochocki (52) has been President and Chief Executive Officer of
InSight, a leading national provider of diagnostic imaging services, since
November 1999. Prior to his current position, 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 (66) 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. He also had served until
April 2000 as the Company's President since its inception except for the period
from August 1990 to August 1991. Additionally, Mr. Razin served as Treasurer
from the Company's inception until October 1982. Prior to founding the Company,
he held various technical and managerial positions with Rockwell International
Corporation, and was a founder of the Company's predecessor, Quality Systems, a
sole proprietorship engaged in the development of software for commercial and
space applications and in management consulting work. Mr. Razin holds a B.S.
degree in Mathematics from the Massachusetts Institute of Technology.
BOARD OF DIRECTORS MEETINGS AND RELATED MATTERS
The Company's Bylaws require that at least three-quarters of the members
of the Board of Directors be independent. For purposes of any action by the
Board, at least one-half of the directors
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present and eligible to vote must be independent. Under the Company's Bylaws, an
"independent" director is a Board member who:
(a) has never been an employee of the Company or any of its
subsidiaries;
(b) receives no fees for services provided to the Company or to the
Chief Executive Officer or senior management of the Company as an
advisor, consultant or otherwise;
(c) is not employed by an entity which provides fee based services to
the Company or to the Chief Executive Officer or senior management
of the Company as an advisor, consultant or otherwise;
(d) is not affiliated with a significant customer or supplier of the
Company ("significant" means more than 1% of the Company's annual
sales);
(e) has not had, during the past two years, any interest in any
significant transaction, or any business or financial relationship,
with the Company or an affiliate of the Company (other than service
as a director) for which the Company has been required to make
disclosure under Regulation S-K of the Securities and Exchange
Commission;
(f) is not a relative of an executive officer or director of the
Company;
(g) receives no compensation from the Company other than director's
fees;
(h) does not personally receive and is not an employee, director, or
trustee of a foundation, university, or other institution that
receives grants or endowments from the Company that are material to
the Company or to either the recipient and/or the foundation,
university or institution; and
(i) is not employed by an entity of which (i) an executive officer of
the Company serves as a director or trustee, or (ii) a director of
the Company serves in a senior executive capacity.
During the fiscal year ended March 31, 2004, the Board of Directors held
11 meetings. There were no actions taken by unanimous written consent. No
director attended less than 75% of the aggregate of all meetings of the Board of
Directors and all meetings of committees of the Board of Directors upon which he
served, except for Mr. El Bardai, who attended seven out of eleven Board
meetings.
On May 30, 2003, Emad Zikry resigned from the Board effective on that
date. Mr. Zikry subsequently notified the Board of Directors' Nominating
Committee of his interest in being nominated to the Board. The Nominating
Committee and the Board approved of Mr. Zikry's nomination for election to the
Board. Mr. Zikry was elected to the Board at the 2003 Annual Shareholders'
Meeting, and in October 2003 received 3,500 options to purchase the Company's
common stock under the Company's 1998 Stock Option Plan. These options were
fully vested at the time of grant and had an exercise price of $7.00 per share.
During the fiscal year ended March 31, 2004, and continuing during fiscal
year 2005, certain members of the Company's Board of Directors received
correspondence from Mr. Ahmed Hussein and his attorney as well as Mr. Emad Zikry
and Mr. Tawfik El-Bardai on a variety of topics principally relating to certain
Board actions, Board governance, Board processes and Board functionality issues.
Mr. Hussein, Mr. Zikry and Mr. El-Bardai have stated that they do not support
the Company's slate of Board nominees. A majority of the Company's Board members
disagree with the assertions raised in this correspondence and believe that
Board actions as well as Board committee matters and recommendations have been
considered and voted upon in concert with the Company's Bylaws and applicable
law.
Additionally, Mr. Zikry declined to sign and fully complete the Director's
Questionnaire which he returned to the Company. Therefore, this proxy statement
was prepared in reliance upon his unsigned and incomplete Questionnaire, and
without the benefit of any additional information that may have been included if
his questionnaire had been returned fully completed and signed.
-6-
The Board of Directors has an Audit Committee which consists of Messrs.
Hanson, Meyer, Small, Zikry and El Bardai. The Audit Committee is comprised
entirely of non-employee, "independent" (as defined in Rule 4200(a)(15) of the
NASD listing standards) directors and operates under a written charter adopted
by the Board of Directors. 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 shareholders.
The Audit Committee also evaluates the independent public accountants'
performance and makes recommendations to the Board of Directors 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, 2004, the Audit Committee held twenty
meetings. The Audit Committee's current charter, adopted January 29, 2004, is
included as Appendix A to this Proxy Statement. The Audit Committee and Board of
Directors have confirmed that the Audit Committee does and will continue to
include at least three members. The Audit Committee and the Board of Directors
has confirmed that Dale Hanson meets applicable NASD listing standards for
designation as an "Audit Committee Financial Expert" and being "independent."
The Audit Committee and Board of Directors expects that, if elected, Mr. DeWald
and Mr. Love will meet the applicable NASD listing standards for designation as
an "Audit Committee Financial Expert" and being "independent", however, there
can be no guarantees that these persons will be elected to the Board of
Directors or that if elected, will continue to meet such qualifications or will
in fact be designated as the Company's "Audit Committee Financial Expert."
The Board of Directors has a Nominating Committee which consists of
Messrs. Meyer, Hanson, Small, Zikry and El Bardai. The Nominating Committee is
responsible for identifying, recommending and nominating candidates to the Board
of Directors 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
-7-
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.
In compiling the Board slate appearing in this proxy statement, nominee
referrals as well as nominee recommendations were received from existing
directors, members of management, as well as outside sources - both solicited
and unsolicited. For individual director nominees, the referral source may
differ from the person ultimately recommending the individual for nomination to
the board. The following sets forth the name of each nominee (other than
nominees standing for re-election) and the category of person that recommended
such nominee to the Company's Nominating Committee: Mr. William Botts
(recommended by a non-management director); Mr. Maurice DeWald (recommended by a
non-management director); Mr. Vincent Love (recommended by a non-management
director); Mr. Jonathan Javitt (recommended by a non-management director); and
Mr. Steve Plochocki (recommended by a non-management director). 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, 2004 the Nominating Committee held
one meeting. The Nominating Committee's current charter is included as Appendix
B to this Proxy Statement.
The Board of Directors has a Compensation Committee which consists of
Messrs. Zikry, Hanson, Meyer, Small and El Bardai. 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
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, 2004, the
Compensation Committee held eight meetings. The Compensation Committee's current
charter is included as Appendix C of this Proxy Statement.
The Board of Directors has a Transaction Committee which consists of
Messrs. Small, Hanson, Meyer, Zikry and El Bardai. The Transaction Committee is
responsible for considering and making recommendations to the Company's Board of
Directors 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, 2004, 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. He 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 may be held at other times as designated by the Lead Director. The Lead
Director shall approve, in consultation with the other Independent Directors,
the
-8-
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. Since October 29, 2003 Bud Small has
served as Lead Director. From August 29, 2002 through October 29, 2003 Dale
Hanson served as Lead Director.
Directors of the Company who are also employees of the Company are not
compensated for their services as directors or committee members. Directors of
the Company who are not also employees receive a fee of $2,500 per year along
with reasonable expenses for serving on the Board of Directors. Directors who
serve on a committee of the Board of Directors receive an additional annual fee
of $1,000 per committee and a fee of $250 for each committee meeting attended,
together with reasonable expenses for attendance at committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No director or executive officer of the Company serves as an officer,
adirector 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 of
Directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain compensation information for the three
fiscal years ended March 31, 2004, 2003 and 2002, 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 2004 fiscal year whose aggregate
total annual salary and bonus for such year exceeded $100,000 (the "Named
Executive Officers").
Summary Compensation Table
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Long Term
Compensation
Awards
------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options Compensation ($)(1)
--------------------------------------------------------------------------------------------------------------------
Lou Silverman
Chief Executive Officer and 2004 278,500 139,250 -- 2,000
President 2003 262,937 103,602 -- 2,000
2002 251,947 25,000 59,940 2,000
--------------------------------------------------------------------------------------------------------------------
Patrick Cline 2004 257,500 196,500 9,000 2,000
President, NextGen Healthcare 2003 243,287 118,250 2,000
Information Systems Division 2002 231,413 74,063 8,000 2,000
--------------------------------------------------------------------------------------------------------------------
Greg Flynn 2004 187,500 18,810 5,000 4,063
Executive Vice President, 2003 180,000 -- -- 1,800
General Manager of QSI Division 2002 180,000 -- -- 1,800
--------------------------------------------------------------------------------------------------------------------
Paul Holt 2004 119,378 28,541 -- 1,479
Chief Financial Officer 2003 101,438 27,250 -- 1,197
2002 97,500 3,500 -- 1,035
--------------------------------------------------------------------------------------------------------------------
-----------
(1) This column reflects amounts attributable to Company contributions to the
Company's Deferred Compensation Plan and or 401k
-9-
Option /SAR Information
The following table provides information with respect to option grants in fiscal
2004 to the Named Executive Officers.
-----------------------------------------------------------------------------------------------------------
Percent of Potential Realizable
Total Value at Assumed
Number of Options Annual Rates of Stock
Securities Granted to Exercise Price Appreciation for
Underlyling Employees or Base Option Term (#)
Options in Fiscal Price Expiration
Name Granted (#) Year (%) ($/Share) Date 5% 10%
-----------------------------------------------------------------------------------------------------------
Pat Cline 9,000 15.00 15.46 10/23/2009 38,442 84,946
-----------------------------------------------------------------------------------------------------------
Greg Flynn 5,000 8.33 15.46 10/23/2009 21,357 47,192
-----------------------------------------------------------------------------------------------------------
The following table provides information on option exercises in fiscal 2004 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 2004 or held any stock appreciation rights at
the end of such fiscal year. The value of unexcercised in the money options was
calculated using the closing share price on the last trading day of the fiscal
year ($45.30).
--------------------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Securities Value of Unexercised
Acquired on Realized ($) Underlying Unexercised Options In-the-Money Options
Exercise (#) at March 31, 2004(#) at March 31, 2004 ($)
-------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
--------------------------------------------------------------------------------------------------------------------------
Lou Silverman 42,114 1,564,869 84,456 57,630 2,874,515 2,006,964
--------------------------------------------------------------------------------------------------------------------------
Patrick Cline 14,000 507,140 0 13,000 0 404,800
--------------------------------------------------------------------------------------------------------------------------
Greg Flynn 20,000 816,472 0 5,000 0 149,200
--------------------------------------------------------------------------------------------------------------------------
Paul Holt 1,500 54,420 5,000 1,500 184,406 55,981
--------------------------------------------------------------------------------------------------------------------------
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, 2004.
----------------------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average Number of securities remaining
issued upon exercise of exercise price of available for future issuance
outstanding options, outstanding options, under equity compensation plans
warrants and rights warrants and rights (excluding securities reflected
(a) (b) in column a)
(c)
----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved
by security holders 330,587 $10.52 512,800
----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders 0 0 0
----------------------------------------------------------------------------------------------------------------------------
Total 330,587 $10.52 512,800
----------------------------------------------------------------------------------------------------------------------------
Employment Contracts and Change in 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 124,260 options which
vest equally over a four year period commencing with the effective date of the
Agreement (July 20, 2000). Additionally, on July 20, 2001 he received an
additional 59,940 options per his agreement. Mr. Silverman is eligible for a
cash bonus of up to 50% of his annual base compensation based on performance
goals established jointly between himself and the Board of Directors.
-10-
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 of Directors; the
purchase of 25% or more of the combined voting power of the outstanding
securities of the Company with the exception of the purchase of securities by
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.
For options other than those discussed above, the Board of Directors, 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.
-11-
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.
o Stock Options. If/when utilized, stock options can be utilized to
provide additional incentives to selected employees to work to
maximize shareholder value. Any stock option grants are made by the
Board of Directors. If granted, stock options generally are granted
with an exercise price equal to the fair market value of the
underlying Common Stock on the date of grant and vest in equal
annual installments over a four-year period.
COMPENSATION COMMITTEE
Emad Zikry, Chairman William Small
Frank Meyer Tawfick El-Bardai
Dale Hanson
AUDIT COMMITTEE REPORT
The Audit Committee reports to and acts on behalf of the Board of
Directors 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 2004 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
-12-
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 of Directors that the audited financial
statements be included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2004, 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 ended March 31,
2005, subject to shareholder ratification.
AUDIT COMMITTEE
Dale Hanson, Chairman William Small
Emad Zikry Tawfick El-Bardai
Frank Meyer
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 the NASDAQ
National Market. 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, 2004, its officers, directors and greater than 10% shareholders
complied with all filing requirements applicable to such persons.
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, 2004 assuming $100 was invested on April 1, 1999 with all dividends,
if any, reinvested.
[EDGAR PRESENTATION OF STOCK PERFORMANCE DATA]
-----------------------------------------------------------
Fiscal year ended March 31,
------------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
------------------------------------------------------------------------------------------------------------------
Quality Systems, Inc. 406.67 293.33 406.13 680.27 1211.47
------------------------------------------------------------------------------------------------------------------
NASDAQ Stock Market (U.S.) 195.66 80.80 63.59 51.95 87.02
------------------------------------------------------------------------------------------------------------------
NASDAQ Computer & Data Processing 179.46 65.76 66.46 47.40 64.93
------------------------------------------------------------------------------------------------------------------
-13-
The last trade price of the Company's Common Stock on each of March 31,
2000, 2001, 2002, 2003 and 2004 was published by The Nasdaq Stock Market and,
accordingly for the periods ended March 31, 2000, 2001, 2002, 2003 and 2004 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.
CERTAIN TRANSACTIONS
David Razin, who is Vice President Business Development of the Company, is
the son of Sheldon Razin. David Razin earned $155,000 in salary during the
fiscal year ended March 31, 2004. David Razin was also awarded 5,000 stock
options during the year ended March 31, 2004. Kim Cline, manager of
implementations, is the sister of Pat Cline. Kim Cline earned $138,287 in salary
and bonuses during the fiscal year ended March 31, 2004 and was awarded 4,000
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 of Directors, any individual directors or any group
or committee of directors, correspondence should be addressed to the Board of
Directors or any such individual directors or 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 of Directors
will be forwarded promptly to the addressee. In the case of communications to
the Board or 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 2004 Annual Meeting. All of our directors were in attendance at
the 2003 Annual Meeting.
RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
(Proposal No. 2)
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, 2005, subject to ratification by the
-14-
holders of a majority of the shares represented either in person or 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, 2004 and 2003.
--------------------------------------------------------------------
2004 2003
--------------------------------------------------------------------
Audit fees $250,000 $245,000
--------------------------------------------------------------------
Financialinformation systems design $ 0 $ 0
and implementation fees
--------------------------------------------------------------------
Tax fees $ 11,000 $ 82,000
--------------------------------------------------------------------
All other fees $ 34,000 $ 1,000
--------------------------------------------------------------------
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.
ANNUAL REPORT
The Company's Annual Report containing audited financial statements for
the fiscal years ended March 31, 2004 and 2003 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 March 26, 2005, 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
-15-
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 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 notice or a prior public
disclosure of the date of the scheduled Annual Meeting is given or made, notice
by the shareholder, to be timely, must be so delivered or received not later
than the close of business on the tenth day following the earlier of the day on
which such notice of the date of the scheduled Annual Meeting was mailed or the
day on which such public disclosure was made. 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 of Directors 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 of Directors.
By Order of the Board of Directors,
QUALITY SYSTEMS, INC.
/s/ Paul Holt
Corporate Secretary
Irvine, California
July 27, 2004
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, 2004, (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 CALL (949) 255-2600.
-16-
Appendix A
CHARTER OF THE AUDIT COMMITTEE
OF THE BOARD OF DIRECTORS OF
QUALITY SYSTEMS, INC.
(As Amended and Approved by the Board of Directors on January 29, 2004)
PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities with respect to the
accounting and financial reporting processes of Quality Systems, Inc. (the
"Company") and audits of the financial statements of the Company.
MEMBERSHIP
The Audit Committee shall be comprised of at least three members of the
Board of Directors. Members of the Audit Committee must meet the following
criteria (as well as any criteria required by Section 10A(m)(3) of the
Securities Exchange Act of 1934, the rules and regulations of the Securities and
Exchange Commission and the Nasdaq Stock Market, copies of which will be
provided to the Board of Directors upon request):
A. Each member must be an independent director, as defined in (i) NASD
Rule 4200 and (ii) Rule 10A-3(b)(1) under the Securities Exchange
Act of 1934.
B. Each member must not have participated in the preparation of the
financial statements of the Company or any current subsidiary of the
Company at any time during the past three years.
C. Each member must be financially literate and have the ability to
read and understand fundamental financial statements.
D. At least one member must be an "audit committee financial expert" as
defined by the Item 401(h) of Regulation S-K of the Securities Act
of 1933.
E. At least one member must be the "lead director" as defined in the
Company's bylaws.
The Board of Directors shall also designate a chairperson of the Audit
Committee. Members of the Audit Committee are elected to serve for a term of one
year.
FUNCTIONS
The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain independent legal, accounting or other
advisors. The Company shall provide for appropriate funding, as determined by
the Audit Committee, for payment of (a) compensation to the independent auditor
for the purpose of rendering or issuing an audit report, (b) compensation to any
advisors employed by the Audit Committee, and (c) ordinary administrative
expenses of the Audit Committee that are necessary or appropriate in carrying
out its duties. Without limiting the Audit Committee's authority, the Audit
Committee shall carry out the following specific activities:
-17-
Financial Statement and Disclosure Matters
Review and reassess the adequacy of this Charter annually
and recommend any proposed changes to the Board of
Directors for approval.
Review and discuss with management and the independent
auditor the annual audited financial statements,
including disclosures made in management's discussion
and analysis, and recommend to the Board of Directors
whether the audited financial statements should be
included in the Company's Form 10-K.
Review and discuss with management and the independent
auditor the Company's quarterly financial statements
prior to the filing of its Form 10-Q, including the
results of the independent auditor's review of the
quarterly financial statements.
Review and discuss reports from the independent auditors on:
All critical accounting policies and practices to be
used.
All alternative treatments of financial
information within generally accepted
accounting principles that have been
discussed with management, ramifications of
the use of such alternative disclosures and
treatments, and the treatment preferred by
the independent auditor.
Other material written communications between the
independent auditor and management, such as
any management letter or schedule of
unadjusted differences.
Discuss with the independent auditor the matters required to
be discussed by Statement on Auditing Standards No.
61 relating to the conduct of the audit, including
any difficulties encountered in the course of the
audit work, any restrictions on the scope of
activities or access to requested information, and
any significant disagreements with management.
Review disclosures made to the Audit Committee by the
Company's CEO and CFO during their certification
process for the Form 10-K and Form 10-Q about any
significant deficiencies in the design or operation
of internal controls or material weaknesses therein
and any fraud involving management or other employees
who have a significant role in the Company's internal
controls.
Prepare the audit committee report required by the rules of
the Securities and Exchange Commission to be included
in the Company's annual proxy statement.
Independent Auditors
The Audit Committee shall have the sole authority to
appoint or replace the independent auditor (subject,
if applicable, to shareholder ratification).
The Audit Committee shall be directly responsible for the
compensation and oversight of the work of the
independent auditor (including resolution of
disagreements between management and the independent
auditor regarding financial reporting) for the
purpose of preparing or issuing an audit report or
related work.
-18-
The Audit Committee shall 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. The Audit
Committee may form and delegate authority to
subcommittees consisting of one or more members when
appropriate, including the authority to grant
preapprovals of audit and permitted non-audit
services, provided that decisions of such
subcommittee to grant preapprovals shall be presented
to the full Audit Committee at its next scheduled
meeting.
Obtain from the independent auditor a formal written
statement delineating all relationships between the
independent auditor and the Company, consistent with
Independence Standards Board Standard 1, and the
Audit Committee's responsibility for actively
engaging in a dialogue with the independent auditor
with respect to any disclosed relationships or
services that may impact the objectivity and
independence of the independent auditor and for
taking, or recommending that the full Board of
Directors take, appropriate action to oversee the
independence of the independent auditor.
Ensure the rotation of the audit partners as required by
Section 10A(j) of the Securities Exchange Act of
1934, and consider whether, in order to assure
continuing auditor independence, it is appropriate to
adopt a policy of rotating the independent auditing
firm on a regular basis.
Recommend to the Board of Directors policies for the Company's
hiring of employees or former employees of the
independent auditor consistent with Section 10A(l) of
the Securities Exchange Act of 1934.
Compliance Oversight
Obtain from the independent auditor assurance that Section
10A(b) of the Securities Exchange Act of 1934 has not
been implicated.
Obtain reports from management and the independent auditor
that the Company and its subsidiary and affiliated
entities are in conformity with applicable legal
requirements and the Company's Code of Business
Conduct and Ethics.
Establish procedures for the receipt, retention and treatment
of complaints received by the Company regarding
accounting, internal accounting controls or auditing
matters, and the confidential, anonymous submission
by employees of concerns regarding questionable
accounting or auditing matters.
Discuss with the Company's General Counsel legal matters that
may have a material impact on the financial
statements or the Company's compliance policies.
Review and approve in advance any proposed related party
transactions.
LIMITATION OF AUDIT COMMITTEE'S ROLE
While the Audit Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial
-19-
statements and disclosures are complete and accurate and are in accordance with
generally accepted accounting principles and applicable rules and regulations.
These are the responsibilities of management and the independent auditor.
MEETINGS
The Audit Committee shall meet as often as it determines, but not less
frequently than quarterly. Minutes shall be kept of each meeting of the Audit
Committee and will be provided to each member of the Board of Directors. In
addition to making regular reports to the Board of Directors, the Audit
Committee will summarize its examinations and recommendations to the Board of
Directors as may be appropriate, consistent with the Audit Committee's charter.
-20-
Appendix B
CHARTER OF THE NOMINATING COMMITTEE
OF QUALITY SYSTEMS, INC.
(As Approved by the Board of Directors on May 25, 2004)
PURPOSE:
The purpose of the Nominating Committee of the Board of Directors (the "Board")
of Quality Systems, Inc. (the "Company") is to ensure that the Board is properly
constituted to meet its fiduciary obligations to shareholders and the Company.
To carry out this purpose, the Nominating Committee shall: (i) assist the Board
by identifying prospective director nominees and to recommend to the Board (A)
the director nominees for the next annual meeting of shareholders and (B)
director nominees to fill vacancies on the Board as they may arise from time to
time.
The Nominating Committee is also responsible for overseeing and approving the
text of the Company's description of its nomination process set forth in the
Company's proxy statement.
COMMITTEE MEMBERSHIP AND ORGANIZATION:
o The Nominating Committee shall be comprised of no fewer than three
(3) members.
o The members of the Nominating Committee shall meet the independence
requirements of both the National Association of Securities Dealers
and the Bylaws of the Company (in some cases, the Bylaws may impose
a definition of independence that varies from that of the National
Association of Securities Dealers).
o The members of the Nominating Committee shall be appointed and
replaced by the Board and shall serve at the Board's discretion.
COMMITTEE RESPONSIBILITIES AND AUTHORITY:
o Determine on an annual basis desired Board qualifications, expertise
and characteristics and conduct on a continual basis searches for
potential Board members with corresponding attributes. Evaluate and
propose nominees for election to the Board. In performing these
tasks the Nominating Committee shall, with Board approval, have the
authority to retain and terminate any search firm to be used to
identify director candidates.
o Define and administer the process by which shareholder nominees for
election to the Board are considered.
-21-
o Make reports to the Board concerning the Committee's activities as
appropriate.
o Review and re-examine this Charter annually and make recommendations
to the Board for any proposed changes.
INTERNET ACCESS:
This Charter shall be available for public review via access through
the Company's website.
-22-
Appendix C
CHARTER OF THE COMPENSATION COMMITTEE
OF QUALITY SYSTEMS, INC.
(As Approved by the Board of Directors on May 25, 2004)
PURPOSE:
The purpose of the Compensation Committee of the Board of Directors (the
"Board") of Quality Systems, Inc. (the "Company") shall be to discharge and to
advise the Board concerning the Company's responsibilities relating to
compensation of its executive officers and Board members. The Committee has
overall responsibility for evaluating and recommending to the Board the
executive officer compensation plans, policies and programs of the Company.
The Compensation Committee is also responsible for producing an annual report on
executive compensation for inclusion in the Company's proxy statement.
COMMITTEE MEMBERSHIP AND ORGANIZATION:
The Compensation Committee will be appointed by and will serve at the discretion
of the Board. The Compensation Committee shall consist of no fewer than two
members. The members of the Compensation Committee shall meet the independence
requirements of (i) Rule 4200(a)(15) of the Corporate Governance standards of
The Nasdaq Stock Market (attached hereto as Exhibit A) and (ii) the Company's
Bylaws (the applicable provision of which is attached hereto as Exhibit B).
The members of the Compensation Committee will be appointed and replaced by the
Board. Compensation Committee members will serve at the discretion of the Board.
COMMITTEE RESPONSIBILITIES AND AUTHORITY:
o The Compensation Committee shall annually review and recommend to
the Board for approval for the CEO and the executive officers of the
Company (i) the annual base salary, (ii) the annual incentive bonus,
including the specific goals and amounts, (iii) equity compensation,
(iv) employment agreements, severance arrangements, and change in
control agreements/provisions, and (v) any other benefits,
compensation or arrangements.
o The Compensation Committee shall annually review and recommend to
the Board for approval Board compensation policies and programs.
o The Compensation Committee shall make reports to the Board as
appropriate.
-23-
o The Compensation Committee shall review and reassess the adequacy of
this Charter annually and recommend any proposed changes to the
Board for approval.
o The Compensation Committee shall also have authority to obtain
advice and assistance from internal or external legal, accounting or
other advisors in carrying out its duties hereunder.
-24-
Exhibit A
The Nasdaq Stock Market Rule 4200(a)(15):
(15) "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 company's board of directors,
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 who
accepted any payments from the company or any parent or subsidiary
of the company in excess of $60,000 during the current or any of the
past three fiscal years, other than the following:
(i) compensation for board or board committee service;
(ii) payments arising solely from investments in the
company's securities;
(iii) compensation paid to a Family Member who is a
non-executive employee of the company or a parent or
subsidiary of the company;
(iv) benefits under a tax-qualified retirement plan, or
non-discretionary compensation; or
(v) loans permitted under Section 13(k) of the Act.
Provided, however, that audit committee members are subject to
additional, more stringent requirements under Rule 4350(d).
2
(C) a director who is a Family Member of an individual who is, or at
any time during the past three years was, employed by the company or
by any parent or subsidiary of the company as an executive officer;
(D) a director who is, or has a Family Member who is, a partner in,
or a controlling shareholder or an executive officer of, any
organization to which the company made, or from which the company
received, payments for property or services in the current or any of
the past three fiscal years that exceed 5% of the recipient's
consolidated gross revenues for that year, or $200,000, whichever is
more, other than the following:
(i) payments arising solely from investments in the
company's securities; or
(ii) payments under non-discretionary charitable
contribution matching programs.
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(E) a director of the listed 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 executive
officers of the listed 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.
(G) In the case of an investment company, in lieu of
paragraphs (A)-(F), a director who is an "interested person" of the
company as defined in section 2(a)(19) of the Investment Company Act
of 1940, other than in his or her capacity as a member of the board
of directors or any board committee.
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Exhibit B
[from the Bylaws of Quality Systems, Inc.]
An independent director means a person who:
(a) has never been an employee of the Company or any of its
subsidiaries.
(b) provides no services to the Company or to the Chief Executive
Officer or senior management of the Company as an adviser,
consultant or otherwise.
(c) is not employed by an entity which provides services to the Company
or to the Chief Executive Officer or senior management of the
Company as an adviser, consultant or otherwise.
(d) is not affiliated with a significant customer or supplier of the
Company ("significant" means more than 1% of annual sales).
(e) has not had, during the past two years, any interest in any
significant transaction, or any business or financial relationship,
with the Company or an affiliate of the Company (other than service
as a director) for which the Company has been required to make
disclosure under Regulation S-K of the Securities and Exchange
Commission.
(f) is not a relative of an executive officer or director of the
Company.
(g) receives no compensation from the Company other than director's
fees.
(h) does not personally receive and is not an employee, director, or
trustee of a foundation, university, or other institution that
receives grants or endowments from the Company that are material to
the Company or to either the recipient and/or the foundation,
university or institution.
(i) is not employed by an entity of which (i) an executive officer of
the Company serves as a director or trustee, or (ii) a director of
the Company serves in a senior executive capacity.
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