Re: | Quality Systems, Inc. Form 10-K for the fiscal year ended March 31, 2010 Form 10-Q for the quarterly period ended September 30, 2010 File No. 001-12537 |
1. | The Form 10-K must be signed by your controller or principal accounting officer. Refer to General Instruction D(2) of Form 10-K. If a person occupies more than one of the positions specified in Instruction D(2), his or her signature block must indicate each capacity in which that person is signing the form. Please confirm that your future 10-K filings will include the signature of your controller or principal accounting officer. |
2. | We note your discussion on page 11 of the factors that your compensation committee considered in establishing base salaries for your NEOs. In your response letter, please provide additional detail as to how the committee considered and weighed each factor in setting the base salary of each of your NEOs for fiscal 2010. For example, discuss how the committee measured individual and companywide performance, future contribution potential, peer compensation and internal equity and explain specifically how each factor contributed to the percentage increase in each NEOs salary. Also, confirm that you will provide a similar level of disclosure in future filings. |
3. | We note that the cash incentive compensation for Messrs. Plochocki, Cline and Kaplan, and the equity compensation for Messrs. Plochocki, Cline and Holt were based on the company meeting certain target increases in EPS performance and revenue growth during fiscal 2010. However, you do not appear to have disclosed these quantitative performance targets. Please advise. To the extent you believe that disclosure of the performance targets is not required because it would result in competitive harm such that the targets could be excluded under Instruction 4 to Item 402(b) of Regulation S-K, please provide a detailed supplemental analysis supporting your conclusion. In particular, your competitive harm analysis should clearly explain the nexus between disclosure of the performance objectives and the competitive harm that is likely to result from disclosure. Refer to Item 402(b)(2)(v) of Regulation S-K and Regulation S-K Compliance and Disclosure Interpretation 118.04. Please take particular care to explain how disclosure of targets relating to |
completed financial statement periods could pose a reasonable threat of competitive harm. | ||
Also, to the extent that you are relying on Instruction 4 to Item 402(b) to omit performance target disclosure, you must provide meaningful disclosure of the level of difficulty of attaining such targets. General statements regarding the level of difficulty, or ease, associated with achieving performance goals either corporately or individually are not sufficient. In this regard, the following disclosure does not appear to sufficiently address the disclosure requirement: Our Compensation Committee has structured EPS performance criteria, revenue growth criteria and discretionary elements to require the named executive officers to exert increasingly greater efforts in order to earn increasingly higher potential cash and equity incentive compensation. |
(i) | 40% was based on meeting revenue growth performance targets; | ||
(ii) | 40% was based on meeting EPS growth performance targets; and | ||
(iii) | 20% was discretionary as determined by recommendation of the Compensation Committee to the Board. |
The revenue performance targets, constituting 40% of the cash incentive bonus, were as follows: |
Revenue Growth | % of Criteria Amount | |
20.0% | 20 | |
22.5% | 40 | |
25.0% | 60 | |
27.5% | 80 | |
30.0% | 100 |
The EPS performance targets, constituting 40% of the cash incentive bonus, were as follows: |
EPS Growth | % of Criteria Amount | |
20.0% | 20 | |
22.5% | 40 | |
25.0% | 60 | |
27.5% | 80 | |
30.0% | 100 |
The percentage shown in the right hand column of the above charts were awarded if the applicable criterion was reached, i.e., it is a step function application. The EPS and Revenue targets do not include acquisitions (either revenue or expense). | |
The discretionary portion, constituting 20% of the cash incentive bonus, considered the following matters: successful completion of a new business plan; completion of an acceptable succession plan for the position of CEO; operational improvements in the business; appropriate restructuring of the business units; and growth in the RCM business profitability. |
Equity Incentive Bonus: |
Fifty percent of the equity incentive bonus was based on revenue growth performance targets and 50% was based on EPS growth targets. The target thresholds, award percentages and method of calculation for each of these growth performance targets was the same as those for revenue and EPS growth calculations and target thresholds in connection with Mr. Plochockis cash incentive bonus as described above. |
Cash Incentive Bonus: |
Mr. Clines cash incentive bonus contained three components: |
(i) | 33.33% was earned upon Mr. Cline providing services to the Company through the period ending two weeks after the Companys public release of the financial data for the fiscal year ended March 31, 2010; | ||
(ii) | 33.33% was based on meeting revenue growth performance targets; and | ||
(iii) | 33.33% was based on meeting EPS growth performance targets. |
The revenue growth performance targets, constituting 33.33% of the cash incentive bonus, were as follows: |
Revenue Growth | % of Criteria Amount | |
12.5% 25% | 0 100 |
The EPS growth performance targets, constituting 33.33% of the cash incentive bonus, were as follows: |
EPS Growth | % of Criteria Amount | |
12.5% 25% | 0 100 |
Mr. Clines cash incentive bonus related to achieving revenue growth scaled proportionally between 12.5% and 25%, with 100% of the cash incentive bonus related to revenue growth earned if the Companys annual revenue growth equaled or exceeded 25%. The portion of the cash incentive bonus related to EPS growth was calculated in the same manner. |
Equity Incentive Bonus: |
Mr. Clines equity incentive bonus contained two components: |
(i) | 33.33% was earned upon Mr. Cline providing services to the Company through the period ending two weeks after the Companys public release of the financial data for the fiscal year ended March 31, 2010; and | ||
(ii) | 66.66% was based on meeting EPS growth performance targets. |
The EPS growth performance targets and method of calculation related to Mr. Clines equity incentive bonus were the same as the EPS growth performance targets and method of calculation used in connection with his cash incentive bonus as described above. |
Equity Incentive Bonus: |
Mr. Holts cash incentive bonus contained two components: |
(i) | 50% was based on meeting revenue growth performance targets; and | ||
(ii) | 50% was based on meeting EPS growth performance targets. |
The revenue performance targets, constituting 50% of the cash incentive bonus, were as follows: |
Revenue Growth | % of Criteria Amount | |
20.0% | 20 | |
22.5% | 40 | |
25.0% | 60 | |
27.5% | 80 | |
30.0% | 100 |
The EPS performance targets, constituting 50% of the cash incentive bonus, were as follows: |
EPS Growth | % of Criteria Amount | |
20.0% | 20 | |
22.5% | 40 | |
25.0% | 60 | |
27.5% | 80 | |
30.0% | 100 |
The percentage shown in the right hand column of the above charts was awarded if the applicable criterion was reached, i.e., it is a step function application. The EPS and Revenue targets do not include acquisitions (either revenue or expense). |
Cash Incentive Bonus: |
Mr. Kaplans cash incentive bonus contained three components: |
(i) | 40% was based on meeting revenue growth performance targets; | ||
(ii) | 40% was based on meeting EPS growth performance targets; and | ||
(iii) | 20% was discretionary as determined by recommendation of the Compensation Committee to the Board. |
The revenue performance targets, constituting 40% of the cash incentive bonus, were as follows: |
Revenue Growth | % of Criteria Amount | |
20.0% | 20 | |
22.5% | 40 | |
25.0% | 60 | |
27.5% | 80 | |
30.0% | 100 |
The EPS performance targets, constituting 40% of the cash incentive bonus, were as follows: |
EPS Growth | % of Criteria Amount | |
20.0% | 20 | |
22.5% | 40 | |
25.0% | 60 | |
27.5% | 80 | |
30.0% | 100 |
The percentage shown in the right hand column of the above charts was awarded if the applicable criterion was reached, i.e., it is a step function application. The EPS and Revenue targets do not include acquisitions (either revenue or expense). | ||
The discretionary portion, constituting 20% of the cash incentive bonus, considered the following matters: business performance, structuring and growth; various operating requirements; and the growth in the RCM business profitability. | ||
Mr. Kaplans maximum cash incentive bonus compensation opportunity, $240,000 on an annualized basis, was to be pro-rated based on the portion of fiscal 2010 during which he was employed as the COO of the Company. Mr. Kaplan assumed the role of Chief Operating Officer on September 17, 2009, approximately six months into the Companys 2010 fiscal year. | ||
4. | We note that 75% of Mr. Holts cash incentive compensation for fiscal 2010 was based on specific, objective goals approved by your board. We also note from footnote 7 to your Grants of Plan-Based Awards table that Mr. Deckers fiscal 2010 cash incentive award was based on the achievement of certain quantitative and qualitative goals approved by your president. In your response letter, please describe the performance goals applicable to Messrs. Holt and Decker and disclose any quantitative targets that were established in connection with them. Refer to Items 402(b)(2)(v) and (vii) of Regulation S-K. |
| The Company files its 2010 Form 10-K on a timely basis with no material weaknesses noted; | ||
| The Company files its first, second and third quarter 10-Qs on a timely basis; and | ||
| The Company creates and presents an adequate business plan by its January 2010 Board meeting to cover the following fiscal year and beyond. The business plan shall include substantial strategy and financial sections with detailed projections. |
| Deliver to the Board quarterly summary budget tracking reports; | ||
| Deliver to the Board a quarterly report of the company Key Performance Indicator metrics; | ||
| Establish proper overall staffing and management of the finance department, demonstrably upgrading the quality of the accounting and finance staff; | ||
| Deliver accounting department performance at a competitive cost/revenue ratio; | ||
| No material misstatements in public filings; | ||
| Collection department goals achieved; | ||
| Demonstration of proper controls and procedures; | ||
| Appropriate management of investments; | ||
| Continue to perform well in NextGen customer satisfaction survey scores in fiscal year 2010; | ||
| Deliver quarterly report to the Compensation Committee on how the department is tracking vs. the Companys goals; and | ||
| Demonstrate progress on ERP system. |
5. | We note the table provided in this section. In your response letter, please provide an expanded table that includes columns showing the total cash and equity bonuses that each of your NEOs was eligible to receive in fiscal 2010. Also, provide a narrative explanation as to why each NEO received the bonus that he received or why he did not receive a bonus. Please confirm that you will provide a similar level of disclosure in future filings. |
Maximum | Maximum | |||||||||||||||
Cash Bonus | Eligible Cash | Equity Bonus | Eligible Equity | |||||||||||||
Name | Earned | Bonus | Earned (Options) | Bonus (Options) | ||||||||||||
Steven. T. Plochocki |
$ | 25,000 | $ | 522,500 | 0 | 40,000 | ||||||||||
Patrick B. Cline |
$ | 376,766 | $ | 750,000 | 15,000 | 45,000 | ||||||||||
Paul A. Holt |
$ | 50,000 | $ | 80,000 | 0 | 10,000 | ||||||||||
Philip N. Kaplan |
$ | 0 | $ | 240,000 | N/A | 0 |
The Companys revenue and EPS annual growth rate for fiscal 2010 was 19% and 4%, respectively. As a result, Messrs. Plochocki and Kaplan did not qualify for any portion of their cash bonus related to their individual revenue and EPS targets. Mr. Plochocki was awarded $25,000 under the discretionary portion of his cash incentive bonus based upon his attainment of certain Board objectives including successful completion of a new business plan, completion of an acceptable succession plan, operational improvements in the business, restructuring of the business units, growth in the RCM business profitability and the integration of certain NextGen administrative and line-reporting management operations with those of the Company. The Companys revenue and EPS growth rates resulted in a $376,766 cash bonus awarded to Mr. Cline as calculated in accordance with his revenue and EPS targets. Mr. Holt received a $50,000 cash bonus based upon Mr. Holt achieving a majority of his objective, specific goals including timeliness of the Companys filings, the completion of a new business plan and the appropriate management of the Companys investments. |
Under the terms of their individual revenue and EPS targets, no equity bonus was awarded to Messrs. Plochocki and Holt for fiscal 2010. Mr. Cline received 15,000 options as calculated in accordance with his EPS targets. |
6. | The director compensation table indicates that Mr. Pflueger earned $78,063 in cash for his service as a director during fiscal 2010. In light of the directors fees disclosed on page 25, however, it is unclear how he earned the amount disclosed in the table. Please advise. |
Compensation | Effective | |||||||||||
Program | Date | Compensation Components | ||||||||||
Fiscal 2009 Program |
04/01/09 | $ | 30,000 | annual retainer |
||||||||
$ | 2,000 | per Board meeting attended |
||||||||||
$ | 1,000 | per Committee meeting attended | ||||||||||
Fiscal 2010 Program | 08/13/09 | Annual Base compensation | ||||||||||
$ | 80,000 | Independent Director | ||||||||||
$ | 92,500 | Compensation Committee or | ||||||||||
Nominating Committee Chair | ||||||||||||
$ | 100,000 | Audit Committee Chair or | ||||||||||
Chairman of the Board |
Fiscal | Fiscal | |||||||||||
Compensation | Program | Program | ||||||||||
Components | 2009 | 2010 | Total | |||||||||
Retainer ($30,000 x 4.5/12 months) |
$ | 11,250 | $ | 11,250 | ||||||||
Meetings attended |
$ | 9,000 | $ | 9,000 | ||||||||
Base
compensation ($92,500 x 7.5/12 months) |
| $ | 57,813 | $ | 57,813 | |||||||
Totals |
$ | 20,250 | $ | 57,813 | $ | 78,063 | ||||||
7. | It appears that your board has two compensation committees, the committee consisting of Messrs. Pflueger, Davis and Brennan and the Independent Directors Compensation and Executive Personnel Committee, comprised of all of your independent directors. In your response letter, please explain why your board established the Independent Directors Committee in May 2010. Also, describe the relationship between the two committees and their respective responsibilities. Refer to Item 407(e)(3) of Regulation S-K. |
8. | We note your disclosure that growth in maintenance revenue for the NextGen Division has come from new customers that have been added each quarter, existing customers who have purchased additional licenses, and [your] relative success in retaining existing maintenance customers as well as a recent price increase during the quarter ended September 30, 2010. Please tell us how you considered disclosure of the relative contribution or significance of the items listed in describing the underlying reasons for the increase in maintenance revenues. Please refer to Section III.D and E of SEC Release 33-6835 and Section III.4 of SEC Release 33-8350. |
| the Company is responsible for the adequacy and accuracy of the disclosure in the filing; | ||
| staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and | ||
| the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Sincerely yours, |
||||
/s/ James J. Sullivan | ||||
James J. Sullivan | ||||
Executive Vice President, General Counsel and Secretary | ||||