<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
(RULE 13D-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)
(Amendment No. 10)*
Quality Systems, Inc.
- -------------------------------------------------------------------------------
(Name of Issuer)
Common Stock
- -------------------------------------------------------------------------------
(Title of Class of Securities)
747582104
-------------------------------
(CUSIP Number)
David J. Berger, Esq.
Andrew E. Shapiro, Manager Page Mailliard, Esq.
Lawndale Capital Management, LLC Wilson Sonsini Goodrich & Rosati
One Sansome Street, Suite 3900 650 Page Mill Road
San Francisco, CA 94104 Palo Alto, CA 94304
(415) 288-2330 (650) 493-9300
- -------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications)
April 12, 1999
-------------------------------
(Date of Event Which Requires Filing of This Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), 13d-1(f) or 13(d)-1(g), check the following
box.[ ]
Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7 for other
parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
SCHEDULE 13D
<TABLE>
<CAPTION>
CUSIP No. 747582104 Page 2 of 28 Pages
- ---------------------------------- --------------------------------------
<S> <C> <C>
1 NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Lawndale Capital Management, LLC
- -----------------------------------------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b)
- -----------------------------------------------------------------------------------------------------------------
3 SEC USE ONLY
- -----------------------------------------------------------------------------------------------------------------
4 SOURCE OF FUNDS AF
- -----------------------------------------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- -----------------------------------------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
California
- -----------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY OWNED 0
BY REPORTING PERSON ----------------------------------------------------------------------------------
WITH 8 SHARED VOTING POWER
621,200
----------------------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
0
----------------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
621,200
- -----------------------------------------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY REPORTING PERSON
621,200
- -----------------------------------------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ]
- -----------------------------------------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.99%
- -----------------------------------------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
OO and IA
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 13D
CUSIP No. 747582104 Page 3 of 28 Pages
- ---------------------------- -----------------------------------
<S> <C> <C>
1 NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Andrew E. Shapiro
- -----------------------------------------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b) [ ]
- -----------------------------------------------------------------------------------------------------------------
3 SEC USE ONLY
- -----------------------------------------------------------------------------------------------------------------
4 SOURCE OF FUNDS AF
- -----------------------------------------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- -----------------------------------------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
USA
- -----------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY OWNED 0
BY REPORTING PERSON ----------------------------------------------------------------------------------
WITH 8 SHARED VOTING POWER
621,200
----------------------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
0
----------------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
621,200
- -----------------------------------------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY REPORTING PERSON
621,200
- -----------------------------------------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
- -----------------------------------------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.99%
- -----------------------------------------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
IN
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 13D
CUSIP No. 747582104 Page 4 of 28 Pages
- ------------------------------------- --------------------------------------
<S> <C> <C>
1 NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Diamond A Partners, L.P.
- -----------------------------------------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b) [ ]
- -----------------------------------------------------------------------------------------------------------------
3 SEC USE ONLY
- -----------------------------------------------------------------------------------------------------------------
4 SOURCE OF FUNDS WC
- -----------------------------------------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- -----------------------------------------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
California
- -----------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY OWNED 0
BY REPORTING PERSON ----------------------------------------------------------------------------------
WITH 8 SHARED VOTING POWER
525,300
----------------------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
0
----------------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
525,300
- -----------------------------------------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY REPORTING PERSON
525,300
- -----------------------------------------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
- -----------------------------------------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
8.45%
- -----------------------------------------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
PN
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 13D
CUSIP No. 747582104 Page 5 of 28 Pages
- --------------------------------------- ------------------------------------
<S> <C> <C>
1 NAME OF REPORTING PERSON
I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Diamond A Investors, L.P.
- -----------------------------------------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [X]
(b) [ ]
- -----------------------------------------------------------------------------------------------------------------
3 SEC USE ONLY
- -----------------------------------------------------------------------------------------------------------------
4 SOURCE OF FUNDS WC
- -----------------------------------------------------------------------------------------------------------------
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
- -----------------------------------------------------------------------------------------------------------------
6 CITIZENSHIP OR PLACE OF ORGANIZATION
California
- -----------------------------------------------------------------------------------------------------------------
NUMBER OF SHARES 7 SOLE VOTING POWER
BENEFICIALLY OWNED 0
BY REPORTING PERSON ----------------------------------------------------------------------------------
WITH 8 SHARED VOTING POWER
95,900
----------------------------------------------------------------------------------
9 SOLE DISPOSITIVE POWER
0
----------------------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
95,900
- -----------------------------------------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY REPORTING PERSON
95,900
- -----------------------------------------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN
SHARES [ ]
- -----------------------------------------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
1.54%
- -----------------------------------------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON
PN
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Item 1. Security and Issuer.
This statement relates to Common Stock of Quality Systems, Inc. ("QSII")
The principal executive office of QSII is located at 17822 East 17th Street,
Tustin, CA 92780.
Item 2. Identity and Background.
The persons filing this statement and the persons enumerated in Instruction
C of Schedule 13D and, where applicable, their respective places of
organization, general partners, directors, executive officers and controlling
persons, and the information regarding them, are as follows:
(a) Lawndale Capital Management, LLC, a California limited liability
company ("LCM"); Diamond A Partners, L.P., a California limited partnership
("DAP"); Diamond A Investors, L.P., a California limited partnership
("DAI"); and Andrew E. Shapiro ("Shapiro").
(b) The business address (and principal office) of LCM, DAP, DAI and
Shapiro is One Sansome Street, Suite 3900, San Francisco, California 94104.
(c) LCM is the investment adviser to and general partner of DAP and
DAI, which are investment limited partnerships. Shapiro is the sole manager
of LCM.
(d) During the last five years, none of such persons has been convicted
in a criminal proceeding (excluding traffic violations or similar
misdemeanors).
(e) During the last five years, none of such persons was a party to a
civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a
judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to, Federal or State securities
laws or finding any violation with respect to such laws.
(f) Shapiro is a citizen of the United States of America.
Item 3. Source and Amount of Funds or Other Consideration.
The source and amount of funds used in purchasing the Common Stock were as
follows:
<TABLE>
<CAPTION>
Purchaser Source of Funds Amount
- ------------------------------ ------------------------------------------- ---------------------------------
<S> <C> <C>
LCM Funds Under Management (1) $4,068,070
DAP Working Capital $3,438,846
DAI Working Capital $ 629,224
</TABLE>
-----------------------------
(1) Includes funds of DAP and DAI invested in Common Stock.
Item 4. Purpose of Transaction.
Lawndale Capital Management ("LCM") has decided to nominate candidates for
election to the Board of Directors of QSII (the "Board") at the annual meeting
of QSII expected to be held in September 1999 as well as cumulate its votes to
support such candidates.
As discussed in several previous amendments to this Schedule 13D and as
repeatedly conveyed to the Board, LCM believes that the Board lacks sufficient
independence. LCM further believes that QSII's
<PAGE>
corporate governance practices have been inadequate and a major factor in QSII's
poor shareholder performance.
To remedy these perceived problems, LCM has attempted to work with the
Board to increase the involvement of experienced independent directors and to
strengthen corporate governance practices generally. In particular, on March 17,
1999 and again on March 24, 1999, LCM requested an opportunity to meet with the
Board to discuss these corporate governance issues (copies of those requests are
included as Exhibit F and Exhibit E, respectively, to this Amendment No. 10 to
the Schedule 13D ("Amendment No. 10")). QSII, through its attorneys, rejected
LCM's requests in a letter dated March 29, 1999. A copy of the letter from
QSII's counsel is included as Exhibit D to this Amendment No. 10. On March 31,
1999, LCM responded in a letter to the Board again requesting a meeting. A copy
of that letter is included as Exhibit C to this Amendment No. 10.
Because of the failure of the Board to adequately address its concerns, LCM
decided to turn to the shareholders of QSII to effect changes in board
composition and corporate governance practices that LCM believes are critical to
the long-term success of QSII. Consequently, on March 29, 1999, LCM, on behalf
of Diamond A Partners, L.P., submitted a shareholder proposal for inclusion in
the proxy materials of QSII for the annual meeting expected to be held in
September 1999. As discussed in Amendment No. 9 to the Schedule 13D filed by
LCM on March 30, 1999, the proposal provides for an increased role for
independent directors on the Board. A copy of the shareholder proposal is
included as Exhibit G to this Amendment No. 10.
Sheldon Razin, the Chairman of the Board, has sought to prevent shareholder
consideration of LCM's proposal. In a letter dated April 8, 1999, Mr. Razin
notified LCM of QSII's intent to exclude the shareholder proposal from its proxy
materials. This reaction to LCM's shareholder proposal and other initiatives
demonstrates that the corporate governance problems permeating QSII cannot be
remedied with just structural change. Accordingly, on April 12, 1999, Andrew
Shapiro, president of LCM, sent a letter to Mr. Razin providing notice of LCM's
intent to nominate candidates for election to the Board at the upcoming annual
shareholders' meeting and its intent to cumulate votes in support of its
nominees. A copy of the April 12, 1999 letter is included as Exhibit B to this
Amendment No. 10.
LCM does not have any present plan or proposal which would relate to or
result in any of the matters set forth in subparagraphs (a) through (j) of Item
4 of Schedule 13D except as set forth herein or in prior amendments to this
Schedule 13D or such as would occur upon completion of any of the actions
discussed above. LCM intends to review its investment in QSII on a continuing
basis and, depending on various factors including, without limitation, QSII's
financial position and LCM's investment strategy, the price levels of QSII
Common Stock and conditions in the securities markets and general economic and
industry conditions, LCM may in the future take such actions with respect to its
investment in QSII as it deems appropriate including, without limitation,
purchasing additional shares of Common Stock or selling some or all of its
shares of Common Stock or change its intention with respect to any and all
matters referred to in Item 4. To the extent not inconsistent with the
foregoing, LCM incorporates by reference the material in Item 4 of its
previously filed Schedule 13D and the amendments thereto.
Item 5. Interest in Securities of the Issuer.
The beneficial ownership of the Common Stock by the persons named in Item 2
of this Schedule is as follows at the date hereof:
<TABLE>
<CAPTION>
Aggregate Beneficially
Owned Voting Power Dispositive Power
---------------------- -------------------- -------------------
Name Number Percent Sole Shared Sole Shared
- ----------------------------------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
LCM 621,200 9.99 0 621,200 0 621,200
Shapiro 621,200 9.99 0 621,200 0 621,200
DAP 525,300 8.45 0 525,300 0 525,300
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
DAI 95,900 1.54 0 95,900 0 95,900
</TABLE>
The persons filing this statement effected no transactions in the Common
Stock since the filing of Amendment No. 9 to the Schedule 13D on March 30, 1999.
The percentages of outstanding shares of Common Stock used in this
Schedule are calculated based upon the 6,213,666 shares of Common Stock stated
by QSII to be issued and outstanding at January 29, 1999, as reflected in QSII's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1998.
Item 6. Contracts, Arrangements, Understandings or Relationships with Respect
to Securities of the Issuer.
LCM is the general partner of DAP and DAI pursuant to limited partnership
agreements providing to LCM the authority, among other things, to invest the
funds of DAP and DAI in Common Stock, to vote and dispose of Common Stock and to
file this statement on behalf of DAP and DAI. Pursuant to such limited
partnership agreements, the general partner of DAP and DAI is entitled to
allocations based on assets under management and realized and unrealized gains.
Andrew Shapiro is the sole manager of LCM.
Item 7. Material to be Filed as Exhibits.
A. Agreement Regarding Joint Filing of Statement on Schedule 13D or
13G.
B. Letter dated April 12, 1999 from Andrew E. Shapiro, President of
Lawndale Capital Management, to Sheldon Razin, Chairman of the Board
of Directors of Quality Systems, Inc., attaching "Barriers to Good
Corporate Governance" published by CALPERS.
C. Letter dated March 31, 1999 from Andrew E. Shapiro, President of
Lawndale Capital Management, to Members of the Board of Quality
Systems, Inc.
D. Letter dated March 29, 1999 from Rutan & Tucker, LLP to Andrew E.
Shapiro, President of Lawndale Capital Management.
E. Letter dated March 24, 1999 from Andrew E. Shapiro, President of
Lawndale Capital Management, LLC, to Sheldon Razin, Chairman of the
Board of Directors of Quality Systems, Inc.
F. Letter dated March 17, 1999 from Andrew E. Shapiro, President of
Lawndale Capital Management, LLC, to the Board of Directors of
Quality Systems, Inc., attaching a proposal dated December 28, 1998
from Metropolitan Adjustment Bureau, Inc. to the Board of Directors
of Quality Systems, Inc.
G. Letter dated March 29, 1999 from Diamond A Partners, L.P. to Janet
Razin, Secretary of Quality Systems, Inc., attaching a shareholder
proposal for inclusion in the proxy materials of QSII for the annual
meeting of QSII expected to be held in September 1999.
<PAGE>
SIGNATURES
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: April 14, 1999.
DIAMOND A PARTNERS, L.P. DIAMOND A INVESTORS, L.P.
By: Lawndale Capital By: Lawndale Capital
Management, LLC Management, LLC
General Partner General Partner
By: /s/ Andrew E. Shapiro By: /s/ Andrew E. Shapiro
--------------------- ---------------------
Andrew E. Shapiro Andrew E. Shapiro
Manager Manager
LAWNDALE CAPITAL MANAGEMENT, LLC
By: /s/ Andrew E. Shapiro /s/ Andrew E. Shapiro
---------------------- ---------------------
Andrew E. Shapiro Andrew E. Shapiro
Manager
<PAGE>
EXHIBIT A
AGREEMENT REGARDING JOINT FILING
OF STATEMENT ON SCHEDULE 13D OR 13G
The undersigned agree to file jointly with the Securities and Exchange
Commission (the "SEC") any and all statements on Schedule 13D or Schedule 13G
(and any amendments or supplements thereto) required under section 13(d) of the
Securities Exchange Act of 1934, as amended, in connection with purchases by the
undersigned of Common Stock of Quality Systems, Inc. For that purpose, the
undersigned hereby constitute and appoint Lawndale Capital Management, LLC, a
California limited liability company, as their true and lawful agent and
attorney-in-fact, with full power and authority for and on behalf of the
undersigned to prepare or cause to be prepared, sign, file with the SEC and
furnish to any other person all certificates, instruments, agreements and
documents necessary to comply with section 13(d) and section 16(a) of the
Securities Exchange Act of 1934, as amended, in connection with said purchases,
and to do and perform every act necessary and proper to be done incident to the
exercise of the foregoing power, as fully as the undersigned might or could do
if personally present.
Dated: December 22, 1997
DIAMOND A PARTNERS, L.P. DIAMOND A INVESTORS, L.P.
By: Lawndale Capital By: Lawndale Capital
Management, LLC Management, LLC
General Partner General Partner
By: /s/ Andrew E. Shapiro By: /s/ Andrew E. Shapiro
--------------------- ---------------------
Andrew E. Shapiro Andrew E. Shapiro
Manager Manager
LAWNDALE CAPITAL MANAGEMENT, LLC
By: /s/ Andrew E. Shapiro /s/ Andrew E. Shapiro
--------------------- ---------------------
Andrew E. Shapiro Andrew E. Shapiro
Manager
<PAGE>
EXHIBIT B
Andrew E. Shapiro
President
April 12, 1999
Mr. Sheldon Razin
Chairman
Quality Systems, Inc.
17822 E. 17th Street #210
Tustin, CA 92680
(by facsimile)
Re: Quality Systems
Dear Shelly:
As you know, Lawndale has been very disappointed in the actions taken by you as
chairman of the Board of Directors particularly as it relates to proper
functioning of the Board. As a result, as indicated in Lawndale's filings on
Schedule 13D, Lawndale believes the QSII board has not acted in a sufficiently
independent and informed manner to protect the interests of QSII's shareholders.
Recent events, including your responses to Lawndale's requests, compel us to
conclude that the board as presently constituted is incapable of satisfying its
duties to QSII's shareholders. This conclusion is based, in part, upon our view
that too often you are willing and able to usurp activities which are in the
proper province of the board as a whole. As a result the individual QSII
directors, whatever their intentions or inclinations, appear to have been
deprived of the necessary information and opportunity to properly exercise their
fiduciary duties. This kind of interference with a director's duty "to make
informed decisions and exercise effective oversight" is recognized by experts as
a "barrier to good corporate governance". (See enclosed copy of "Barriers to
Good Corporate Governance", a synopsis of questions raised by panel of corporate
governance veterans convened by Richard Koppes representing issues that can
impede good corporate governance and published by CALPERS).
Your recent summary rejection of the amendment proposed by Lawndale for
inclusion in QSII's proxy only again demonstrates your unwillingness to accept
basic concepts of corporate governance. Frankly, we had hoped the Board would
recognize the merits of an independent board of directors, and adopt the
proposal without the need of a shareholder vote. Unfortunately, your response
makes clear that you are not just opposed to this proposal, but are attempting
to prevent QSII's shareholders the opportunity to vote on this matter.
Thus, we have now concluded that corporate governance problems permeating QSII
cannot be remedied with just structural change. Accordingly, please accept this
letter as Lawndale's formal notification that it intends to nominate candidates
for the QSII board. While Lawndale has not yet decided on any particular
candidate(s), Lawndale now believes that the necessary changes in the governance
process at QSII require the replacement of at least some of QSII's board with
directors with greater corporate governance and/or industry expertise, as well
as independence from QSII's chairman. Please also accept this letter as formal
notification that Lawndale intends to cumulate its votes in support of the
candidates it nominates for QSII's board.
<PAGE>
Finally, please note that this letter is not meant as our formal response
pursuant to SEC Rule 14a-8 to your letter of April 8, 1999. Lawndale will send
that response arguing for inclusion of our shareholder proposal separately, in
accordance with the time periods established under Rule 14a-8.
Sincerely,
/s/ Andrew E. Shapiro
Andrew E. Shapiro
President
Enclosure-as stated
CC: Dr. John Bowers, Sr., Director
Mr. William Bowers, Director
Mr. Patrick Cline, Director
Mr. Don Cook, Director
Ms. Janet Razin, Director
Mr. Gordon Setran, Director
<PAGE>
Barriers to Good Corporate Governance
Introduction
Corporate Governance codes and/or blue-ribbon commission reports have
been adopted on every continent but Antarctica. Scores of prescriptive
statements on correct corporate governance are now extant, promulgated
by entities as varied as investors (the California Public Employees'
Retirement System and the Teachers Insurance and Annuity
Association/College Retirement Equities Fund); corporations (General
Motors); self-regulatory organizations (NYSE listing requirements);
directors' groups (National Association of Corporate Directors);
business groups (Business Roundtable); investor groups (Council of
Institutional Investors); and religious groups (Interfaith Center on
Corporate Responsibility). In general, this body of work represents a
varied, useful, and valid, if sometimes contradictory, road-map
towards the goal of "good" corporate governance.
Eighteen corporate governance veterans [1], many of whom helped draft
several of those prescriptive codes, gathered over the past year to
discuss corporate governance. They determined that rather than seeking
a synthesis of the best prescriptive codes, they would focus on issues
that can impede good corporate governance. The group omitted issues
that are largely agreed upon in the American context (such as
independent audit committees) and focused on issues that are within
the power of the corporation to change.
What follows are a series of questions designed to elicit what
barriers to effective governance exist, if any, in a corporation's
governance structure and processes. Not all of the commentators agreed
on the significance of each of the questions, but all agreed that each
question represented an issue that many in the group thought
important, and therefore ought to be addressed in a review of
corporate governance.
1.See following list for participants. The views expressed in this
document are those of the individuals, and do not necessarily
reflect those of their employer.
01 of 05
<PAGE>
Barriers to Good Corporate Governance
I. ARE DIRECTORS' INTERESTS SUFFICIENTLY ALIGNED WITH AND
DEDICATED TO THE LONG-TERM VALUE OF THE COMPANY?
A. Structural Issues:
1.Does the board include members who have conflicting interests
that prevent them from effective representation of all
shareholders?
2.Does the compensation of directors encourage them to act in
shareholders' interests?
a.Do the directors have ownership positions which positively
align their interests with shareholders' interests?
b.Are the directors dependent on the cash compensation and
perquisites from their directorship to an extent which
precludes responsible action on the shareholders' behalf?
B. Cultural Issues:
1.Do directors overly identify themselves with management of the
company?
2.Are directors overly prone to yield to the CEO?
3.Do the directors insufficiently recognize their accountability
to shareholders?
4.Do directors participate actively in the decision-making
process?
5.Have directors made an adequate commitment of time to every
company on whose board they serve?
02 of 05
<PAGE>
Barriers to Good Corporate Governance
II. HOW DOES THE BOARD OPERATE?
A. Structural Issues:
1.Are new director candidates nominated using a process that is
controlled by insiders?
2.Are incumbent directors nominated for re-election without a
thoughtful consideration and evaluation of the continuing skills
and perspectives that they bring to the board, and the time they
have available to commit to board service?
3.Does the director nomination process include the opportunity for
effective shareholder input?
4.Do insiders control key committees?
a.Does the process for establishing committee composition
include effective independent director input?
5.Has the Board failed to establish and evaluate appropriate
performance criteria for the board, for individual directors,
and for the CEO?
a.Do directors who have personal or financial relationships to
the CEO control the CEO evaluation process?
6.Are directors provided with insufficient training or education
(both on a one-time and continuing basis) regarding the business
of the company and the role of directors?
7.Are directors able to both access internal and hire independent
resources, as needed to make informed decisions and exercise
effective oversight?
B. Cultural Issues:
1.Does management provide directors with incomplete or inadequate
information?
2.Is the board excluded from major company decisions (such as
strategic planning and decisions affecting the company's capital
structure)?
3.Are directors unable to express disagreement and yet continue to
work as a collegial board?
4.Does the board micro-manage (i.e., focus on daily operations
instead of strategic direction)?
03 of 05
<PAGE>
Barriers to Good Corporate Governance
III. ARE SHAREHOLDERS DISENFRANCHISED OR DISINTERESTED?
A. Structural Issues:
1.Have directors and managers instituted anti-takeover measures to
entrench themselves?
2.Does the existence of unequal voting rights substantially
disenfranchise some shareholders?
3.Does the lack of confidential voting discourage some
shareholders from participation in proxy decisions?
4.Are proxy votes tabulated in accordance with rules consistently
applied by independent tabulators?
5.Are voting results reported promptly?
B. Cultural Issues:
1.Is there a significant percentage of shareholders who do not
vote?
2.Are shareholders knowledgeable about the issues and do they make
informed voting decisions?
3.Are there effective communications between the Company and
shareholders?
04 of 05
<PAGE>
Barriers to Good Corporate Governance
CONVENOR: Richard H. Koppes
Consulting Professor of Law, Stanford Law School
Of Counsel, Jones, Day, Reavis & Pogue
Director, Apria Healthcare Group, Inc.
Burton, James E./Chief Executive Officer
California Public Employees' Retirement System
Carr, Gwenn L./Vice President, Secretary & Associate General Counsel
ITT Industries, Inc.
Cassidy, Donald W./Director of Proxy Research
Fidelity Management & Research Corporation/Fidelity Investments
Clapman, Peter C./Senior Vice President and Chief Counsel, Investments
Teachers Insurance and Annuity Association/
College Retirement Equity Fund
Coyle, Martin A./Executive Vice President
TRW Inc.
Gallagher, Terence J./Vice President, Corporate Governance
Pfizer Inc.
Gangl, Walter T./Senior Corporate Counsel
Pfizer Inc.
Gillan, Kayla J./General Counsel
California Public Employees' Retirement System
Holsenbeck, G. Penn/Vice President, Associate General Counsel &
Corporate Secretary
Philip Morris Companies Inc.
Horan, Anthony J./Corporate Secretary
The Chase Manhattan Corporation
Lochner, Jr., Philip R./Consultant and Corporate Board Director
Time Warner Inc. (Retired Senior Vice President)
Lukomnik, Jon/Managing Director
CDC Investment Management Corp.
(Formerly Deputy Comptroller for Pensions/New York City)
Norman, Stephen P./Secretary
American Express Company
Ryan, James P./Associate Counsel
Capital Group Companies, Inc./Capital Research and Management
Company
Schacht, Kurt N./General Counsel
<PAGE>
State of Wisconsin Investment Board
Selbach, Linda S./Principal/Proxy Manager, Corporate Governance &
Proxy Services Group
Barclays Global Investors, NA
West, B. Kenneth/Senior Consultant for Corporate Governance
Teachers Insurance and Annuity Association/College Retirement Equity
Fund
Corporate Board Director
05 of 05
<PAGE>
EXHIBIT C
Andrew E. Shapiro
President
March 31, 1999
Board of Directors
Quality Systems, Inc.
17822 E. 17th Street #210
Tustin, CA 92680
Re: requested meeting with directors
Dear Members of the Board of Quality Systems Inc.:
I write in response to the March 29, 1999 letter to me from Quality Systems'
counsel Thomas Crane. His letter reflects apparent misunderstandings. For
example, Lawndale has not "demanded" that QSII hold a "special meeting of the
QSII Board", nor has Lawndale sought to have the board "deliberate in the
presence of Mr. Shapiro and his counsel".
Rather, as stated in our letter of March 24, 1999 "Lawndale renews its request
to each and all of the directors for a meeting with Lawndale, with counsel for
the directors and Lawndale present." We want to sit down face-to-face directly,
personally, with QSII's individual directors and in particular the outside
directors-- to discuss their views of shareholder concerns. It is assumed each
director is already fully informed of the issues which I have previously stated
in writing in several 13D filings and letters. Individual directors should
welcome such an opportunity to meet and communicate directly with someone whose
interests they are obligated to represent.
While I am glad to see that QSII's counsel is offering you advice on corporate
procedure, please note our suggestion of meeting with directors with counsel was
intended to refer to an attorney in a position to advise individual directors on
their personal fiduciary duties according to professional codes of conduct.
I hope this letter clarifies your misunderstanding the purpose of my requested
meeting. Again, Lawndale remains willing to accommodate reasonable scheduling
needs of the individual directors, but believes it is imperative that this
meeting occur in the next several days.
We look forward to your prompt response.
Sincerely,
/s/ Andrew E. Shapiro
Andrew E. Shapiro
President
<PAGE>
EXHIBIT D
Rutan & Tucker, LLP
ATTORNEYS AT LAW
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
611 ANTON BOULEVARD, SUITE 1400
COSTA MESA, CALIFORNIA 92626-1998
DIRECT ALL MAIL TO: P.O. BOX 1950
COSTA MESA, CALIFORNIA 92628-1950
TELEPHONE (714) 641-5100
FACSIMILE (714) 546-9035
INTERNET www.rutan.com
March 29, 1999
Via Facsimile and Federal Express
Mr. Andrew E. Shapiro
c/o David J. Berger, Esq.
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Re: Quality Systems, Inc.
---------------------
Dear Mr. Shapiro:
We are counsel to Quality Systems, Inc. ("QSI"). We have been informed by
certain members of the QSI Board of Directors that you have demanded to bring
certain concerns and recommendations regarding the corporate governance of QSI
before a specially convened meeting of the Board of Directors prior to April 1,
1999, and that your attorney be present at such meeting.
While QSI is sensitive to the desires of a substantial shareholder such as
yourself, we see no compelling reason that QSI's Board deliberations be
conducted in the presence of you and your attorney. Instead, we believe it
would be in the best interest of QSI and its shareholders that the Board be
informed of your concerns in writing. Please be assured that any written
statement you provide will be promptly delivered to all directors, after which
the Board will meet to assess your concerns and recommendations and address them
in frank and confidential discussions with the Company's counsel.
Very truly yours,
RUTAN & TUCKER, LLP
/s/ Thomas J. Crane
Thomas J. Crane
TJC:cd
cc: Board of Directors
of Quality Systems, Inc.
<PAGE>
EXHIBIT E
[Letterhead of Lawndale Capital Management, LLC]
Andrew E. Shapiro
President
March 24, 1999
Mr. Sheldon Razin
Chairman
Quality Systems, Inc.
17822 E. 17th Street #210
Tustin, CA 92680
(by facsimile)
RE: QUALITY SYSTEMS
Dear Shelly:
I write to follow up on our conversation yesterday.
You indicated in our conversation that, in response to Lawndale's request to the
QSII board for a meeting with all of the directors and counsel, "the Board" had
rejected Lawndale's request. Instead, "the Board acting through you" offered a
one-on-one meeting with you alone, with no other director or counsel present.
While I appreciate this offer, unfortunately the offer is unacceptable and in
fact illustrates one of Lawndale's primary concerns: that you personally take
upon yourself the authority delegated by shareholders and the law to the board
of directors.
As you know, and as indicated in Lawndale's Schedule 13d and subsequent
amendments, Lawndale believes a major factor in the company's poor shareholder
performance is the lack of adequate corporate governance and board procedures.
In particular, it is Lawndale's view that the board of directors generally are
not obtaining sufficiently independent advice, and have not been adequately
informed concerning significant corporate events.
Lawndale's concerns, and the lack of adequate governance procedures, was again
demonstrated by your reaction to the recent $7.50 per share merger proposal.
According to press reports, you rejected this proposal immediately, and only
afterwards told some--but not all--directors about the offer. You took this
action individually, despite the fact that the offer was addressed to the entire
board. Further, it is our understanding that the board never formally met to
discuss or consider the offer, nor did it receive any expert advice concerning
either the bona fides of the bidder or the value of QSII.
These facts lead us to believe that one of the major problems with the company's
corporate governance procedures is that you personally make decisions that are
in the proper province of the board as a whole, deliberating body. This is not
meant with any disrespect to you personally, but rather is symptomatic of the
larger issues facing the board. We believe that qsii's directors in this
situation cannot satisfy their individual legal and fiduciary obligations unless
they become more directly and actively involved in qsii's affairs, including but
not limited to meeting with shareholders to discuss shareholder concerns.
Therefore, a meeting with you without the other directors present does not
satisfy Lawndale's concerns or, we believe, the directors' legal obligations.
<PAGE>
It is for a similar reason that we think counsel for us and the board should be
present at this meeting. We believe it is essential for a properly functioning
board to have direct access to both expert advisers and the company's large
shareholders. This is the best way for the directors to understand the concerns
of the company's shareholders, as well as the directors' legal obligations.
Again, direct access to expert advisers and shareholders also ensures that
directors are able to act in an informed manner and satisfy its due care
obligations.
Accordingly, Lawndale renews its request to each and all of the directors for a
meeting with Lawndale, with counsel for the directors and lawndale present.
Such meetings between directors and stockholders have become common-place today,
and we believe this type of meeting would be beneficial for everyone concerned.
We remain available at your convenience to attend such a meeting, but would like
to have this meeting by april 1, 1999.
Thank you in advance for your prompt response.
Sincerely,
/S/ Andrew E. Shapiro
Andrew E. Shapiro
President
CC: Dr. John Bowers, Sr., Director
Mr. William Bowers, Director
Mr. Patrick Cline, Director
Mr. Don Cook, Director
Ms. Janet Razin, Director
Mr. Gordon Setran, Director
<PAGE>
EXHIBIT F
[Letterhead of Lawndale Capital Management, LLC]
Andrew E. Shapiro
President
March 17, 1999
The Board of Directors
Quality Systems, Inc.
17822 E. 17th Street #210
Tustin, CA 92680
Dear Members of the Board of Quality Systems Inc.:
RE: QUALITY SYSTEMS
As you know, Lawndale Capital Management, LLC ("Lawndale") currently owns
approximately 9.99% of Quality Systems Inc.'s ("QSII") outstanding stock. As
you are further aware from Lawndale's filings on Schedule 13D, Lawndale believes
that a significant factor in the company's poor return to shareholders for at
least the last three years is the lack of independence of a majority of the
Company's Board of Directors. Recent events that have come to Lawndale's
attention further demonstrate the negative impact that the QSII board's poor
corporate governance practices are having on the interests of QSII's
shareholders.
Specifically, Lawndale understands that on December 28, 1998, Mr. Shelly Razin,
QSII's chairman and chief executive officer, received a written acquisition
proposal addressed to QSII's board of directors. This proposal, a copy of which
is attached hereto, sought an acquisition of QSII at a price of $47 million or
approximately $7.50 per share. This price, which represents a premium of 107%
over QSII's closing price on that date and a 94% premium over the Company's
current price, was an important offer worthy of consideration.
We understand, however, that Mr. Razin summarily rejected the offer himself,
claiming that he was not interested in selling "his" company. We further
understand that QSII's board did not study or formally discuss the offer, that
the board did not retain professional advisers to consider the offer and that
all of the directors may not even have been fully informed of the proposal,
despite the fact that it was addressed to the entire board. The absence of
these essential and necessary deliberations raises grave concerns in our mind
about whether the board is properly focused on, and acting in accordance with,
their fiduciary duties to QSII's public shareholders. Equally significant, Mr.
Razin's apparent willingness to reject a serious offer at a substantial premium
without any formal board deliberations raises again the issue of whether QSII's
board is sufficiently independent to perform its fiduciary obligations to QSII's
shareholders.
<PAGE>
We do not mean to state that we endorse this proposal, or that we believe a sale
of the company at this time is appropriate. Rather, our point is that the
board's apparent passivity or lack of awareness of this proposal is further
evidence of its poor corporate governance practices and the potential harm these
practices can cause QSII's shareholders. Specifically, in this instance it
appears that those practices resulted in the company's response to a credible
offer being (i) immediate rejection of the offer by the chief executive officer
without any analyses, (ii) no discussion at the board level concerning the
offer, (iii) no review of the offer by any independent expert adviser, and (iv)
not even full disclosure of the offer to all board members. We believe that
this type of process is fundamentally inconsistent with the board's due care
obligations to shareholders and with Mr. Razin's duties as an officer and a
director of the company.
Lawndale believes these facts raise very troubling issues for the independent
directors and the Company's shareholders. In an effort to resolve these issues,
and better understand the Board's position on the issues, we would like to meet
with the Board. The purpose of the meeting would be to discuss the board's
response to this offer and corporate governance issues more generally.
We are generally available for such a meeting, and would rearrange our schedule
to suit the needs of the directors. However, we believe that there is some
urgency to this situation, and would expect to have this meeting before April 1,
1999. We further would expect to have our counsel present at this meeting, and
would similarly expect the company's counsel to be present. We are prepared to
meet at the Company's offices, or any other mutually convenient location.
We look forward to your prompt response.
Sincerely,
/s/ Andrew E. Shapiro
Andrew E. Shapiro
President
<PAGE>
[Letterhead of Metropolitan Adjustment Bureau, Inc.]
December 28, 1998
THE BOARD OF DIRECTORS
QUALITY SYSTEMS INC.
17822 E. 17th Street, Suite 210
Tustin, CA 92680
Dear Members of the Board of Quality Systems Inc.:
Please allow this letter to serve as our request to pursue a friendly
acquisition of Quality Systems Inc. by a subsidiary of Metropolitan Adjustment
Bureau. Our firm desires to make an offer in the amount of $47,000,000.00
(Forty-Seven Million Dollars) for all outstanding shares of Quality Systems Inc.
Our offer would be subject to a review of the books and records of Quality
Systems Inc. by our accounting firm as well as subject to the procurement of
financing necessary to consummate such transaction. We believe that financing
of this proposed transaction can be secured in an expeditious manner. This
offer is made through January 6, 1999 at 3:00PM.
We believe that our offer is generous in light of the current market conditions
and represents a substantial premium to shareholders over current share prices.
We thus seek the approval of the board to enter into a definitive purchase
agreement at the earliest possible time.
Please contact the undersigned so that we may set up a convenient time to meet
with respective counsel. I look forward to your response and the opportunity to
work with all of you.
Sincerely,
/s/ John P. Kutasi
JOHN P. KUTASI
PRESIDENT
hd/jpk
<PAGE>
EXHIBIT G
Diamond A Partners, L.P.
March 29, 1999
Ms. Janet Razin
Secretary
Quality Systems, Inc.
17822 East 17th Street, #210
Tustin, CA 92780
Re: Shareholder Proposal for Independent Board
Dear Ms. Razin:
Please find attached a shareholder proposal for inclusion in the proxy
materials of Quality Systems, Inc. (the "Company") for the annual meeting of the
Company expected to be held in September 1999.
We comply with the eligibility requirements under Rule 14a-8 of Regulation
14A under the Securities Exchange Act of 1934, as amended. We have continuously
held at least $2,000 in market value of the Company's securities entitled to
vote on the proposal at the annual meeting for at least one year as of the date
hereof, and we intend to continue ownership of at least $2,000 in market value
of the Company's securities entitled to vote on the proposal at the annual
meeting through the date of the annual meeting. We have filed a Schedule 13D
which reflects our ownership of the required shares before the date on which the
one-year eligibility period begins, and we attach a copy of the Schedule 13D and
all subsequent amendments to the Schedule 13D to date that report a change in
ownership level.
Sincerely,
DIAMOND A PARTNERS, L.P.
By: LAWNDALE CAPITAL MANAGEMENT, LLC
General Partner
By: /s/ Andrew E. Shapiro
Andrew E. Shapiro
Manager
Attachments
cc: David Berger, Esq.
Page Mailliard, Esq.
Wilson Sonsini Goodrich & Rosati
<PAGE>
ATTACHMENT A
Quality Systems, Inc. SHAREHOLDER PROPOSAL
WHEREAS, the board of directors should be an independent body elected by
stockholders, and owes fiduciary obligations to stockholders; and
WHEREAS, the Company's stockholders believe that an increased role for
independent directors would help our Company improve its long-term financial
condition, stock performance and competitiveness;
NOW THEREFORE, BE IT RESOLVED that pursuant to Section 8 of Article V of
the Bylaws of Quality System, Inc. ("QSII" or the "Company"), the Company's
stockholders hereby amend Article III of the Company's Bylaws to add the
following Section 16, such amendment to become effective 30 days following
approval by holders of a majority of the outstanding shares of stock entitled to
vote at the stockholders meeting at which this amendment is proposed:
SECTION 16. INDEPENDENT BOARD OF DIRECTORS. At least seventy-five
percent (75%) of the directors on the Board shall be Independent Directors.
At the end of each meeting of the Board, the Independent Directors shall meet
in executive session, separately from other directors, to discuss such matters
as they deem appropriate. The Independent Directors shall elect the Chairman
of the Board, who shall be an Independent Director. The Independent Directors
as a group shall constitute the Nominating Committee of the Board, which shall
have sole responsibility for recommending and nominating candidates to the
Board.
An "Independent Director" is one who, at any time during the past five
years, has had (i) no familial relationship with any of QSII's executive
officers or directors and (ii) no direct or indirect financial relationship
with QSII or any affiliate other than as a director or shareholder of the
Company, except those past relationships which are (a) fully disclosed in the
Company's proxy statements, and (b) deemed insignificant and non-material by a
majority of the other Independent Directors. Notwithstanding any other
provision of these Bylaws, this Section 16 shall govern in the event of any
inconsistency with other provisions of these Bylaws and may not be altered,
amended or repealed, except by approval of the outstanding shares (as defined
in Section 152 of the California General Corporation Law).
Lawndale Capital Management, LLC is the third largest investor in QSII. As
discussed in Lawndale's Schedule 13D and amendments thereto, Lawndale believes
QSII's board lacks sufficient independence to take necessary actions to stop
poor managerial decision-making. Lawndale further believes that QSII's
corporate governance practices have been inadequate and a major factor in QSII's
poor shareholder performance. Lawndale believes that a greater role for
independent directors will improve QSII's corporate governance practices.
Ultimately, Lawndale believes that shareholders can more confidently rely
on the board if decisions about, for example, management changes, corporate
control contests, executive compensation and major lawsuits are made by an
independent board.
Lawndale requests your support for the above resolution, which amends the
Company's Bylaws to increase the role of independent directors on the board.
Having a truly independent board is integral to shareholder confidence, and
ultimately enhancing QSII's long-term value.
This amendment would become effective 30 days following approval by
stockholders.
<PAGE>
ATTACHMENT B
SCHEDULE 13D AND AMENDMENTS THERETO FILED FOR DIAMOND A PARTNERS, L.P.
[The following attachments to the March 29, 1999 letter sent by Diamond A
Partners, L.P. to Janet Razin, Secretary of Quality Systems, Inc., were
previously filed with the Securities and Exchange Commission ("SEC"), as
indicated below, and are incorporated by reference:
<TABLE>
<S> <C>
. Schedule 13D, filed by Lawndale Capital Management, LLC ("LCM") with the SEC on December 22, 1997
. Amendment No. 1 to the Schedule 13D, filed by LCM with the SEC on January 28, 1998
. Amendment No. 2 to the Schedule 13D, filed by LCM with the SEC on June 8, 1998
. Amendment No. 3 to the Schedule 13D, filed by LCM with the SEC on July 29, 1998
. Amendment No. 4 to the Schedule 13D, filed by LCM with the SEC on August 25, 1998
. Amendment No. 5 to the Schedule 13D, filed by LCM with the SEC on February 2, 1999
. Amendment No. 6 to the Schedule 13D, filed by LCM with the SEC on March 11, 1999
. Amendment No. 7 to the Schedule 13D, filed by LCM with the SEC on March 22, 1999]
</TABLE>
