<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D/A
(RULE 13D-101)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 13)*
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
RULE 13d-2(a)
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)
July 15, 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.
(1 of 37)
<PAGE>
* 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)
(2 of 37)
<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.
In a letter dated July 15, 1999, Mr. Andrew Shapiro, Manager of Lawndale
Capital Management ("LCM"), notified Mr. Sheldon Razin, President and Chief
Executive Officer of Quality Systems, Inc. ("QSII"), of LCM's intent to seek the
approval of QSII's shareholders of the following actions which LCM believes will
improve QSII's governance and ultimately shareholder value:
(3 of 37)
<PAGE>
1) Election of Dale Hanson, Kelly McCrann and former QSII Director, Donald
Cook, as Directors to QSII's Board;
2) Amendment of Article III of QSII's bylaws to:
a) create an independent board;
b) establish a compensation committee consisting entirely of
independent directors;
c) require each Board member be compensated solely in the form of
equity of QSII;
d) to set term limits for Board members;
3) Repeal of by-laws adopted by the Board subsequent to June 9, 1999; and
4) Approval of reimbursement of LCM's fees and expenses.
A copy of this letter and the shareholder proposals are attached hereto as
Exhibit B. This letter also expressed LCM's views concerning the resignation of
Mr. Donald Cook from the Company's Board of Directors. Copies of Mr. Cook's
resignation letter and resume are attached at exhibit C and D hereto.
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 8.455 0 525,300 0 525,300
DAI 95,900 1.544 0 95,900 0 95,900
</TABLE>
DAP and DAI each have record ownership of 100 shares since the filing of
Amendment No. 12 to the Schedule 13D on July 8, 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 May 28, 1999, as reflected in QSII's Annual Report
on Form 10-K for the fiscal year ended March 31, 1999.
(4 of 37)
<PAGE>
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
B. Letter dated July 15, 1999 from Andrew Shapiro to Board of Directors and
Notice
C. Resignation of Donald A. Cook, dated July 15, 1999
D. Resume of Donald A. Cook
(5 of 37)
<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: July 21, 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
(6 of 37)
<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
(7 of 37)
<PAGE>
EXHIBIT B
LETTER DATED JULY 15, 1999 FROM ANDREW SHAPIRO TO
BOARD OF DIRECTORS AND NOTICE
July 15, 1999
Board of Directors
Quality Systems, Inc.
17822 E. 17th Street #210
Tustin, CA 92680
To the members of the Quality Systems Board of Directors:
For more than a year, Lawndale has taken a number of actions designed to
improve the corporate governance practices of, and shareholder value at, Quality
Systems. As a collective body, you have consistently sought to ignore the
shareholder concerns we raised, refusing to engage in any type of dialogue on
these issues or even to meet as a group with Lawndale representatives to discuss
our governance concerns. Indeed, you allowed substantial company assets to be
wasted unnecessarily and unsuccessfully seeking to exclude our independent board
proposal from QSII's proxy statement. Instead, you have delegated all authority
to Mr. Razin, while ignoring the reality that Mr. Razin's recent practices
conflict with fundamental notions of good corporate governance. As the recent
resignation of Donald Cook from the QSII board makes clear, our concerns about
the inadequacy of the current QSII board and practices were not just correct,
but actually understated the scope of the problem.
Based upon the (in)action of the directors as a group, we believe QSII's
shareholders can no longer rely on this board's ability to effectively monitor
the performance or actions of Mr. Razin. Lawndale (and we believe other
shareholders as well) also no longer trust the existing QSII board to
effectively govern the company. Accordingly, this is to notify you that your
refusal to make real changes has left Lawndale with no alternative but to call
upon the Company's shareholders to take directly a number of steps which this
board should have done in its fiduciary capacity. As outlined below, and set
forth in the accompanying notice pursuant to the Company's by-laws, Lawndale
hereby announces its intent to seek the approval of QSII's shareholders on a
number of actions which, both collectively and individually, we believe will
improve QSII's governance and ultimately shareholder value.
The actions to be taken by Lawndale include the following:
1. Nominate Candidates For the QSII Board.
Lawndale had previously told Mr. Razin that we intended to nominate two
candidates for the QSII board: Dale Hanson, and Kelly McCrann. Lawndale now
intends to nominate a third candidate for QSII's board: Donald A. Cook. We did
not know Mr. Cook before you selected and appointed him as a director in
September 1998 and you chose him over a candidate we had proposed. Frankly, in
our March 11, 1999 13D Amendment #6 Exhibit B, while acknowledging Mr. Cook's
outstanding background and experience, we expressed concern over whether he
would actively engage himself as necessary to be an effective board member.
However, based upon our knowledge of what Mr. Cook has done as a director over
the last year--his activism and willingness to question management and his
attempted oversight of management, as well as his efforts to establish a
dialogue with the company's shareholders and work to learn about the company
through direct contact with the company's customers and others-- we have
concluded that Mr. Cook is a far superior candidate for the QSII board than any
other incumbent director
(8 of 37)
<PAGE>
and would provide needed continuity to the board. Mr. Cook has given his consent
to this nomination, which we believe further demonstrates the strength and
independence of Messrs. Hanson and McCrann.
We believe that these three gentlemen provide the nucleus of a superb board
of directors for QSII. Enclosed you will find the formal notices required under
the Company's by-laws to nominate Messrs. Hanson, McCrann and Cook.
2. Propose By-laws To Establish An Independent and Properly
Functioning Board of Directors.
Lawndale will propose four separate new by-law amendments designed to
ensure an independent and properly functioning board of directors. These four
proposals include: (i) the establishment of an independent board of directors,
which shall also appear on the Company's proxy statement; (ii) the creation of a
compensation committee, consisting entirely of independent directors and
therefore without the improper influence of Mr. Razin (who we understand is a
member of the Board's existing compensation committee), which would review the
past and current compensation practices of the company; (iii) a proposal to
compensate all directors with QSII equity, to better align director interests
with shareholder interests; and (iv) director term limits, which would prohibit
any director from continuously serving on the company's board for more than 12
years, and render any person who has served for such a period ineligible to
again be a director of the company for at least three years. Again, the formal
notification for these proposals is attached.
3. Propose Actions In Response to the Board's Recently Reported
Behavior.
We were very troubled by the reports that the QSII board had recently taken
actions--without disclosing such actions to shareholders--to expand the scope of
indemnification available to the board. Further we believe that the board tried
to take such action in a way that may limit a new board's ability to reconsider
this decision. Accordingly, Lawndale will propose a by-law amendment that would
repeal any by-law adopted by the QSII board of directors after June 9, 1999 (the
date of the most recent publicly available copy of QSII's by-laws) and before
the directors elected after the next shareholder meeting have their first
meeting. Lawndale will also seek reimbursement of its expenses from the Company
in its effort to reconstitute and restructure QSII's board from a passive
instrumentality to an active and effective board. We believe that reimbursement
is not just fair, but also should serve as a continual reminder to QSII's
current board that its continual fight against good governance practices has
substantial cost for the company.
We have continually held out the hope that you, QSII's existing directors,
would eventually act as directors of a public company should act; that you would
listen to the company's shareholders, act independently of Mr. Razin and on an
informed basis. Because it is now clear that such hopes are not realistic, we
are left with no alternative but to take our proposals directly to QSII's
shareholders. Accordingly, attached is the appropriate notices pursuant to the
Company's by-laws. If, after your review of these proposals and candidates, as
well as your further consideration of Mr. Cook's resignation and the reasons
therefore, you conclude that it is time for a change, we remain open to a
dialogue with the full board to discuss these issues.
Sincerely,
Andrew E. Shapiro
Manager
(9 of 37)
<PAGE>
July 15, 1999
Quality Systems, Inc.
17822 East 17th Street, #210
Tustin, California 92780
Attention: Secretary
Re: Notice of Intention to Submit
Shareholder Proposals at the 1999
Annual Meeting of Stockholders of Quality Systems, Inc.
-------------------------------------------------------
Ladies and Gentlemen:
Lawndale Capital Management, LLC ("Lawndale") is the sole General Partner
of Diamond A Partners, LP ("Diamond"), the holder of record of 100 shares of
Common Stock of Quality Systems, Inc. ("QSII" or the "Company") and the
beneficial owner of 525,200 shares of Common Stock of the Company.
In accordance with Section 2 of Article II of the By-Laws of the Company,
as amended and restated as of November 22, 1996 (the "By-Laws"), Diamond hereby
gives you written notice of its intention to submit the following proposals
(collectively, the "Proposals") at the 1999 Annual Meeting of Stockholders of
the Company, scheduled to be held on September 17, 1999, or any other meeting of
shareholders held in lieu thereof, and any adjournment(s), postponement(s),
rescheduling(s) or continuation(s) thereof, (the "Annual Meeting"). This
letter, the Schedules attached hereto and all enclosures herewith are
collectively referred to as the "Notice."
1. Election of Directors: Proposal to nominate the persons listed as
---------------------
nominees herein (each a "Nominee" and collectively, the "Nominees") for election
as Directors of the Company as set forth in Shareholder Proposal No. 1 attached
hereto as Schedule A. Diamond reserves its right to nominate additional persons
for election as Directors to the Company's Board in compliance with Section 2(c)
of Article II of the Company's By-Laws.
<PAGE>
The name, age and business and residence addresses of each of the Nominees
is set forth in the following table:
<TABLE>
<CAPTION>
Name of Nominee Age of Nominee Business and Residence Address of Nominee
- -------------------------------- ------------------- ------------------------------------------------------
<S> <C> <C>
Donald A. Cook 44 Business:
--------
19235 Northfleet Way
Tarzana, CA 91356
Residence:
---------
19235 Northfleet Way
Tarzana, CA 91356
Dale M. Hanson 56 Business:
--------
1203 Donahue Way
Roseville, CA 95661
Residence:
---------
1203 Donahue Way
Roseville, CA 95661
Kelly J. McCrann 43 Business:
--------
Professional Dental Associates, Inc.
600 Worcester Rd., Suite 204
Natick, MA 01760
Residence:
---------
4 Michael Lane
Sudbury, MA 01776
</TABLE>
The following material is provided in response to clauses (i) and (iii) of
Section 2(c) of Article II of the Company's By-Laws with respect to the
principal occupation or employment of each Nominee, the class and number of
shares of capital stock of the Company which are beneficially owned by each
Nominee and all information concerning each Nominee that is required to be
disclosed in solicitations of proxies for election of Directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended:
i. The principal occupations of the Nominees and the name, if any, of
the organization in which such employment is carried on are as follows: Donald
A. Cook: Chairman and President, Venture Catalyst Group; Dale M. Hanson: Chief
Executive Officer, American Partners Capital Group; Kelly J. McCrann: Director,
President and Chief Executive Officer, Professional Dental Associates, Inc.
ii. Except as described in this Notice, no Nominee and no associate of
any Nominee has any substantial interest, direct or indirect, by security
holdings or otherwise, in any matter known by Lawndale or Diamond to be acted
upon at the Annual Meeting.
iii. The current principal business address and the business experience
of each Nominee during, the last five years is set forth below:
(11 of 37)
<PAGE>
<TABLE>
<S> <C>
Donald A. Cook (44)................... Chairman and President, Venture Catalyst Group from
January 1999 to present; President and Chief Executive
Officer of CORDA Medical Care from January 1996 to
December 1998; Vice President of Corporate Development,
Coram Healthcare Corp. from January 1994 to December
1995; Director of QSII, appointed in September 1998 and
served until resignation in July 1999.
Dale M. Hanson (56)........................ Chief Executive Officer, American Partners Capital Group
American Partners Capital Group since July 1994; Chief Executive Officer of California
1203 Donahue Way Public Employees' Retirement System from April 1987 to
Roseville, CA 95661 July 1994.
Kelly J. McCrann (43)...................... Director, President and Chief Executive Officer of
Professional Dental Associates, Inc. Professional Dental Associates, Inc. since March 1996;
600 Worcester Rd., Suite 204 Executive Vice President and President of Lithotripsy
Natick, MA 01760 Division of Coram Healthcare Corporation from January 1,
1994 to March 1996.
</TABLE>
iv. None of the corporations or organizations in which any of the
Nominees has conducted his principal occupation or employment was a parent,
subsidiary or other affiliate of the Company.
v. None of the Nominees (i) holds any position or office with the
Company, (ii) has any family relationship with any executive officer or director
of the Company or any other Nominee, (iii) has entered into any arrangement or
understanding between him and any other person pursuant to which he was selected
to be a Nominee or (iv) except as described in this Notice, has been involved in
any legal proceedings of the type required to be disclosed by Item 401(f) of
Regulation S-K of the Securities and Exchange Commission.
vi. During the past ten years, no Nominee has been convicted in a
criminal proceeding (excluding traffic violations or similar misdemeanors).
vii. As of the date hereof, set forth below is the amount of Shares
owned beneficially, directly or indirectly, by each Nominee:
<TABLE>
<CAPTION>
Name of Nominee Shares Beneficially Owned Percent of Class
- --------------------------------- ----------------------------- --------------------------
<S> <C> <C>
Donald A. Cook 0 0
Dale M. Hanson 0 0
Kelly J. McCrann 0 0
</TABLE>
viii. Each Nominee disclaims any beneficial interest in the Shares held
by any other Nominee, Parent or Diamond or Lawndale.
<PAGE>
ix. Except as described in this Notice, as of the date hereof, no
Nominee owns beneficially, directly or indirectly, any securities of any class
of the Company or any parent or subsidiary of the Company, and none has any
right to acquire any securities of the Company.
x. No shares of any class of securities of the Company are owned of
record by any Nominee.
xi. The Nominees were not within the past year and are not a party to
any other contract, arrangement or understanding with any person with respect to
the securities of the Company.
xii. Except as described in this Notice, no associate of any Nominee
owns beneficially, directly or indirectly, any securities of the Company.
xiii. None of the Nominees or any of their associates has been involved
in any transaction of the type required to be disclosed by Item 404(a) of
Regulation S-K.
xiv. None of the Nominees has been or is indebted to the Company or any
its subsidiaries to the extent required to be disclosed by Item 404(c) of
Regulation S-K.
xv. None of the Nominees or any of their associates has any
arrangement or understanding with any person (1) with respect to any future
employment by the Company or any of its affiliates or (2) with respect to any
future transactions to which the Company or any of its affiliates will or may be
a party.
xvi. None of the Nominees or any of their associates is involved in any
legal proceedings of the type required to be disclosed by Instruction 4 to Item
103 of Regulation S-K.
xvii. None of the Nominees has any relationships of the type required to
be disclosed by Item 404(b) of Regulation S-K.
xviii. Each Nominee has consented to serve as a director of the Company,
if so elected. Enclosed herewith are executed written consents of each of the
Nominees to serve as a Director of the Company if elected at the Annual Meeting.
Diamond reserves the right, subject to any limitation resulting from an
equitable and proper application of the By-Laws as the same may be construed by
a court of competent jurisdiction, (i) to substitute another nominee for any
Nominee who becomes unavailable to serve; (ii) to nominate additional nominees
to fill any director positions created by the board of directors of the Company
prior to or at the Annual Meeting; (iii) to delete any Nominee if any director
position is deleted prior to or at the Annual Meeting; (iv) to nominate
additional or other persons if the Company makes or announces any amendment to
the By-Laws or takes or announces any other actions that are designed to, or
have the effect of, disqualifying any or all of the Nominees; and (v) to take
all other action in response to any action that may be taken by the Company with
respect to the election of Directors at the Annual Meeting.
2. Creation of an Independent Board of Directors: Proposal to amend
---------------------------------------------
Article III of the Company's By-Laws to create an Independent Board of Directors
for the Company, as set forth in Shareholder Proposal No. 2 attached hereto as
Schedule B;
3. Establishment of Compensation Committee Consisting Entirely of
--------------------------------------------------------------
Independent Directors: Proposal to amend Article III of the Company's By-Laws to
- ---------------------
require that each member of any committee designated to review and establish the
compensation of the officers of the Company and/or develop
(13 of 37)
<PAGE>
policies and practices regarding the compensation of the officers of the Company
be an Independent Director, as set forth in Shareholder Proposal No. 3 attached
hereto as Schedule C;
4. Director Compensation: Proposal to amend Article III of the Company's
---------------------
By-Laws to require that each Board member be compensated solely in the form of
equity of the Company, as set forth in Shareholder Proposal No. 4 attached
hereto as Schedule D;
5. Director Term Limits: Proposal to amend Article III of the Company's
--------------------
By-Laws to require that no Board member be eligible for re-election or
appointment who has served as a Director continuously for more than 12 years, as
set forth in Shareholder Proposal No. 5 attached hereto as Schedule E;
6. Repeal of By-Laws or any Amendment thereto Adopted Subsequent to June
---------------------------------------------------------------------
9, 1999 and Prior to the First Meeting of the Newly-Elected Board of Directors:
- ------------------------------------------------------------------------------
Proposal to adopt a shareholder resolution repealing each provision of the
Company's By-Laws or any amendment adopted thereto by the Company's Board
subsequent to June 9, 1999 and prior to the first meeting of the newly-elected
Board of Directors, as set forth in Shareholder Proposal No. 6 attached hereto
as Schedule F;
7. Approval of Reimbursement of Lawndale's Fees and Expenses: Proposal to
---------------------------------------------------------
approve the reimbursement of Lawndale's fees and expenses by the Company as set
forth in Shareholder Proposal No. 7 attached hereto as Schedule G.
The information specified in clauses (i), (ii), (iii), (iv) of Sections
2(b) and (i) and (ii) of Section 2(c) of Article II of the By-Laws is set forth
above and in the attached Schedules and the enclosures. Any facts disclosed
below or in Schedules or elsewhere in this Notice, shall be deemed to have been
disclosed for each such clause.
The name and address of Stockholder, a representative of which intends to
appear in person or by proxy at the Annual Meeting to nominate the individuals
specified in this Notice, or any other person which Diamond may nominate under
the conditions described above at the Annual Meeting, is Diamond A Partners, LP,
One Sansome Street, Suite 3900, San Francisco, CA 94104. Diamond is the holder
of record of 100 shares entitled to vote at the Annual Meeting, as of the date
hereof. In addition, as of the date hereof Diamond beneficially owns an
additional 525,200 shares of the Company's Common Stock.
In addition to the information provided in this Notice, the Nominees and
Diamond will promptly provide any and all additional information reasonably
requested by the Company pursuant to the By-Laws or the Articles of
Incorporation.
This Notice fully complies with the provisions of the By-Laws. The
information provided herein is to the best of the undersigned's knowledge as of
the date hereof. Any claim that this Notice is in any way defective should be
addressed to the undersigned so that there is adequate opportunity to address
such a claim in a timely fashion. The giving of this Notice is not an admission
that the By-Laws procedures are legal, valid or binding, and Diamond reserves
the right to challenge their validity
(14 of 37)
<PAGE>
Please sign the enclosed copy of this Notice to acknowledge your
receipt of the same and return the executed copy in the self-addressed Federal
Express envelope provided.
Very truly yours,
By: /s/ Andrew E. Shapiro
____________________________
Name: Andrew E. Shapiro
Title: Manager
ACKNOWLEDGED AND RECEIVED:
____________________________________
By:
On behalf of Quality Systems, Inc.
(15 of 37)
<PAGE>
State of California )
) ss:
County of San Francisco )
The undersigned being first duly sworn, does say that he is Manager of
Lawndale Capital Management, LLC, the sole General Partner of Diamond A
Partners, L.P., which executed the foregoing letter, and he acknowledged the
execution of said letter to be his act and deed and the act and deed of Lawndale
Capital Management, LLC, the sole General Partner of Diamond A Partners, L.P.,
and the information and facts stated therein are true and correct.
Lawndale Capital Management, LLC
Diamond A Partners, L.P.,
By: /s/ Andrew E. Shapiro
__________________________________
Andrew E. Shapiro, Manager
Subscribed and sworn to before me
this 15th day of July, 1999
(16 of 37)
[Notary Public Seal]
/s/ Emil Cabuhat
<PAGE>
NOMINEE CONSENT
---------------
The undersigned hereby consents to be named as a Lawndale nominee for
election as a director of Quality Systems, Inc. in any proxy materials and, if
so elected, to serve as a director of Quality Systems, Inc.
/s/ Donald A. Cook
---------------------------------
Name
Dated: 7/15/99
--------------------
(17 of 37)
<PAGE>
NOMINEE CONSENT
---------------
The undersigned hereby consents to be named as a Lawndale nominee for
election as a director of Quality Systems, Inc. in any proxy materials and, if
so elected, to serve as a director of Quality Systems, Inc.
/s/ Kelly McCrann
-----------------------------
Name
Dated: June 10, 1999
----------------------
(18 of 37)
<PAGE>
NOMINEE CONSENT
---------------
The undersigned hereby consents to be named as a Lawndale nominee for
election as a director of Quality Systems, Inc. in any proxy materials and, if
so elected, to serve as a director of Quality Systems, Inc.
/s/ Dale M. Hanson
------------------------------
Name
Dated: 6/10/99
----------------
(19 of 37)
<PAGE>
SCHEDULE A
ELECTION OF DIRECTORS
(Quality Systems, Inc. - Shareholder Proposal No. 1)
Lawndale Capital Management, LLC ("Lawndale") proposes that three new
Directors be elected at the Annual Meeting of Quality Systems, Inc. ("QSII" or
the "Company"), to serve until the next annual meeting of shareholders and until
their successors have been elected and qualified. Lawndale proposes to nominate
a "Shareholder Slate" of three candidates (including one former QSII director)
to be elected as directors (the "Nominees"), each of whom is committed to
improving the company's corporate governance practices and policies. The three
highly qualified persons nominated by Lawndale are as follows:
<TABLE>
<CAPTION>
Name of Nominee Age of Nominee Principal Occupation
- -------------------------------- --------------------------------- ----------------------------------
<S> <C> <C>
Donald A. Cook 44 Chairman and President, Venture
Catalyst Group since January 1999.
Dale M. Hanson 56 Chief Executive Officer, American
Partners Capital Group since July
1994.
Kelly J. McCrann 43 Director, President and Chief
Executive Officer of Professional
Dental Associates, Inc. since
March 1996.
</TABLE>
Donald A. Cook was the founder, President and Chief Executive Officer
("CEO") of CORDA Medical Care, a cardiology-focused physician practice
management company, from January 1996 to December 1998 and since that time, Mr.
Cook has been Chairman and President, Venture Catalyst Group. Mr. Cook was also
Vice President of Corporate Development, Coram Healthcare Corp. from January
1994 to December 1995. Mr. Cook was appointed by the current QSII board as a
QSII director in September 1998, and served as a director until his resignation
in July 1999. Lawndale believes that during this period Mr. Cook was the only
QSII outside Director with significant and proven operating and consulting
experience in QSII's industry. Lawndale, while originally skeptical of Mr.
Cook's appointment, further believes that Mr. Cook, while a member of QSII's
board, was the sole QSII outside Director to act in an independent and informed
basis. Lawndale believes that Mr. Cook's resignation from QSII's board deprived
QSII of the skills and insights of a talented and capable director.
Accordingly, Lawndale nominates Mr. Cook to be a director of QSII, and is
pleased that Mr. Cook has consented to serve as a director of QSII.
Dale M. Hanson was the CEO of the California Public Employees Retirement
System from 1987 to 1994. Since that time, Mr. Hanson has been CEO of American
Partners Group, a private investment firm. Mr. Hanson has led the shareholder
and corporate governance efforts at numerous companies, including Texaco, Inc.,
Time Warner, Inc., Avon Products, Inc., Eastman Kodak Co., General Motors Corp.,
and Lockheed Martin Corp. and has demonstrated an ability to develop good
corporate governance procedures in companies with poor governance histories.
Lawndale believes that Mr. Hanson would provide leadership to transform the
Company's board, which is now deficient in the most basic corporate
(20 of 37)
<PAGE>
governance knowledge and structures, into one which is capable of performing its
fiduciary duties to its shareholders.
Kelly J. McCrann is the President and CEO of Professional Dental
Associates, Inc. ("PDA"), a dental practice management company, and, from 1993
to 1996 was President of the Lithotripsy Division of Coram Healthcare
Corporation. Mr. McCrann's proven operating and consulting expertise in both
the dental and medical industries would bring sorely needed industry experience
to the Company's board. Indeed, as a result of the resignation of Donald Cook
from QSII's board, no outside director of QSII has the type of meaningful or
significant recent industry experience to provide adequate oversight or
significant added value to the Company's board and its shareholders.
OTHER RELEVANT INFORMATION REGARDING THE NOMINEES
None of the corporations or organizations in which any of the Nominees has
conducted his principal occupation or employment was a parent, subsidiary or
other affiliate of the Company.
None of the Nominees (i) holds any position or office with the Company, (ii) has
any family relationship with any executive officer or director of the Company or
any other Nominee, (iii) has entered into any arrangement or understanding
between him and any other person pursuant to which he was selected to be a
Nominee or (iv) except as described in this Notice, has been involved in any
legal proceedings of the type required to be disclosed by Item 401(f) of
Regulation S-K of the Commission.
During the past ten years, no Nominee has been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors).
Set forth below is the amount of Shares owned beneficially, directly or
indirectly, by each Nominee:
<TABLE>
<CAPTION>
Name of Nominee Shares Beneficially Owned Percent of Class
- ----------------------------------- -------------------------------- ----------------------------
<S> <C> <C>
Donald A. Cook 0 0
Dale M. Hanson 0 0
Kelly J. McCrann 0 0
</TABLE>
Each Nominee disclaims any beneficial interest in the Shares held by any other
Nominee, Parent or Diamond or Lawndale.
Except as described in this Notice, no Nominee owns beneficially, directly or
indirectly, any securities of any class of the Company or any parent or
subsidiary of the Company, and none has any right to acquire any securities of
the Company.
No shares of any class of securities of the Company are owned of record by any
Nominee.
The Nominees were not within the past year and are not a party to any other
contract, arrangement or understanding with any person with respect to the
securities of the Company.
No associate of any Nominee owns beneficially, directly or indirectly, any
securities of the Company.
None of the Nominees or any of their associates has been involved in any
transaction of the type required to be disclosed by Item 404(a) of Regulation
S-K.
(21 of 37)
<PAGE>
None of the Nominees has been or is indebted to the Company or any its
subsidiaries to the extent required to be disclosed by Item 404(c) of Regulation
S-K.
None of the Nominees or any of their associates has any arrangement or
understanding with any person (1) with respect to any future employment by the
Company or any of its affiliates or (2) with respect to any future transactions
to which the Company or any of its affiliates will or may be a party.
PDA has one affiliate which currently utilizes the QSII product. PDA's payments
to QSII for maintenance and system upgrades were as follows: 1997, $1,481.59;
1998, $19,020.01; and 1999, year-to-date, $26,294.24.
CORDA has two subsidiaries which Mr. Cook believes purchased QSII's MicroMed
system during the 1997-1998 period with one subsidiary making payments of
$57,000 and $28,491 in 1997 and 1998, respectively and the other subsidiary
paying $84,509 in 1998.
None of the Nominees or any of their associates is involved in any legal
proceedings of the type required to be disclosed by Instruction 4 to Item 103 of
Regulation S-K.
None of the Nominees has any relationships of the type required to be disclosed
by Item 404(b) of Regulation S-K.
No Nominee and no associate of any Nominee has any substantial interest, direct
or indirect, by security holdings or otherwise, in any matter known by Lawndale
to be acted upon at the Annual Meeting.
LAWNDALE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE ELECTION OF EACH OF THE
NOMINEES NAMED ABOVE TO THE BOARD.
(22 of 37)
<PAGE>
SCHEDULE B
----------
CREATION OF AN INDEPENDENT BOARD OF DIRECTORS
(Quality Systems, Inc. - Shareholder Proposal No. 2)
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 By-Laws of Quality Systems, Inc. ("QSII" or the "Company"), the Company's
stockholders hereby amend Article III of the Company's By-Laws 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 By-Laws to increase the role of Independent Directors on the Board.
Having a truly independent Board is integral
(23 of 37)
<PAGE>
to shareholder confidence, and ultimately enhancing QSII's long-term value. This
amendment would become effective 30 days following approval by stockholders.
LAWNDALE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE AMENDMENT TO THE BY-
LAWS REQUIRING THE ESTABLISHMENT OF AN INDEPENDENT BOARD OF DIRECTORS FOR THE
COMPANY.
(24 of 37)
<PAGE>
SCHEDULE C
----------
ESTABLISHMENT OF A COMPENSATION COMMITTEE
CONSISTING ENTIRELY OF INDEPENDENT DIRECTORS
(Quality Systems, Inc. Shareholder Proposal No. 3)
WHEREAS, it is appropriate for the board of directors of Quality Systems,
Inc. ("QSII" or the "Company") to have a committee designated to review and
establish the compensation of the Company's officers and/or develop policies and
practices regarding the compensation of the officers of the Company (the
"Compensation Committee");
WHEREAS, the Company's stockholders believe that the Compensation Committee
should consist entirely of independent directors without any members of
management on the Compensation Committee;
WHEREAS, the Company's board of directors has purported to create a
Compensation Committee, consisting of the QSII's chairman and three long-serving
directors;
WHEREAS, the Compensation Committee as currently constituted has apparently
approved additional, and inappropriate, compensation for QSII's chairman;
NOW THEREFORE, BE IT RESOLVED that pursuant to Section 8 of Article V of
the By-Laws of the Company, the Company's stockholders hereby amend Article III
of the Company's By-Laws to add the following Section 17, 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 17. INDEPENDENT COMPENSATION COMMITTEE. Each member of any
committee designated to review and establish the compensation of the officers
of the Company and/or develop policies and practices regarding the
compensation of the officers of the Company shall be an Independent Director.
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 By-Laws, this Section 16 shall govern in the event of any
inconsistency with other provisions of these By-Laws 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 ("Lawndale") 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 has recently created a Compensation Committee, which includes Mr. Shelley
Razin, the Company's Chief Executive Officer, as well a three of the longest
serving members of QSII's board of directors. Further Mr. Razin, in addition to
his position as the Company's chairman, also has family members who hold senior
positions with the Company. Under these circumstances, Lawndale
(25 of 37)
<PAGE>
believes that it is not appropriate for Mr. Razin, other officers of the Company
or anyone else who is not an Independent Director to be on the Compensation
Committee of the Board of Directors.
Lawndale is aware of the fact that a number of recent corporate governance
experts have called for the establishment of a Compensation Committee comprised
entirely of Independent Directors. Lawndale believes that such a structure for
QSII will help assure shareholders that the Company's senior officers are being
fairly and adequately compensated. Further, Lawndale believes that the
Compensation Committee can obtain all of the information that it needs, without
any members of management on the Committee, by having management provide such
information as is necessary to the Committee.
Lawndale requests your support for the above resolution, which would create
a Compensation Committee comprised entirely of Independent Directors.
LAWNDALE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE AMENDMENT TO THE BY-
LAWS REQUIRING THAT A COMPENSATION COMMITTEE BE COMPRISED ENTIRELY OF
INDEPENDENT DIRECTORS.
(26 of 37)
<PAGE>
SCHEDULE D
----------
DIRECTOR COMPENSATION
(Quality Systems, Inc. - Shareholder Proposal No. 4)
WHEREAS, the Board of Directors, which is elected by the stockholders and
owes fiduciary duties to the stockholders, should have their interests properly
aligned with the interests of the stockholders of Quality Systems, Inc. ("QSII"
or the "Company"); and
WHEREAS, in order to ensure the interests of the Company's outside
directors are aligned with the Company's shareholders, all the Company's
directors, inside or outside, should receive compensation solely in the form of
equity
NOW THEREFORE, BE IT RESOLVED that pursuant to Section 8 of Article V of
the By-Laws of the Company, the Company's stockholders hereby amend Article III
of the Company's By-Laws to add the following Section 18, 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 18. DIRECTOR COMPENSATION. Each member of the Board who is not
an employee or officer of the Company shall be compensated, excluding any
reimbursement for out-of-pocket expenses, solely in the form of equity of the
Company.
Lawndale Capital Management LLC ("Lawndale") believes that it is important
to ensure that the interests of the Company's Independent outside Directors are
aligned with the Company's shareholders. Lawndale further believes that
Independent Directors of public companies should be encouraged to be
shareholders of such companies. Accordingly, Lawndale believes that all of the
compensation (other than reimbursement for out-of-pocket expenses) for Directors
who are not employees or officers should be in the form of equity.
LAWNDALE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE AMENDMENT TO THE BY-
LAWS REQUIRING THAT THE MEMBERS OF THE BOARD BE COMPENSATED SOLELY IN THE FORM
OF EQUITY.
(27 of 37)
<PAGE>
SCHEDULE E
----------
DIRECTOR TERM LIMITS
(Quality Systems, Inc. - Shareholder Proposal No. 5)
WHEREAS the Company's stockholders believe it essential to the long-
term health of Quality Systems, Inc. ("QSII" or the "Company") to have an
independent board of directors which can provide effective governance and
oversight of QSII's management.
WHEREAS, the ability of an outside director to be independent and
perform their required oversight responsibilities may be negatively impacted by
their long-term service as a director;
WHEREAS, the existing QSII board of directors consists of several
directors who have served extraordinarily lengthy terms as directors and no
longer appear to be actively informed about the Company or able to act on an
independent basis;
WHEREAS, allowing extraordinary persons who have served 12 years as a
director to return to the Company's board after a three year absence may benefit
the Company's shareholders;
NOW THEREFORE, BE IT RESOLVED that pursuant to Section 8 of Article V
of the By-Laws of the Company, the Company's stockholders hereby amend Article
III of the Company's By-Laws to add the following Section 19, such amendment to
become effective at the first meeting of the QSII board of directors following
the 1999 Annual Meeting of QSII's shareholders;
SECTION 19. DIRECTOR TERM LIMITS. No Director who has served as a
Director of the Company continuously for more than twelve (12) years shall be
eligible for re-election by the shareholders or appointment by the Board until
at least three years following the anniversary of the Director's last date of
service. Any Director who has served for more than twelve (12) consecutive
years shall resign at the Board of Directors meeting following the 1999 Annual
Meeting of Shareholders. Notwithstanding any other provision of these By-
Laws, this Section 19 shall govern in the event of any inconsistency with
other provisions of these By-Laws 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).
As discussed in Lawndale Capital Management LLC's ("Lawndale")
Schedule 13D and amendments thereto, Lawndale believes QSII's Board lacks
sufficient independence to provide adequate oversight of management. Lawndale
further believes that one reason for this failure is that several of QSII's
Directors have served continuously on QSII's Board for many years, which has
resulted in their losing their ability to act in a sufficiently objective manner
and provide effective oversight of QSII's management.
Accordingly, Lawndale believes that a limitation of the length of
continuous service as a QSII director is necessary to ensure that the directors
of QSII are actively involved in the Company's affairs and remain capable of
exercising independent judgment and oversight. Lawndale further believes that
12 years is an adequate and sufficiently lengthy term of service for any QSII
Director, and that allowing a person who has served on QSII's Board for 12 years
to again serve following a three year waiting period will allow a truly
extraordinary Board member to return to the Board thereafter.
(28 of 37)
<PAGE>
LAWNDALE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE AMENDMENT TO THE BY-
LAWS IMPOSING A TERM LIMIT OF TWELVE YEARS FOR MEMBERSHIP TO THE BOARD OF
DIRECTORS.
(29 of 37)
<PAGE>
SCHEDULE F
----------
REPEAL OF BY-LAWS OR ANY AMENDMENTS THERETO
ADOPTED SUBSEQUENT TO JUNE 9, 1999 AND PRIOR TO
THE FIRST MEETING OF THE NEWLY-ELECTED BOARD OF DIRECTORS
(Quality Systems, Inc. - Shareholder Proposal No. 6)
WHEREAS, the shareholders of Quality Systems, Inc. ("QSII" or the
"Company") desire to prevent the Company's Board from taking any actions to
amend the Company's By-Laws to attempt to nullify or delay the actions taken by
the shareholders pursuant to the proposals by Lawndale Capital Management LLC
("Lawndale") or other shareholders or to create new obstacles to the
effectiveness of these Proposals;
WHEREAS, the Company's By-Laws filed on June 9, 1999 as an exhibit to its
Form 10-K for the year ended March 31, 1999 were the last publicly available
version of the Company's By-Laws prior to the date of the commencement of this
proxy solicitation;
WHEREAS, it appears that the QSII board may have considered and/or adopted
(or attempted to adopt) additional by-laws since June 9, 1999 and it is not
clear that these by-law amendments are in the best interests of the Company's
shareholders or were adopted by an independent QSII board of directors;
NOW THEREFORE, BE IT RESOLVED that pursuant to Section 8 of Article V of
the By-Laws of the Company, the Company's stockholders hereby repeal any By-Law
or amendment thereto adopted subsequent to June 9, 1999 and prior to the first
meeting of the newly-elected Board of Directors.
Lawndale believes, based upon publicly available information, that QSII's
board of directors has recently adopted (or sought to adopt) a by-law resolution
which would purport to increase the scope of indemnification for QSII's
directors. Lawndale further believes that this amendment was adopted without
the directors having sufficient information on the relevant issues, and that the
directors voting in favor of the amendment were self-interested in the proposed
resolution.
Lawndale believes that, as a result of the board's actions, and the fact
that Lawndale has proposed other by-law resolutions which the current board of
directors apparently opposes, there is a risk that QSII's board may try to adopt
other by-law resolutions which are not in the best interests of the Company or
its shareholders. In particular, Lawndale believes that QSII's board may try to
adopt or amend the Company's by-laws in an effort to nullify or create obstacles
to Lawndale's other proposals and/or potential proposals by other shareholders.
ACCORDINGLY, LAWNDALE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE REPEAL OF
BY-LAWS ADOPTED SUBSEQUENT TO JUNE 9, 1999 AND PRIOR TO THE FIRST MEETING OF THE
NEWLY-ELECTED BOARD OF DIRECTORS.
(30 of 37)
<PAGE>
SCHEDULE G
----------
APPROVAL OF REIMBURSEMENT OF LAWNDALE'S FEES AND EXPENSES
(Quality Systems, Inc. - Shareholder Proposal No. 7)
WHEREAS, Lawndale Capital Management LLC ("Lawndale") has set forth
shareholders' proposals to improve Quality Systems, Inc. ("QSII" or the
"Company") Board's governance practices and composition;
WHEREAS, Lawndale's actions and proposals have exposed the Company's
actions to the scrutiny of its shareholders and provide significant additional
benefit to the Company and its shareholders;
WHEREAS, Lawndale's proposals, if approved, would lead to a better
performing QSII;
WHEREAS, the Company has refused to meet with Lawndale to discuss
corporate governance matter and undertook a lengthy and costly effort to prevent
the inclusion of Lawndale's proposal for the creation of an Independent Board of
Directors in the Company's proxy, which has increased expenses and unnecessarily
delayed the resolution of issues;
WHEREAS, Lawndale's efforts to improve the Company's governance
practices have already resulted in significant expenditures;
WHEREAS, if the Company does not voluntarily adopt Lawndale's
proposals, Lawndale's expenditures will increase significantly in proportion to
the contest waged by the Company;
NOW THEREFORE, BE IT RESOLVED that pursuant to California law, the
Company's stockholders hereby approve and agree to require the Company to
reimburse Lawndale for its fees and expenses it has occurred and will incur in
connection with this proxy solicitation, including expenses incurred thus far in
connection with Lawndale's efforts to improve the Board's governance practices
and composition.
Lawndale Capital Management LLC ("Lawndale") seeks reimbursement from
Quality Systems, Inc. ("QSII" or the "Company") for the significant expenditures
it has incurred and will incur in connection with this proxy solicitation,
including expenses incurred thus far in connection with Lawndale's efforts to
improve the Board's governance practices and composition.
California law recognizes that proxy expenses can be reimbursed from a
corporate treasury under the rationale that the expenditures incurred promote
the shareholders' intelligent evaluation and adoption of policy or fundamental
decisions. Lawndale believes that its actions and proposals fall within this
rationale because it is exposing the Company's actions to the scrutiny of its
shareholders, including the historically poor corporate governance practices of
the Company's Board of Directors. Lawndale believes that its efforts thus far
have forced the QSII Board to start to consider governance issues. Lawndale
further believes that its actions, if approved by the Company's shareholders,
will provide significant additional benefit to the Company and its shareholders.
Specifically, as described in Lawndale's public filings, Lawndale believes that
a better governed Company will lead to a better performing QSII.
Lawndale hopes that the QSII Board will determine, without the need
for a proxy contest, that its current governance practices are deficient and
adopt the measures proposed by Lawndale. These
(31 of 37)
<PAGE>
measures would, in Lawndale's opinion, materially improve the practices of the
QSII Board. However, if the QSII Board does not voluntarily adopt these
measures, and this proxy solicitation becomes highly contested, Lawndale
believes its expenditures will increase significantly, in proportion to the
contest waged by the Company.
Already, the Company has undertaken actions which have served to increase
expenses and unnecessarily delay the resolution of issues. In addition to
refusing to meet with Lawndale to discuss corporate governance matters, the
Company undertook a effort to prevent the inclusion of Lawndale's proposal for
the creation of an independent Board in the Company's proxy materials, causing
both the Company and Lawndale to incur significant additional expenses. The
Securities and Exchange Commission refused to concur in QSII's exclusion of
Lawndale's proposal from its proxy materials.
To date, Lawndale's efforts have resulted in substantial expenditures for
it. Lawndale believes that shareholders such as Lawndale, who are not seeking
control of the Company, would be unwilling to undertake these types of efforts
to improve companies if the expense of such actions is not borne by the Company.
LAWNDALE RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE REIMBURSEMENT BY THE
COMPANY OF LAWNDALE FOR ITS FEES AND EXPENSES IT HAS INCURRED AND WILL INCUR IN
CONNECTION WITH THIS PROXY SOLICITATION, INCLUDING EXPENSES INCURRED THUS FAR IN
CONNECTION WITH LAWNDALE'S EFFORTS TO IMPROVE THE BOARD'S GOVERNANCE PRACTICES
AND COMPOSITION.
(32 of 37)
<PAGE>
EXHIBIT C
RESIGNATION OF DONALD A. COOK, DATED JULY 13, 1999
Donald A. Cook
19235 Northfleet Way
Tarzana, CA 91356
July 13, 1999
Mr. Sheldon Razin
President and Chairman
Quality Systems, Inc.
Tustin, California
VIA FACSIMILE
Dear Shelly:
I joined the board of QSII at your request in September of 1998. At that time,
you and I both believed I could add considerable value to QSII because of my
expertise in marketing and management, particularly in the physician practice
management sector. I brought experience in both public and private companies
from start up to over $500 million in annual sales. I understood the
relationships that any public company has with its customers, shareholders and
competitors. I looked forward to making a positive contribution and attempted
to learn as much as I could about the Company and its stakeholders.
We both acknowledged going in that there were some challenges. Over time, I
made a number of suggestions regarding the integration of the subsidiary
companies, the process for business and marketing planning, marketing strategy
and developing relationships with investment analysts. While these ideas were
not rejected outright, follow-up was not forthcoming and I am disappointed in
the progress the Company has made. It is in this context and with some
difficulty that I feel it is necessary and in the best interests of all
shareholders that I write this letter.
After considerable thought regarding the actions I have observed as a Director
of QSII, I have concluded that I fundamentally disagree with a number of key
decisions made by you and approved by the board in recent months. I believe
that these actions are indicative of both a lack of support for good corporate
governance practices as well as a general disregard for the interests of QSII
shareholders. I specifically refer to the following actions:
. Having received an offer in December of 1998 to buy the company at a
substantial premium to the market value, you failed to notify the
board or to organize a transaction committee to review the offer. I
heard about the offer for the first time in March of 1999 even though
a board meeting was conducted in February of 1999 where a discussion
of the proposed acquisition could have occurred.
. After learning of the derivative lawsuit filed on behalf of the
Company against you and certain board members, you sought a
resolution by the board specifically approving all of your actions
regarding the rejection of the acquisition proposal, presumably to
distance yourself as much as possible from the actions.
(33 of 37)
<PAGE>
. O'Melveny and Myers was retained to represent the board in its
response to the lawsuit brought on behalf of QSII. This same firm is
representing QSII in at least one other lawsuit involving
shareholders. This seeming conflict of interest was dismissed as
inconsequential upon questioning.
. During the board conference call of July 6th, you read to the board,
and without prior review, called for a vote on a proposed amendment
to the bylaws of the corporation to ensure that all directors and
officers of the Company would be fully indemnified against any
liabilities arising out of the derivative suit, even if the existing
director's and officer's liability insurance did not cover the
liability. The amendment also assured that this indemnification could
not be revoked for any reason by any power in the future. You told us
that "the lawyers" recommended it. I voted against this amendment and
believe it to be self-serving. Even though other directors are named
in the suit, you alone acted on behalf of the board in your response
to the acquisition proposal. If all of those actions were deemed to
be within acceptable business judgment standards, there isn't any
reason why the existing D&O insurance wouldn't cover you. I have yet
to see the text to the amendment.
. Upon receipt of the shareholder proposal from Lawndale Capital, the
attitude and actions have been combative. I counseled very early on
that many of the proposal elements were sound corporate governance
and that the Company could avoid costly and counterproductive
diversions by simply adopting most or all of the proposal
immediately. Instead, the Company retained legal counsel to research
and prepare a lengthy response requesting the SEC to drop the
shareholder proposal. After all of this effort and expense was
directed toward fighting the proposal, your statement regarding
QSII's agreeableness to including the proposal and that you "only
wanted to see if it was okay with the SEC" is at best misleading to
shareholders who may be following the Company's actions.
. Particularly troubling to me is your mandate that the board refrain
from speaking with any shareholders of the Company. I feel it is my
duty and obligation to understand the views of my primary constituent
group as I am formulating an opinion regarding direction and
management for the company.
. Finally, I believe the Company's posture with respect to the
shareholder proposal and, separately, to Ahmed Hussein's position
will result in a very costly proxy contest that will ultimately
directly impact shareholder value. You and the board should have
approached these constituents both separately and together, if need
be, with an openly conciliatory mindset and a goal of mutual
agreement.
The delayed integration of the subsidiary divisions and the poor
performance of the Company with respect to plan are truly management issues and
are the concern of the board only from an oversight and advisory capacity. The
management team should be held accountable to the board for the results. Given
the results of the company over the past year, asking for and receiving
additional compensation and stock options is inappropriate. This board needs to
better evaluate the actual performance of the Company and of the management and
act accordingly.
(34 of 37)
<PAGE>
Given these actions, I find it impossible to fulfill my fiduciary duties to
the Company and its shareholders. As a result, effective today, July 13, 1999, I
am hereby resigning as a director of QSII.
Sincerely,
Donald A. Cook
Copy of QSII Board of Directors
(35 of 37)
<PAGE>
EXHIBIT D
RESUME OF DONALD A. COOK
DONALD A. COOK
-----------------------------------------------
19235 Northfleet Way Tarzana, CA 91356
-----------------------------------------------
Senior Executive with success in leading new ventures and taking organizations
to the next level through effective capitalization, deal making, strategic
planning and marketing skills.
Proven ability to keep growing companies well-capitalized through venture
funding, mergers, acquisitions and IPOs.
. $22 million capital raised through 6 rounds of venture funding utilizing
personal contacts and financing expertise.
. $750 million company formed after managing the first-ever 4-way merger
of public companies.
. Prepared $340 million company for successful IPO at $8 per share; sold
company 1 year later for $16 per share.
Successful in identifying emerging market opportunities and starting companies
to fulfill that need.
. Led management company to $50 million revenue run rate in 3 years,
securing first mover advantage in large market.
. Founded Arthur Young/Chicago Consulting Group and grew to $20 million in
revenue in 4 years.
. Started Physicians Services business unit which generated $20 million in
revenue for healthcare company.
Track record in identifying and marketing new products that jump-start an
organization.
. Created innovative drug delivery system which added $100 million in
value to company (25% of its total).
. Facilitated 7-fold growth for regional manufacturer by developing new
product line for growing market segment.
. Personally sold 75% of consulting firm's business through persistence
and strong client relationships.
Married. Age 44. Licensed pilot. Avid snow skier and scuba diver.
---------------
EDUCATION
---------------
MBA, KELLOGG GRADUATE SCHOOL OF MANAGEMENT, NORTHWESTERN UNIVERSITY, 1985
Concentrations in marketing, management policy and finance. Accelerated
4-quarter program.
BSBA, UNIVERSITY OF ARIZONA, 1983
Concentration in marketing with emphasis in decision modeling.
Outstanding Senior Award.
(36 of 37)
<PAGE>
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PROFESSIONAL EXPERIENCE
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<CAPTION>
<S> <C>
Chairman and President 1999 - present
VENTURE CATALYST GROUP, Tarzana, CA
. Assist healthcare technology companies with business development and strategy
. Created WoundCare Partners
President and CEO 1996 - 1998
CORDA MEDICAL CARE, INC., Houston, TX
. Founded cardiology-focused physician practice management company operating 53 clinics in 6
regions.
. Grew to niche market leader with run rate of $50 million revenue and profitable.
Vice President, Corporate Development 1994 - 1995
CORAM HEALTHCARE CORPORATION,
Denver, CO
. Led merger integration and operational planning for 4-way merger; completed under budget and
ahead of schedule.
. Held P&L responsibility for 9 business units, including international division. Managed 6 unit
divestitures.
Vice President, Marketing 1991 - 1994
McGAW, INC., Irvine, CA
. Instrumental in boosting revenues from $240 million to $340 million over 3 years after 10 years
of stagnant sales.
. Prepared company for 1993 IPO and 1994 sale. Identified new product lines and marketing
opportunities.
Senior Manager/Director, Strategic Management and Marketing Consulting 1989 - 1991
ERNST & YOUNG WEST REGION CONSULTING, Los Angeles, CA
Principal/Manager/Director, Strategic Management and Marketing Consulting 1985 - 1989
ARTHUR YOUNG/CHICAGO CONSULTING GROUP, Chicago, IL
General Manager 1980 - 1984
THE SUN GROUP, Tucson, AZ
Directorships
QUALITY SYSTEMS, INC., a $30 million healthcare software company September 1998 - July 1999
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