<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 6)*
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)
March 11, 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 final
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
- ----------------------------- ----------------------------
CUSIP No. 747582104 Page 2 of 19 Pages
- ----------------------------- ----------------------------
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
SS OR IRS 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
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 0
SHARES ------------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 620,700
EACH ------------------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 0
WITH -------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
620,700
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
620,700
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
(2 of 19)
<PAGE>
SCHEDULE 13D
- ----------------------------- ----------------------------
CUSIP No. 747582104 Page 3 of 19 Pages
- ----------------------------- ----------------------------
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
SS OR IRS 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
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 0
SHARES ------------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 620,700
EACH ------------------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 0
WITH -------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
620,700
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
620,700
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
(3 of 19)
<PAGE>
- ----------------------------- ----------------------------
CUSIP No. 747582104 Page 4 of 19 Pages
- ----------------------------- ----------------------------
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
SS OR IRS 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
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 0
SHARES ------------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 524,800
EACH ------------------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 0
WITH -------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
524,800
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
524,800
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
(4 of 19)
<PAGE>
SCHEDULE 13D
- ----------------------------- ----------------------------
CUSIP No. 747582104 Page 5 of 19 Pages
- ----------------------------- ----------------------------
- --------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
SS OR IRS 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
- --------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 0
SHARES ------------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 95,900
EACH ------------------------------------------------------------------
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON 0
WITH -------------------------------------------------------------------
10 SHARED DISPOSITIVE POWER
95,900
- --------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH 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
- --------------------------------------------------------------------------------
(5 of 19)
<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:
Purchaser Source of Funds Amount
- ------------------- ---------------------------------------- -------------------
LCM Funds Under Management (1) $4,066,115.10
DAP Working Capital $3,436,915.20
DAI Working Capital $ 629,199.90
- -----------------
(1) Includes funds of DAP and DAI invested in Common Stock.
Item 4. Purpose of Transaction.
Subsequent to their filing of this Schedule 13D and its amendments #1
through #5, the Reporting Persons ("Lawndale") have been in contact with
management and members of the Board of Directors of QSII and other QSII
shareholders and third parties, to discuss the strategies QSII plans to employ
to maximize shareholder value, including, but not limited to, changes in the
composition and functioning of QSII's Board of Directors (the "Board").
(6 of 19)
<PAGE>
Board has fiduciary duty to take necessary actions.
--------------------------------------------------
According to Lawndale's research, Lawndale believes that QSII went public
at a split-adjusted $8.50/share on December 1, 1982, and last traded at
approximately $3.75/share on March 9, 1999, a decline of 56% over a 16-year
period. More recently, QSII stock is down over 80% in the three years since its
Founder/Chairman/CEO, Sheldon Razin, sold shares on March 5, 1996 (reducing his
stake from a majority position to approximately 25% of QSII).
Three of QSII's seven current directors have been QSII Board members for
this ENTIRE 16-year period. Another director has been a Board member for the
last 11 years and is affiliated with a customer of QSII. Lawndale believes that
no properly functioning board, especially one that has been in place for so
long, would allow such a long-term record of lost shareholder value to exist
without taking decisive and meaningful actions. Lawndale believes that the
Board has failed to do its job largely as the result of dysfunctional and not
sufficiently independent board composition and the lack of any or poor corporate
governance practices.
Lawndale believes that the Board has a fiduciary duty, when faced with such
poor long-term results, to take action. Lawndale believes that each individual
QSII director owes fiduciary duties to QSII's shareholders which require each
director to take immediate action to reform QSII's corporate governance and
management structures. Lawndale further believes that any QSII director who
does not take such action potentially violates his or her fiduciary obligations
to QSII's shareholders.
Public shareholders already have sent a message that Board has failed to
------------------------------------------------------------------------
hear.
- ----
QSII held its most recent annual meeting on September 9, 1998. At that
meeting, as disclosed in Amendment #4 of this Schedule 13D, Lawndale voted
against a Board-proposed option plan that two institutional proxy advisory
services, Proxy Monitor and Institutional Shareholder Services (ISS), also
analyzed and recommended a vote "against". As disclosed in QSII's 10-Q for the
quarter ended September 30, 1998, 42% of those voting voted against the option
plan and over 25% of those voting voted to "withhold" on the reelection of
QSII's directors. These are substantial percentages of the voting shares not
held by QSII's Chairman/CEO, Mr. Razin.
The Board's response to Lawndale's requested reforms is inadequate and is
-------------------------------------------------------------------------
the result of the Board's lack of independence.
- ----------------------------------------------
Lawndale believes that corporate boards lacking independence are more
likely to avoid taking necessary actions to put a stop to bad managerial
decision-making and poor performance resulting therefrom. Lawndale, as QSII's
second largest non-management shareholder, in April 1998, introduced a highly
qualified independent director for QSII's consideration to fill a vacancy on
QSII's Board. By the end of July (4 months later), QSII's Chairman informed
Lawndale that QSII had been unable to "fully evaluate" candidates in time for
nomination and election by shareholders at the upcoming September annual meeting
but that the candidate introduced by Lawndale was among several under
"consideration" for appointment to the Board. The Chairman represented to
Lawndale that QSII's Board intended to continue the "evaluation process" and to
appoint new Board members in a timely manner, but this has not occurred.
Following the September 9, 1998 annual meeting, Lawndale's President,
Andrew Shapiro, addressed the Board regarding the public shareholders' obvious
dissatisfaction with the Board and the Board's failure to hold management
accountable for QSII's continual under-performance as well as Lawndale's request
for changes in the Board's composition and governance practices. While the
Board has presumably been discussing these matters for the last six months,
deferral of action given the grave and persistent senior management problems
equals no action. Lawndale believes this is unacceptable, as the problems are
apparent and the need for action is clear.
(7 of 19)
<PAGE>
On February 2, 1999, Lawndale filed Amendment #5 to this Schedule 13D
requesting that the Board timely take apparent and necessary decisive actions to
restore and enhance shareholder value at QSII as listed below (see "Necessary
Actions"). On February 3, 1999, Lawndale sent copies of this filing to each
Board member along with a cover letter further detailing its reasons for its
demands (see Exhibit B, February 3, 1999 letter).
On February 9, 1999, QSII's Board held its regularly scheduled quarterly
meeting. On February 10, 1999, QSII announced its financial results for the
third quarter ended December 1998 and held an analyst conference call. On this
conference call, when QSII's Chairman/CEO, Sheldon Razin was asked by Mr.
Shapiro what actions the Board had taken to improve its composition and
corporate governance mechanisms, Mr. Razin responded on behalf of the whole
Board that the Board feels its composition and corporate governance mechanisms
are adequate, implying no need for improvement.
On February 16, 1999, in his report maintaining a "hold" rating despite
QSII's improved financial results, Brad Whitt of Morgan Keegan, the only analyst
still covering QSII, wrote " . . . we are perplexed that meaningful action has
not been taken to enhance the company's management expertise." On February 23,
1999, Lawndale sent copies of the Morgan Keegan Report along with a cover letter
(see Exhibit B, Morgan Keegan cover letter and the 2/16/99 report) notifying the
Board that its response to Lawndale's request for Necessary Actions was
inadequate and that QSII's stock price, trading at levels down approximately
another 15% from the date of its earnings conference call, was the shareholders'
response to Board inaction.
Lawndale intends to submit shareholder proposal.
-----------------------------------------------
As the Board has continued to fail to take apparent and necessary decisive
actions to restore and enhance shareholder value, it is now Lawndale's intent to
submit, before the March 30, 1999 deadline, a proposal pursuant to Rule 14a-8
under the Securities Exchange Act of 1934, as amended, for inclusion in the QSII
proxy for shareholder vote at QSII's next annual meeting. Pursuant to Rule 14a-
8, Lawndale has held the requisite $2,000 in market value of QSII's stock for
the minimum required period (one year by the date of the submission of the
proposal) and will hold such stock through the expected September 1999 annual
meeting. While Lawndale has not yet decided upon the specifics of the proposal
it currently intends to submit to a shareholder vote, it is considering, amongst
other alternatives, changes in QSII's by-laws requiring a substantial majority
of its Board members be independent, requiring a nominating committee composed
solely of independent Board members, requiring an independent lead director
elected solely by the independent directors if the Chairman is not independent,
prohibiting spouses or family members from either serving on the Board or
working in company at the same time (anti-nepotism), prohibiting the same person
from serving as CEO/President and Chairman of Board at the same time, removing
QSII's shareholder rights plan until approved by a majority of shareholders,
requiring all Board members to be paid in stock and prohibiting repricing of
stock options without majority shareholder vote.
Lawndale intends to cumulate its votes to improve Board composition.
-------------------------------------------------------------------
Under the laws of QSII's state of incorporation, California, shareholders
have the right to cumulate their votes in the election of directors. Cumulative
voting means that a shareholder has the right to give any one candidate whose
name has been properly placed in nomination prior to the voting a number of
votes equal to the number of directors to be elected multiplied by the number of
shares such shareholder would otherwise be entitled to vote, or to distribute
such votes on the same principle among as many nominees (up to the number of
persons to be elected) as the shareholder may wish.
Lawndale has increased its ownership position in QSII to approximately
9.99% since the Record Date for the annual meeting. It is Lawndale's current
intent to give notice at QSII's annual meeting to cumulate its votes and cast
them for director nominees who it feels are most likely to support substantial
improvements to the composition and corporate governance practices of QSII's
Board (including but not limited to the "Necessary Actions"), as well as changes
in QSII's senior management. Lawndale believes that under
(8 of 19)
<PAGE>
cumulative voting at the next annual meeting, based on Lawndale's current 9.99%
position and the substantial percentage of shares voted in disapproval of the
board's re-election and management's option proposal at the last annual meeting,
QSII shareholders who disapprove of events and circumstances at QSII will be
able to have a substantial impact in altering the composition of QSII's Board
and effect changes in QSII's corporate governance practices and senior
management.
Lawndale is considering additional actions.
------------------------------------------
Lawndale believes that QSII's Common Stock at current market prices is
undervalued. Lawndale intends to actively monitor efforts by the Board to
increase stockholder value. In the absence of Board actions toward improving
QSII's Board composition and governance practices before the annual meeting,
Lawndale is considering calling a special meeting of QSII shareholders to effect
some of these improvements.
If Lawndale believes that the Common Stock continues to be undervalued
and/or the Board fails to timely take apparent and necessary decisive actions to
restore and enhance shareholder value at QSII as listed below (see "Necessary
Actions"), Lawndale may seek in the future to have non-management shareholder
representatives appointed to the Board, by agreement with QSII or otherwise,
including by running its own slate of nominees at an annual or special meeting
of QSII. Lawndale may in the future propose such other matters or support other
shareholders' proposals for consideration and approval by QSII's shareholders or
the Board at an annual or special meeting. Lawndale may also propose a
transaction whereby all or a portion of QSII be sold, and in connection
therewith Lawndale may seek to participate in such transaction or seek to
acquire control of QSII in a negotiated transaction or otherwise.
Necessary Actions.
-----------------
1) Changing the composition of the Board such that a substantial majority
of its members are independent through:
1a) adding independent person(s) with operating depth and experience in
QSII's industries and/or
1b) adding representative(s) of non-management shareholders.
2) Adopting a formal policy whereby a nominating committee of QSII's
Board, composed solely of independent members is responsible for the evaluation
and nomination of Board members.
3) Adopting a formal policy requiring the appointment of either an
independent Chairman or independent Lead Director. That Director shall be
selected by the independent members of the Board from among the independent
Directors. His/her role would be to coordinate with the other independent
Directors, chair Executive Sessions (see item 4 below) of the independent
Directors and act as a liaison between them and the Chairman/CEO.
4) Adopting a formal policy for each Board meeting, whereby at the end of
each meeting the Board meets in Executive Session, without members of management
present, to discuss such matters as they think appropriate, including management
performance.
Lawndale 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 such as would occur upon
completion of any of the actions discussed above. Lawndale intends to review
its investment in QSII on a continuing basis and, depending on various factors
including, without limitation, QSII's financial position and Lawndale's
investment strategy, the price levels of QSII Common Stock and conditions in the
securities markets and general economic and industry conditions. Lawndale 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
(9 of 19)
<PAGE>
Stock or to change its intention with respect to any and all matters referred to
in Item 4. To the extent not inconsistent with the foregoing, Lawndale
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 620,700 9.99 0 620,700 0 620,700
Shapiro 620,700 9.99 0 620,700 0 620,700
DAP 524,800 8.45 0 524,800 0 524,800
DAI 95,900 1.54 0 95,900 0 95,900
</TABLE>
The persons filing this statement effected the following transactions in
the Common Stock on the dates indicated, and such transactions are the only
transactions in the Common Stock by the persons filing this statement since
January 8, 1999.
<TABLE>
<CAPTION>
Purchase or Number Price
Name Sale Date of Shares Per Share
- -------------- ------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
DAP P 01/08/99 500 $4.250
DAP S 01/08/99 800 $4.375
DAI S 01/08/99 200 $4.375
DAP P 01/12/99 1,000 $4.156
DAP P 01/15/99 200 $4.406
DAP P 01/20/99 1,200 $4.287
DAP P 01/20/99 300 $4.313
DAP S 01/20/99 300 $4.438
DAP P 01/21/99 200 $4.500
DAP S 01/21/99 2,000 $4.469
DAI S 01/21/99 500 $4.469
DAP P 01/22/99 100 $4.375
DAP P 01/25/99 700 $4.222
DAI P 01/25/99 200 $4.222
DAP P 01/26/99 500 $4.250
DAP P 01/27/99 800 $4.375
DAP S 01/27/99 2,000 $4.462
DAI P 01/27/99 200 $4.375
DAI S 01/27/99 300 $4.462
DAP S 03/03/99 1,200 $4.000
</TABLE>
All transactions were executed through the Nasdaq National Market System.
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.
(10 of 19)
<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 of Statement on Schedule 13D or 13G.
B. Letter dated February 3, 1999 from Andrew E. Shapiro, President of
Lawndale Capital Management, LLC, to the Board of Directors of Quality
Systems, Inc.; Letter dated February 23, 1999 from Andrew E. Shapiro,
President of Lawndale Capital Management, LLC, to the Board of
Directors of Quality Systems, Inc., attaching Morgan Keegan 2/16/99
Research Notes.
(11 of 19)
<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: March 11, 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
(12 of 19)
<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
(13 of 19)
<PAGE>
EXHIBIT B
Andrew E. Shapiro
President
February 3, 1999
To the Board of Directors:
Re: Quality Systems
As you know, Lawndale Capital Management, LLC ("Lawndale") is the third largest
investor in Quality Systems, Inc. ("QSII") and has been a shareholder for quite
some time. On more than one occasion we have been very helpful to the company.
From our discussions over these many years, I would hope you agree that we have
been patient investors and have sought to learn from QSII as much as possible
about its business and opportunities. As such I hope you seriously consider the
issues raised in Item 4 of the enclosed Amendment No. 5 to our Schedule 13D
("13D") which we filed February 2, 1999 with the U.S. Securities and Exchange
Commission.
Over the past few years, the health care information industry has been
undergoing rapid and increasing change. This change has created substantial
opportunity for companies with cutting edge technologies and the infrastructure
to sell, deliver and support them. During this time, several companies in QSII's
industry have grown from a size much smaller than QSII to several times that of
QSII. And even periodically, the industry's potential has been reflected in
QSII's stock price when management and interim operating results have led the
investment community to believe that QSII might also benefit from these changes.
But, on repeated occasions year after year, QSII has managed to disappoint its
shareholders such that they have lost all confidence in QSII's management and
Board. This past year alone QSII's stock price has fallen to and remained near
52-week lows. Shareholder value has been decreased by millions of dollars.
AS DISCUSSED IN ITEM 4 OF THE 13D, YOU APPARENTLY AREN'T LISTENING TO YOUR
SHAREHOLDERS.
At September's annual meeting, 42% of those voting, voted against your option
plan and over 25% (30% for some directors) of those voting voted to "withhold"
on your re-election. A substantial portion (arguably a majority) of QSII's non-
management shareholders want change. After this annual meeting, when
shareholders' disgust was clear, I articulated shareholders' concerns to the
Board. Still, the Board did not and has not adequately responded to these
concerns. Lawndale has many more shares to vote at the next meeting. A public
campaign for change is inevitable and will win if you do not take immediate and
substantive actions to maximize shareholder value.
AS DISCUSSED IN ITEM 4 OF THE 13D, QSII'S BOARD LACKS SUFFICIENT INDEPENDENCE.
Boards lacking independence are more likely to avoid taking necessary actions to
put a stop to bad managerial decision-making and poor performance resulting
therefrom. As our repeated 13D filings have disclosed, for some time, years in
fact, I have asked QSII's Chairman/CEO to improve the composition of the Board
by adding individuals possessing greater operating depth and experience in
QSII's industry(ies) than QSII's current independent board members. In addition,
we provided QSII with widely accepted guidelines defining "independence"
promulgated by some of the biggest investors in the world. QSII's Chairman/CEO,
possibly accustomed to owning over 50% of QSII, has avoided making the necessary
improvements. We therefore introduced to QSII, a board-certified physician with
8 years senior management experience at a very large public company with
extensive knowledge of your industry. Yet neither this candidate nor other
candidates
(14 of 19)
<PAGE>
were "fully evaluated" in time for September's annual meeting. We believe 4 of
the 6 people nominated by QSII's Board would not qualify as "independent". The
ratio should be at least just the opposite.
Regardless of the independence or lack of independence of QSII's board, a
company with QSII's very poor performance needs quick and decisive leadership
changes at the Board and management levels.
LACK OF INDEPENDENT AND INDUSTRY EXPERIENCED BOARD OVERSIGHT ALLOWED WASTE OF
CORPORATE ASSETS.
Micromed was acquired in the spring of 1997. Its "earn-out" closed in the spring
of 1998. Almost 2 years after Micromed was acquired, the promised integration of
Micromed and Clinitec is a disaster, piecemeal at best, and far less than public
representations made by the QSII's management on more than one occasion. Current
senior management either does not know how to integrate these businesses or
after 2 years is still "evaluating" whether to integrate these businesses. The
Board appears to come up short of it fiduciary duties to act here as well.
QSII's failure to adapt and change runs counter to the forces that drive QSII's
industry and risks destroying more shareholder value.
QSII acknowledged that its financial results for Q2 ended 9/98, again did not
meet analyst expectations. Among other things cited as reasons for "missing"
this quarter's numbers included a write-off for "bad debt" related to sales
previously recorded at QSII's Micromed division (for Q4 ended 3/98). QSII
Management has stated that had the sales written off in Q2 as "bad debt" not
been previously recorded at Micromed, $1.6 million of the "earn-out" paid to buy
Micromed would not have been paid. Yet just in the previous quarter (Q1 ended
June) management had no idea of Micromed's enormous sales and profits shortfall
until after that quarter closed. Only 3 weeks earlier management had publicly
projected much higher results for this same period. We believe that QSII would
likely not have been caught flat-footed in the June quarter and would not have
wasted at least $1.6 million of shareholder money paid on Micromed's "earn-out",
if QSII had independent board members with greater operating depth and
experience in QSII's industry.
LACK OF INDEPENDENT BOARD OVERSIGHT ALLOWED INAPPROPRIATE "ALTERNATIVE"
INVESTMENTS OF QSII CASH.
Another contributing factor cited for Q2's underperformance was substantial
unrealized losses on "hedge fund" investment(s). QSII's Chairman/CEO has
explained that such investments were properly made by him within discretion
granted by the Board to management. It is appalling to us that in 1994 the Board
allowed a great portion of QSII's cash to be invested by its Chairman/CEO in
speculative foreign and domestic securities rather than traditional cash
equivalents. While we hope our complaints then contributed to those volatile
investments being pared back, the Board remains oblivious to the years of
investment community concerns over the "lack of visibility" of QSII's earnings.
Had independent board members representing large non-management shareholders
been in place, they would have known that such "alternative" investments are not
the best use of the Chairman/CEO's time and skill set and could prove
detrimental to QSII's already volatile operating earnings streams.
NEW ADDITION TO BOARD GOOD START BUT NOT ENOUGH "INDEPENDENT" MEMBERS.
In November, 1998, 8 months after we first submitted a qualified and value-added
candidate for the Board, QSII appointed Donald Cook to the Board. Mr. Cook's
background and experience should be valuable to his service as a Board member
should he choose to use it actively. Yet the Board still has insufficient
independence from management.
Thus, we intend to actively monitor efforts by the Board to increase stockholder
value. If we believe that the Common Stock continues to be undervalued and/or
the Board fails to timely take apparent and necessary decisive actions to
restore and enhance shareholder value at QSII as listed in the 13D, Lawndale may
take the actions discussed in the 13D.
(15 of 19)
<PAGE>
I trust you will give the enclosed 13D and this letter careful and diligent
attention at your upcoming Board meeting. I look forward to hearing the Board's
positive response and to working together with you toward creating positive
results for QSII and all of its shareholders.
Sincerely,
Andrew E. Shapiro
President
(16 of 19)
<PAGE>
Andrew E. Shapiro
President
February 23, 1999
By facsimile
To the Board of Directors: page 1 of 3
William Bowers
Dr.John Bowers Sr.
Patrick Cline
Donald Cook
Sheldon Razin
Janet Razin
Gordon Setran
Re: Quality Systems
THE BOARD'S RESPONSE IS INADEQUATE
On the Q3 earnings conference call that took place on 2/10/99, when I asked
QSII's Chairman/CEO, Sheldon Razin what actions the Board had taken to improve
its composition and corporate governance mechanisms, he responded on behalf of
the whole Board that the Board feels its composition and corporate governance
mechanisms are adequate, implying no need for improvement. Those comments did
not escape notice by your shareholders and industry analysts, as today, despite
improved results, QSII's stock price traded at levels down approximately another
15% from the date of the company's earnings announcement.
In addition, note the attached February 16, 1999 analysis by Brad Whitt at
Morgan Keegan, the only analyst still covering QSII. One comment in particular,
"...we are perplexed that meaningful action has not been taken to enhance the
company's management expertise.", illustrates that the investment community is
focussed on and concerned with matters directly within the board's fiduciary
responsibility. Board inaction can be as much a breach of fiduciary duty as
improper action. A diligent board member, given the current circumstances
surrounding Quality Systems, would call Brad (and others in the investment
community) to discuss the reasons for his conclusions about QSII. You may find
others' opinions enlightening and confirm that our views on Quality Systems are
not unique.
Quality System's stock has become more undervalued and, from the response
communicated to shareholders so far, the Board has failed to take apparent and
necessary decisive actions to restore and enhance shareholder value at QSII. The
status quo is unacceptable.
I look forward to hearing a more constructive and detailed response from the
Board and to working together with you toward creating positive results for QSII
and all of its shareholders.
Sincerely,
Andrew E. Shapiro
President
Attachment- Morgan Keegan 2/16/99 Research Note
(17 of 19)
<PAGE>
Morgan Keegan & Company, Inc.
Research Notes
February 16, 1999
Quality Systems, Inc.
QSII* - $4 1/4
52 Wk Range $3 - $11
Inst. Ownership 32%
Mgt. Ownership 25%
Current Chg. From Avg. Daily Vol. 10,200
------- --------- Market Cap. (mill) $26.5
Book Value $4.65
Rating: M-S Price/Book 0.9x
TTM Revenue (mill) $33.0
EPS: 3/98A: $0.28 Price/TTM Revenue 0.8x
3/99E: $0.06 1999 EPS P/E 15.7x
3/00E: $0.32 $0.37 Cash per share $2.22
Rpt. Date Range
--------- -----
Q3: $0.06A vs. $0.04 2/10 First Call: $0.06A vs. $0.04 NR
Q4: $0.09 vs. $0.15 5/99 First Call: $0.09 vs. $0.15 NR
Q1: $0.03 vs. $(0.10) 3/99 First Call: $0.03 vs. $(0.10) NR
Q2: $0.07 vs. $0.01 6/99 First Call: $0.07 vs. $0.01 NR
Q3: $0.10 vs. $0.06 9/99 First Call: $0.10 vs. $0.06 NR
Q4: $0.12 vs. $0.09 12/99 First Call: $0.12 vs. $0.09 NR
- --------------------------------------------------------------------------------
COMPANY SHOWS SOME NEEDED PROGRESS WHILE MEETING ESTIMATES
Revenue/Income Analysis. Quality Systems reported third fiscal quarter
(December) results in line with our revised estimate of $0.06 per share -- a
53.5% increase from last year's $0.04 per share. Revenue increased 17% to $8.8
million, as compared to the same quarter in fiscal 1998. The dental division
reported a record $4.9 million in revenue due to strong upgrade sales and
growing EDI services. In addition, the company booked more than $400,000 in
revenue for its clinical dental system. The MicroMed division showed significant
improvement, growing revenue 98% Y/Y and 55% sequentially to $1.7 million. The
Clinitec division continues to struggle due to a sluggish market for physician
electronic medical record (EMR) systems. Although we believe Clinitec is one of
the leading EMR vendors, the market for these systems could stay depressed until
Year 2000 challenges pass. Gross margins declined 240 basis points due to more
hardware in the revenue mix. Operating margins expanded 300 basis points
sequentially to 6.3%, as the company kept operating expenses relatively flat
from the previous quarter.
Balance Sheet/Cash Flow Analysis. The cash and equivalent balance increased
$968,000 to $13.8 million or $2.22 per share. Accounts receivable declined a few
days sequentially to an acceptable 103 days. Cash flow for the quarter was
strong (a positive $1.5 million), bringing the YTD total cash flow from
operations to $2.3 million (compared to $732,000 last year). The company's
deferred revenue has consistently grown this fiscal year to the current $3.5
million balance. This revenue will likely be recognized over the next 6-9
months. In general, we believe the balance sheet remains strong and shows signs
of building a steady backlog.
Fourth Quarter Forecast. We are projecting a modest 5% Y/Y revenue growth in Q4
and gross margins closer to those obtained in the previous quarter (Q2:99). We
anticipate modest expense growth leading to a 10% operating margin and a $0.09
EPS estimate. This would be significantly less than the $0.15 earned the same
quarter last year. We believe the company's visibility for Q4 is stronger than
in previous quarters for several reasons listed below:
. The company's deferred revenue balance has grown 88% YTD.
. QSI booked $400,000 in dental clinical revenue during the quarter but
only recognized $258,000.
. The company has purchase orders for $600,000 in Year 2000 upgrades that
have not been delivered.
. Cash flow was strong and DSOs declined this quarter, leading us to
believe the reported earnings were high in quality.
(18 of 19)
<PAGE>
Caution is Still Advised. We remain cautious, however, because the company's
earnings have fluctuated materially in the past. We continue to believe that the
near-term success of QSI is contingent upon the performance of the MicroMed
division. We believe this division has the most immediate growth potential,
which is being fueled by the necessity for physicians to upgrade or replace
their billing systems before Year 2000. We estimate that the majority of
physician practices are still running legacy systems that are not Y2K compliant.
QSI has recognized this opportunity (along with the sluggish market conditions
for EMR systems) and decided to integrate the much larger Clinitec sales team
with MicroMed's. The company had several customers this quarter contract for
both products, leading us to believe the integration of these two divisions
should have been accomplished much sooner. In time, this could bolster the
company's sales pipeline and lead to more operational consistency.
QSI Performance Lags the Competition. Although QSI has shown progress the last
two quarters, the company's performance continues to lag the competition. QSI
went public in 1982 at $8.50 (200% higher than the current price) and is
projected to grow revenues a modest 7% in fiscal 1999, while EPS will likely
decline 78% to $0.06. In contrast, two comparable public companies, Infocure
(INCX - $31 7/16) and Medical Manager (MMGR - $31 9/16) have rewarded
shareholders handsomely. As the chart below indicates, QSII noticeably lags the
competition in stock performance, operating margins, and revenue/earnings
growth. Consequently, both Medical Manager and Infocure have much higher PE
valuations.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 Stock 1998 Stock Return on Operating Revenue Run 1999 PE
Performance Performance Equity** Margin** Rate Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
QSII 0% -43% 2.5% 3.2% $35 million 15.7x
- --------------------------------------------------------------------------------
INCX 108% 249% 30.9% 16.3% $120 million 29.1x
- --------------------------------------------------------------------------------
MMGR 62% 74% 27.2% 19.3% $150 million 30.3x
- --------------------------------------------------------------------------------
</TABLE>
**Based on reported trailing twelve (12) months
Based on QSI's lackluster performance over the years, we are perplexed that
meaningful action has not been taken to enhance the company's management
expertise. In our opinion, the addition of new leadership would significantly
enhance the value of QSII shares. If the company continues at the current pace,
we believe the larger players will either acquire QSI or leave it behind.
Summary/Recommendation. Although QSI has shown progress over the past two
quarters, we don't believe investor confidence will return until enhancements
are made in senior management. Additionally, we are concerned that the company
is not properly positioned to benefit from Y2K system replacement opportunities
(primarily in medical financial systems). Finally, we do not believe the company
has moved fast enough or gone far enough to integrate the subsidiaries. As
evidence, the combined sales pipeline for the Clinitec and MicroMed divisions
declined a whopping 40% sequentially this quarter. The injection of some new
leadership is needed to convince investors that the company can deliver solid,
consistent growth in the future. Consequently, we continue to rate the shares
Market Perform-Speculative.
Bradley G. Whitt (901) 579-4216
[email protected]
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
* Morgan Keegan & Company, Inc. makes a market in the shares of this security.
@ Morgan Keegan & Company, Inc. has participated in an offering of the shares
of this company within the past three years.
# Morgan Keegan & Company, Inc. has managed or co-managed an offering of the
shares of this company within the past three years.
The information contained herein is based on sources considered to be reliable
but is not represented to be complete and its accuracy is not guaranteed. The
opinions expressed herein reflect the judgment of the author at this date and
are subject to change without notice and are not a complete analysis of every
material fact respecting any company, industry or security. Morgan Keegan &
Company, Inc. and its officers, directors, shareholders, employees and
affiliates and members of their families may make investments in a company or
securities mentioned herein before, after or concurrently with the publication
of this report. Morgan Keegan & Company, Inc. may from time to time perform or
seek to perform investment banking or other services for, or solicit investment
banking from any company, person or entities mentioned herein. Neither the
information nor any opinion expressed herein constitutes a solicitation for the
purchase or sale of any security.
(19 of 19)
