Firm Says Ex-Director, Dissident Shareholders in Cahoots

Firing another salvo in its battle with critical shareholders, Quality Systems Inc. lashed out this week at a director who recently resigned in a dispute with management.

The Tustin company contends in documents filed with regulators that former director Don Cook has joined forces with a shareholder activist who has proposed a change in the company’s bylaws and a new slate of directors in a move to make the board more independent.

Quality Systems, a developer of health care information systems, said that Cook’s name now has been added to the slate of directors nominated by Lawndale Capital Management, which holds a stake of nearly 10% in Quality Systems and is a key advocate for a more independent board.

Lawndale manager Andrew Shapiro responded that he had initially been skeptical about Cook’s nomination to the board in September 1998 and had wanted a different director in his place but that he had grown to respect him after Cook began questioning management decisions and talking with shareholders. He decided to nominate Cook to his own slate after the director resigned, he said.

“We have concluded that Mr. Cook is a far superior candidate for the board than any other incumbent director and would provide needed continuity,” he said.

Besides Lawndale, Ahmed Hussein, who owns 18% of the company, has nominated his own slate of directors for shareholders to vote upon during the company’s annual meeting in September.

Lawndale has also submitted a shareholder proposal for a vote on the company’s proxy that outlines bylaw changes for a more independent board; Hussein has indicated that he may consider a proposal to amend the bylaws. Both shareholders have expressed concern that the company’s board of directors isn’t operating independently of Chief Executive Sheldon Razin.

Cook’s resignation letter touched on similar concerns about board independence, citing his belief that Razin had turned down a bid for Quality Systems in December 1998 without notifying the board. He also said he disliked a board resolution Razin made retroactively approving his actions in the bid.

Quality Systems, in its documents filed Tuesday with the Securities and Exchange Commission, called Cook’s claims “incorrect, incomplete and misleading.”

The filing says that the December bid was not a true offer to purchase the company and that Cook misunderstood the resolution.

The company’s stock closed Wednesday at $8 a share, up 19 cents.