Quality Systems Directors Extend Olive Branch to Dissident Shareholders

Directors of Tustin-based Quality Systems Inc. on Friday made a peace offering to dissident shareholders, proposing to replace all but one of the entire board of directors with a group of outsiders.

At least one of the dissidents rejected the proposal as inadequate.

For more than a year, several major shareholders have been feuding with Sheldon Razin, the company’s founder, chairman, president and chief executive, over the control and performance of Quality Systems. The company develops information systems for medical and dental group practices.

In addition to bringing in a whole new board, the current board also said it would amend the company’s “poison pill” rights plan and adopt rules requiring that all board committees and three-quarters of the entire board be made up of independent directors.

Quality has seen its revenue increase, but the company earned only $580,000 last year on sales of $33.8 million. Over the previous two years, the company lost a total of $12.1 million on sales of $51.3 million.

Meanwhile, its stock has languished, trading as low as $3.63 in March after topping $30 in 1996. Quality Systems shares rose six cents Friday, to $7.50.

The proposed new board includes one of the dissidents, Ahmed Hussein, who owns 18% of quality Systems, and Kelly McCrann, who heads up a Boston dental practice management company. McCrann was nominated by one of the other dissidents, Andrew Shapiro, head of Lawndale Capital, a San Francisco investment firm that has a 7% stake in Quality Systems.

Also nominated were Emad Zikry, president and chief executive of New York-based investment firm ARM Capital Advisors, who is backed by Hussein, and three businessmen, Frank Meyer, William Small and John Rau, who are backed by Razin. Quality Systems did not specify what Meyer, Small or Rau do for a living.

Razin would be the only director to continue on the board.

“The board is extending an olive branch to Dr. Hussein and Mr. Shapiro, the head of Lawndale Capital,” Razin said in a prepared statement. “We are hopeful each of them will accept it.”

Shapiro said the proposal “does not go far enough.”

“After talking with Ahmed Hussein, Mr. Razin’s action appears to be unilateral, done without consultation with ourselves or Mr. Hussein, and surprisingly without the consent of some of the purported nominees,” Shapiro said. “This is a welcome first step recognizing what we have been saying all along, that the current board of directors and its corporate governance practices have been wholly inadequate.”

Indeed, McCrann said that director William Bowers called him Thursday night to talk about joining the slate, but that McCrann asked for several days to consider the proposal.

Friday’s announcement nominating him to the board “caught me completely by surprise,” McCrann said. “I don’t really appreciate having my name used that way until I’ve made a decision. I was surprised by this and a little disappointed.”

Razin was traveling Friday and could not be reached for comment. Other company officials declined to comment on the release. Hussein, who is based in Egypt, did not return calls to his New York office.

Unless further accommodations between Razin and the other shareholders are reached, the company appears headed toward a proxy fight over control of the company at the annual meeting scheduled Sept. 17.