Lawndale calls for QSII board changes/increases 13-D position
In a filing with the SEC on February 2, 1999, Lawndale Capital Management, LLC amended its Quality Systems (O-QSII) 13-D filing, requesting changes to improve Quality's Board of Directors. Lawndale's filing also disclosed that it had boosted Lawndale's ownership in Quality Systems to 9.96% of QSII stock. Quality Systems, Inc., is a Tustin, CA-based health care information systems company with over $2/share of net cash, substantial recurring revenue from its core dental practice management systems business and two start-up subsidiaries, Clinitec Intl and MicroMed Healthcare Info. Sys that develop and provide electronic medical records systems and enterprise practice management systems, respectively.
The filing can be found at SEC EDGAR dataproviders or at freeedgar.com
Item 4. Purpose of Transaction.
Subsequent to their filing of this Schedule 13D and its amendments, 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 (“Board”).
Board has failed to do its job.
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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 $4.25/share on February 1, 1999, a decline of 50%, over a 16 year period. Three of QSII's seven current directors have served on QSII's Board for this entire period. Lawndale believes that no board should allow such a long-term record of lost shareholder value to exist without taking decisive and meaningful actions. Lawndale believes that the track record of QSII stock (down over 80%) since its Chairman/CEO sold shares on March 5, 1996, (reducing his stake from a majority position to approximately 25% of QSII) is the result of a non-independent, inactive and ineffective Board.
Lawndale believes that responsibility for such poor stock performance is directly related to inconsistent and mediocre operating performance and asset mismanagement combined with the Board's failure to hold management accountable for such ineffective leadership. Lawndale believes the Board has failed to do its job largely as the result of dysfunctional board composition and the lack of or poor corporate governance practices.
Shareholders have sent a message that the Board apparently failed to hear.
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On September 9th, 1998, Andrew Shapiro, President of Lawndale Capital Management, LLC attended QSII's Annual Meeting in person. 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 9/30/98, 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. Following this Annual Meeting, Mr. Shapiro addressed the Board regarding its lack of independence and failure to hold management accountable for QSII's continual underperformance. The Board did not and has not adequately responded to these concerns.
Lack of Board Independence.
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Lawndale believes that 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 believes that the proper framework in determining the "independence" of a director in an under-performing company such as QSII should follow at a minimum widely regarded guidelines promulgated by either the Council of Institutional Investors (CII) or the California Public Employee's Retirement System (CALPERS) which Lawndale provided to QSII in July.
Lawndale, as QSII's second largest non-management shareholder, in April 1998, introduced a highly qualified and 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. Under the CII & CALPERS guidelines, it is Lawndale's belief that 4 of the 6 nominees for election to QSII's Board at the annual meeting and subsequently elected were not and are not “independent”.
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.
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. 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 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. Lawndale may also 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 shareholder's proposals for consideration and approval by QSII's shareholders or the Board.
Necessary Actions
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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 industry(ies) and/or
1b) adding representative(s) of non-management shareholders.
2) Adopting a formal policy requiring the appointment of either an independent Chairman or independent Lead Director. That Director shall be selected by the Board from among the independent Directors. His/her role would be to coordinate with the other independent Directors, chair Executive Sessions of the independent Directors and act as a liaison between them and the Chairman/CEO.
3) 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) - (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 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. |
