Quality Systems Offers to Clean House

Directors of Tustin-based Quality Systems Inc. on Friday made a peace gesture to dissident shareholders, offering to replace all but one member of its board with a group of outsiders.

At least one of the shareholders 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 new board, the current board also said it would amend a “poison pill” takeover defense and adopt rules requiring that all board committees and three-quarters of the entire board be made up of independent directors.

Quality Systems has seen its revenue improve, but it earned only $580,000 last year on sales of $33.8 million. Over the past two years, the company lost $12.1 million on sales of $51.3 million.

Meanwhile, its stock has languished after topping $30 in 1996. The shares rose 6 cents on Friday to close at $7.50 on Nasdaq.

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

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

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

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

“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.