It seems hard to believe any Quality Systems Inc. investor would have much to gripe about, given that shares of the Irvine healthcare software company have doubled in the past year.
But Quality, which had a recent market value of $865 million, has at least one unhappy shareholder, and a big one at that: Ahmed Hussein, an Egyptian businessman who owns 2.3 million shares, or some 17% of the company.
In a filing with the Securities and Exchange Commission, Hussein said he “has been pleased with the market performance of the company’s shares.”
But Hussein said he “is concerned that the company’s strong performance may not continue unless corrective action with respect to its board is taken immediately.”
Hussein charges that Quality’s board and management have taken moves that “threaten to turn the clock back and erase all of the progress made.”
So Hussein is gearing up for a proxy fight. After Quality’s management didn’t nominate Hussein for re-election to the board this year, he said he plans to back his own slate of candidates, including himself.
Hussein has been a Quality director since 1999. The company opted not to put forth his name again after cutting the size of its board from nine to eight directors.
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Silverman: part of management slate |
Quality’s annual shareholder meeting is set for Sept. 21.
The company’s chief executive, Louis Silverman, was on vacation last week and unavailable for comment. Quality makes software that doctors and dentists use to manage their practices.
In the company’s filing for the annual meeting, Quality said it chose not to nominate Hussein because of his recent criticism.
Quality’s “nominating committee and its board took note of a variety of matters that weighed against Mr. Hussein’s renomination, including, among other things, his actions as a member of the board and his recently filed (SEC document) in which he makes numerous allegations with which the company disagrees.”
The Slates
Quality’s slate includes founder and Chairman Sheldon Razin, who owns about 20% of the company. Other candidates include Silverman and Patrick Cline, president of Quality’s dominant NextGen Healthcare Information Systems division.
Management’s last candidate is a familiar face in local healthcare circles: Steven Plochocki, former chief executive of Lake Forest-based InSight Health Services Corp. who now runs Trinity Hospice in Dallas.
Hussein’s slate of candidates includes Ibrahim Fawzy, president of Fawzy Consultant Group, an Egyptian investment firm, and Ian Gordon, a British property development and asset-trading consultant.
Beyond what’s been said in SEC filings, Hussein, who lives in Egypt, isn’t commenting, said Paul Sweeney, a Santa Monica attorney who represents him.
Hussein’s contention about “erasing progress” could be a difficult case to make in view of Quality’s skyrocketing share price. The company is one of the biggest gainers on Wall Street among local companies.
“In a nutshell, the company is basically benefiting from a nationwide transition from paper-based medical charts to electronic medical records,” said Gene Mannheimer, an analyst for New York-based Caris & Co.’s San Diego office.
Mannheimer, who has covered Quality since his days at Newport Beach-based Roth Capital Management LLC, doesn’t see the shareholder fight tripping up Quality.
“The market is ripe for the business they are in,” he said. “There’s more business that they can accommodate,they are still a small company and they can win more business.”
Another analyst, Sean Wieland of US Bancorp Piper Jaffray in Minneapolis, hinted in a recent report about possible storms ahead with Hussein:
“We anticipate boardroom discord in the coming periods,with Ahmed Hussein (17% owner of the stock) not nominated to the board for re-election. Mr. Hussein believes the current structure of the board is to the shareholders’ detriment. We’ll stay tuned via the (SEC filings) we expect to be lobbed back and forth.”
Challenging Independence
Hussein, in his filing, charges that Razin controls the company’s board and “that the other directors simply follow his lead.”
“The board has lost all semblance of independence,” Hussein said.
Razin founded Quality in 1974 and took it public in 1982. He and wife Janet own about 2.6 million shares.
Several things have irritated Hussein, according to his filing. One is what he called “excessive compensation packages for the board and senior management” in the form of stock options for the 12 months through March.
Hussein also took aim at what he called “attempted efforts to sell (Quality) that were never approved in advance by the board, which may be detrimental to (Quality) and its stockholders.”
The filing does not elaborate on any sale efforts.
It does critique a deal Quality’s NextGen division signed in February with Siemens Medical Solutions, a unit of Germany’s Siemens AG.
Under the deal, Siemens is offering NextGen’s electronic medical records and practice management software to its customers.
“It is (Hussein’s) view that the agreement prohibits (Quality) from entering into similar agreements with any of Siemens’ so-called competitors,many of which are prime targets as direct consumers of (Quality’s) products and services,” Hussein said in the filing.
The Siemens deal “considerably impairs the overall value” of Quality to potential buyers, according to Hussein.
The dissident slate, if elected, would make up a minority of Quality’s board. But Hussein said he felt the trio would have a better chance to raise concerns about Quality than he would by himself.
‘Dilute the Control’
He said he “expects that the nominees will bring transparency, accountability and discipline to the way (Quality) is governed and managed” and “will dilute the control currently exercised by Mr. Razin.”
Hussein said he’s been a Quality stockholder since 1982. He is the director of National Investment Co. of Cairo, a firm he founded in 1996.
His background also includes serving for three years as a senior vice president of Dean Witter, now part of Morgan Stanley.
This is not the first time that Quality’s dealt with shareholder issues. In the late 1990s, the company faced several class-action lawsuits from shareholders that eventually were settled, the last of which happened in 2003.
