<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
DAOU SYSTEMS, INC.
- -----------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
[LOGO / LETTERHEAD OF DAOU SYSTEMS, INC.]
DAOU Systems, Inc.
5120 Shoreham Place
San Diego, California 92122
T: (619) 452-2221
http://www.daou.com
May 20, 1999
Dear Stockholder:
You are cordially invited to attend the Company's Annual Meeting of
Stockholders to be held on June 22, 1999. At the meeting, the Company's
management will review actions taken during the fiscal year ended December
31, 1998 and present its plans for 1999.
The meeting will begin promptly at 2:00 p.m., local time, at the
Company's principal executive offices located at 5120 Shoreham Place, San
Diego, California 92122.
The official Notice of Meeting, Proxy Statement and Proxy Card are
included with this letter. The matters listed in the Notice of Meeting are
described in detail in the Proxy Statement.
The vote of every stockholder is important. Mailing your completed
Proxy Card will not prevent you from voting in person at the meeting if you
wish to do so. Please complete, sign, date and promptly return your Proxy
Card in the enclosed envelope. Your cooperation will be greatly appreciated.
Members of the Company's Board of Directors and management look forward
to greeting personally those stockholders who are able to attend the meeting.
Sincerely,
Georges J. Daou
Chairman of the Board and Chief Executive Officer
<PAGE>
DAOU SYSTEMS, INC.
5120 Shoreham Place
San Diego, California 92122
-------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 22, 1999
-------------------
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of DAOU Systems, Inc., a Delaware corporation (the "Company"),
will be held at the Company's principal executive offices located at 5120
Shoreham Place, San Diego, California 92122 on June 22, 1999, at 2:00 p.m.,
local time, for the following purposes:
1. To elect two (2) Class III directors of the Company for a term
expiring at the annual meeting of stockholders to be held in 2002,
with each Class III director to hold office until his respective
successor is duly elected and qualified;
2. To ratify the selection of Ernst & Young LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1999;
and
3. To transact such other business as may properly come before the
Meeting or any adjournment or postponement of the Meeting.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on May 13, 1999
will be entitled to notice of and to vote at the Meeting and any adjournments
thereof. Each of these stockholders is cordially invited to be present and
vote at the Meeting in person.
By Order of the Board of Directors
Fred C. McGee
SECRETARY
San Diego, California
May 20, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN, DATE
<PAGE>
AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE IN THE ENVELOPE
PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THIS IS
IMPORTANT BECAUSE A MAJORITY OF THE SHARES MUST BE REPRESENTED, EITHER IN
PERSON OR BY PROXY, TO CONSTITUTE A QUORUM AT THE MEETING. IF YOU ATTEND THE
MEETING, YOU MAY VOTE IN PERSON EVEN THOUGH YOU SEND IN YOUR PROXY CARD NOW.
IN ADDITION, YOU MAY REVOKE THE PROXY AT ANY TIME BEFORE IT IS VOTED.
<PAGE>
DAOU SYSTEMS, INC.
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 22, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
GENERAL INFORMATION 1
SHARES OUTSTANDING AND VOTING RIGHTS 3
PROPOSAL ONE: ELECTION OF CLASS III DIRECTORS 5
PROPOSAL TWO: RATIFICATION OF INDEPENDENT AUDITORS 26
OTHER BUSINESS 27
</TABLE>
<PAGE>
DAOU SYSTEMS, INC.
5120 Shoreham Place
San Diego, California 92122
-------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 22, 1999
-------------------
GENERAL INFORMATION
Your proxy in the enclosed form is solicited by the Board of Directors
(the "Board") of DAOU Systems, Inc., a Delaware corporation (the "Company"),
for use at its Annual Meeting of Stockholders to be held at the principal
executive offices of the Company at 5120 Shoreham Place, San Diego,
California 92122 on June 22, 1999, at 2:00 p.m., local time (the "Meeting"),
for the purposes set forth in the accompanying notice and at any adjournment
or postponement of the Meeting. The mailing of this Proxy Statement and the
accompanying Notice of Annual Meeting and form of Proxy Card (the "Proxy
Card") to the stockholders of the Company is expected to commence on or about
May 20, 1999.
The shares of the Company's Common Stock, par value $0.001 per share
("Common Stock"), represented by proxy will be voted in accordance with the
instructions given on the Proxy Card, subject to the proper execution of the
Proxy Card and its receipt by the Company prior to the close of voting at the
Meeting or any adjournment or postponement thereof. Proxies received by the
Company on which no contrary instruction has been given will be voted "FOR"
the election of the Class III directors to the Board nominated by the Board
and "FOR" the ratification of the selection of independent auditors for the
fiscal year ending December 31, 1999. A stockholder giving a proxy has the
power to revoke it at any time before it is exercised by filing with the
Secretary of the Company an instrument revoking it or a duly executed proxy
bearing a later date. The powers of the proxy holders will be suspended if
the person executing the Proxy Card is present at the Meeting and votes in
person.
Copies of solicitation material will be furnished to brokerage firms,
nominees, fiduciaries and custodians holding shares of Common Stock in their
names which are beneficially owned by others ("record holders") to forward to
such beneficial owners. In addition, the Company may reimburse such persons
and the Company's transfer agent for their reasonable out-of-pocket expenses
in forwarding the solicitation material to such beneficial owners. Original
solicitation of proxies by mail may be supplemented, if deemed desirable or
necessary, by either telephone, telegram, facsimile or personal solicitation
by directors, officers or employees of the Company. No additional
compensation will be paid for any such services. The Company reserves the
right, if deemed desirable or necessary, to retain a proxy solicitation firm
to deliver solicitation material to record holders for distribution by them
to their principals and to assist the Company in collecting proxies from such
holders. The costs of these services to the Company, exclusive of
out-of-pocket costs, is not expected to exceed $10,000. Except as described
above, the Company does not intend to solicit proxies other than by mail.
1
<PAGE>
SHARES OUTSTANDING AND VOTING RIGHTS
RECORD DATE AND SHARES OUTSTANDING
Only holders of shares of Common Stock of record as of the close of
business on May 13, 1999 (the "Record Date"), are entitled to vote at the
Meeting. On the Record Date, 17,689,728 shares of Common Stock
(collectively, the "Shares") were issued and outstanding. Each of the Shares
is entitled to one vote on all matters to be voted upon at the Meeting.
QUORUM; BROKER NON-VOTES; ABSTENTIONS
The presence, in person or by proxy duly authorized, of the holders of a
majority of the Shares will constitute a quorum for the transaction of
business at the Meeting and any adjournment or postponement thereof. The
Shares that are voted by proxy "FOR," "AGAINST" or "WITHHELD FROM" a proposal
are treated as being present at the Meeting for purposes of establishing a
quorum and are also treated as shares entitled to vote at the Meeting with
respect to such proposal.
Broker non-votes (i.e., Shares held by a broker or nominee which are
represented at the Meeting, but with respect to which such broker or nominee
is not empowered to vote on a particular proposal) will be counted for
purposes of determining the presence or absence of a quorum for the
transaction of business at the Meeting, but will not be counted for purposes
of determining the number of votes cast with respect to a particular proposal
on which the broker has expressly not voted. Accordingly, a broker non-vote
will not affect the outcome of the voting on any proposal set forth in this
Proxy Statement.
The Class III director nominees will be elected by a plurality of votes
of the Shares present in person or represented by proxy at the Meeting. Any
of the Shares not voted (whether by abstention, broker non-votes or
otherwise) will have no impact on the election of the Class III directors,
except to the extent that the failure to vote for one Class III director
nominee results in another nominee receiving a larger portion of votes. The
proposal submitted to ratify the selection of the Company's auditors must be
approved by the vote of the holders of a majority of the Shares represented
in person or by proxy and entitled to vote at the Meeting. In determining
whether such proposal has been approved, abstentions and broker non-votes
will not be counted as votes for or against such proposal.
REVOCABILITY OF PROXY
A proxy may be revoked by a stockholder at any time prior to the voting
at the Meeting by written notice to the Secretary of the Company, by
submission of another duly executed proxy bearing a later date or by voting
in person at the Meeting. Such notice or later proxy will not affect a vote
on any matter taken prior to the receipt thereof by the Company or its
transfer agent. The mere presence at the Meeting of the stockholder who has
appointed a proxy will not revoke the prior appointment.
2
<PAGE>
If not revoked, the proxy will be voted at the Meeting in accordance with the
instructions indicated on the Proxy Card by the stockholder or, if no
instructions are indicated, will be voted "FOR" the election of the Class III
directors to the Board nominated by the Board and "FOR" the ratification of
the selection of independent auditors for the fiscal year ending December 31,
1999 and, as to any other matter that may be properly brought before the
Meeting, in accordance with the judgment of the proxy holders.
3
<PAGE>
PROPOSAL ONE
ELECTION OF CLASS III DIRECTORS
(ITEM 1 ON THE PROXY CARD)
The Board currently consists of seven (7) directors. At the Meeting,
the stockholders will elect two (2) Class III directors to the Board who will
hold office until their respective successors are duly elected and qualified
at the 2002 annual stockholders meeting. The Board has nominated David W.
Jahns and Larry D. Grandia as the two (2) Class III directors to be elected
at the Meeting.
Management knows of no reason why any of these Class III director
nominees would be unable or unwilling to serve; but, in the event that any
Class III director nominee is unable or unwilling to serve, the proxies will
be voted for the election of such other person(s) for the office of Class III
director as management may recommend in the place of such nominee.
INFORMATION REGARDING CLASS III DIRECTOR NOMINEES
The following table sets forth the names, ages, principal occupations
for the periods indicated and other directorships of the two (2) Class III
director nominees, each of whom is currently a director of the Company.
Information as to the stock ownership of each Class III director nominee and
all current directors and executive officers of the Company as a group is set
forth below under "Security Ownership of Certain Beneficial Owners and
Management."
4
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation for the Past Five Director
Name Age Years and Other Directorships Since
<S> <C> <C> <C>
CLASS III
Larry D. Grandia 52 Mr. Grandia has served as a director of 1998
the Company since June 1998 and as its
President since March 1999. From 1971
to March 1999, he served in various
information systems and administrative
positions with Intermountain Health Care,
an integrated delivery network based in
Salt Lake City, Utah. While employed
with Intermountain Health Care, Mr.
Grandia led its information systems
operations from 1976 to March 1999, and
served as its Corporate Vice President
and Chief Information Officer from
November 1995 to March 1999. He served
as a member of the DAOU CIO Advisory
Board from 1995 (and as its Co-Chair from
1996) until late 1998. Mr. Grandia holds
a B.S. in General Engineering/Industrial
Management from the University of Wyoming
and a Masters of Engineering Administration
from the University of Utah.
David W. Jahns 33 Mr. Jahns has been a director of the Company 1995
since October 1995. Mr. Jahns joined
Galen Associates, a venture capital
investment firm, in January 1993, and
has served as Vice President since January
1994. He also serves as General Partner
of Galen Partners III, L.P. and Galen
Partners International III, L.P. Prior
to his service with Galen Associates, he
earned an M.B.A. from the J.L. Kellogg
Graduate School of Business. Mr. Jahns
currently serves on the board of directors
of various private healthcare services and
technology companies. He holds a B.A.
in Political Science and Economics from
Colgate University.
</TABLE>
5
<PAGE>
VOTE REQUIRED AND BOARD RECOMMENDATION
The two (2) Class III director nominees receiving the highest number of
affirmative votes of the Shares present in person or represented by proxy at
the Meeting and entitled to be voted for each of them shall be elected as
Class III directors of the respective classes of the Company. Votes withheld
from any Class III director nominee are counted for purposes of determining
the presence or absence of a quorum for the transaction of business, but have
no other legal effect under Delaware law. Stockholders do not have the right
to cumulate their votes in the election of directors. Holders of proxies
solicited by this Proxy Statement will vote the proxies received by them as
directed on the proxy card or if no direction is made, for the election of
the Board's nominees. If any of the Class III director nominees is unable or
declines to serve as a Class III director at the time of the Meeting, the
proxy holders will vote for a nominee designated by the present Board to fill
the vacancy. It is not presently expected that any of the nominees will be
unable or will decline to serve as a Class III director. THE BOARD
RECOMMENDS A VOTE "FOR" THE TWO (2) CLASS III DIRECTOR NOMINEES ABOVE LISTED.
6
<PAGE>
INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
Information concerning the Company's current executive officers and
directors is set forth below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Georges J. Daou(1) 38 Chairman of the Board and Chief
Executive Officer
Larry Grandia 52 President and Director
Robert J. McNeill 60 Executive Vice President and Chief
Operating Officer
Fred C. McGee 52 Executive Vice President, Chief
Financial Officer and Secretary
Darryl Bollinger 47 Senior Vice President of Application
Implementation Services
Stephen M. Casey 39 Senior Vice President of Integration
Services
D. Parker Hinshaw 49 Senior Vice President of Sales
Vincent K. Roach 54 Senior Vice President of Consulting
Services
Mark Zielazinski 41 Senior Vice President of Infrastructure
Services
Joel Zettl 44 Senior Vice President of Finance
Daniel J. Daou(1) 33 Vice Chairman of the Board
Richard B. Jaffe(2), (3) 45 Director
David W. Jahns(2) 33 Director
John H. Moragne(3) 41 Director
Kevin M. Fickenscher(2), (3) 48 Director
</TABLE>
- ----------
(1) Georges J. Daou and Daniel J. Daou are brothers.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
7
<PAGE>
A description of the background of each of the Class III director
nominees has been provided above under "Information Regarding Director
Nominees." A description of the background of each of the other directors
and executive officers who are not Class III director nominees follows:
MR. GEORGES DAOU, a founder of the Company, has served as Chairman of
the Board and Chief Executive Officer since the Company's inception in 1987.
Mr. Daou sits on the boards of various healthcare and community
organizations, including the College of Healthcare Management Executives and
the Healthcare Information Managers Association. He holds a B.S. in
Electrical Engineering and an M.S. in Information and Communication Theory
from the University of California, San Diego.
MR. McNEILL joined the Company as Executive Vice President and Chief
Operating Officer in November 1996. From September 1981 through November
1996, he served in various executive capacities with Shared Medical Systems
Corporation ("SMS"), a healthcare information services company. In his last
position with SMS as Senior Vice President of Marketing, Mr. McNeill was
responsible for marketing and professional services and managed several
business units, including networking and imaging systems integration. He
holds a B.S. in Accounting from St. Joseph's University.
MR. McGEE joined the Company as Senior Vice President and Chief
Financial Officer in August 1996, and currently serves as its Executive Vice
President, Chief Financial Officer and Secretary. From October 1988 through
July 1996, Mr. McGee was Vice President of Finance and Chief Financial
Officer of Infrasonics, Inc., a publicly-traded manufacturer of medical
devices used in respiratory care. Prior thereto, Mr. McGee held various
financial and management positions with Sears Roebuck & Co. and other retail,
wholesale and manufacturing companies. He holds a B.S. in Finance from San
Diego State University.
MR. BOLLINGER has served as Senior Vice President of Application
Implementation Services since January 1999, and as President of DAOU-RHI,
Inc., a subsidiary of the Company, since December 1998. From July 1998 to
December 1998, Mr. Bollinger was Vice President of DAOU-RHI, Inc., and from
November 1997 to May 1998, Mr. Bollinger was President of Healthcare
Transition Resources, Inc., a healthcare information technology staffing
company that the Company acquired in July 1998. Prior thereto, Mr. Bollinger
was Vice-President of Operations at Management Prescriptions, Inc., a
healthcare quality management firm, from June 1995 to October 1997, and
Vice-President of HSS, Inc., a healthcare consulting firm, from March 1993 to
May 1995. Mr. Bollinger holds a Master of Science in Health Care
Administration from Trinity University and a B.S. in Accounting from Georgia
Southwestern College.
MR. CASEY has served as Senior Vice President of Integration Services
since January 1999, and as President, Chief Executive Officer and a Director
of DAOU-Sentient, Inc., a subsidiary of the Company, since April 1998. Prior
thereto, from August 1993 to March 1998, Mr. Casey was President of Sentient
Systems, Inc., a technical services firm for the healthcare industry that the
Company acquired in March 1998.
8
<PAGE>
Mr. Casey holds a B.S. in Business Administration from the University of
Maryland University College, and is currently enrolled in the M.B.A. program
at the Wharton School of Business at the University of Pennsylvania.
MR. HINSHAW has served as Senior Vice President of Sales of the Company
since January 1999, and as Vice-President of DAOU-RHI, Inc., a subsidiary of
the Company, since June 1998. From January 1993 to July 1998, Mr. Hinshaw
was Chairman of the Board of Directors of Resources In Healthcare
Innovations, Inc., an information technology staffing firm that the Company
acquired in July 1998. Mr. Hinshaw holds a B.S. in Business Administration
from Indiana University.
MR. ROACH has served as Senior Vice President of Consulting Services
since January 1999, and as President of DAOU-TMI, Inc., a subsidiary of the
Company, since June 1998. From December 1983 to June 1998, Mr. Roach was
President of Technology Management, Inc., a management consulting firm that
the Company acquired in June 1998. Mr. Roach holds a B.A. from Wabash
College.
MR. ZIELAZINSKI joined the Company in February 1996 as Midwest Regional
Vice President, and has served as Senior Vice President of Infrastructure
Services since January 1999. From July 1995 to February 1996, Mr.
Zielazinski was Vice President and Chief Information Officer of Columbus
Cabrini Health System, a multi-hospital group based in Chicago, Illinois.
Prior thereto, from May 1993 to July 1995, Mr. Zielazinski served as Chief
Information Officer of Holmes Regional Medical Center, a Florida-based
multi-hospital corporation. Mr. Zielazinski holds a B.S. in Political
Science from Illinois State University.
MR. ZETTL joined the Company as Vice-President of Finance in September
1997, and has served as Senior Vice President of Finance since January 1999.
Prior thereto, Mr. Zettl was Controller of Nellcor Puritan Bennett, Inc., a
medical supplies and equipment manufacturing firm, from April 1996 to
September 1997, and Controller of Infrasonics, Inc., a publicly-traded
manufacturer of medical devices used in respiratory care, from July 1994 to
April 1996. Mr. Zettl holds a B.A. in Accounting from the University of
Wisconsin-Milwaukee and an M.B.A. from the University of Wisconsin-Madison
and is a Certified Management Accountant as governed by the Institute of
Management Accounting.
MR. DANIEL DAOU, a founder of the Company, has served as a director
since the Company's inception in 1987 and as President from December 1994 to
March 1999. Mr. Daou currently serves as the Vice Chairman of the Board of
Directors and a consultant to the Company. From November 1992 to December
1994, he was the President of Complex Network Solutions, Inc., an engineering
services company. From July 1987 to November 1992, Mr. Daou served as Vice
President of the Company. He holds a B.S. in Computer Engineering from the
University of California, San Diego.
9
<PAGE>
MR. JAFFE has been a director of the Company since December 1997. Mr.
Jaffe has served as the Chairman, President and Chief Executive Officer for
Safeskin Corporation ("Safeskin") since May 1996, and has served as a
director of Safeskin since April 1988. Between March 1993 and May 1996, he
was the Vice Chairman of the Board of Directors and Co-Chief Executive
Officer of Safeskin. Mr. Jaffe served as the President of Safeskin
Corporation (Malaysia) Sdn. Bhd. and Chief Operating Officer of Safeskin
between April 1988 and March 1993. From 1985 to 1987 he served on the
executive operating committee of the Coca-Cola Foods Division. Mr. Jaffe
holds a B.S. in Industrial and Labor Relations from Cornell University.
MR. MORAGNE has been a director of the Company since October 1995. Mr.
Moragne has been a managing director of Trident Capital, Inc., a private
investment firm, since May 1993 and a member of Trident Capital Management,
LLC, an affiliated entity, since October 1995. From August 1989 to May 1993,
Mr. Moragne was a principal of Bain Capital, a private investment firm, as
well as a principal of Information Partners, a private equity firm associated
with Dun & Bradstreet Enterprises and Bain Capital. He currently serves on
the board of directors of various private information technology companies.
Mr. Moragne holds a B.A. from Dartmouth College, an M.S. from the Stanford
Graduate School of Applied Engineering and an M.B.A. from the Stanford
Graduate School of Business.
DR. FICKENSCHER has been a director of the Company since March 1998.
Dr. Fickenscher is Senior Vice President and Chief Medical Officer at
Catholic Healthcare West, a regional, integrated healthcare system, since
April 1997. From April 1994 to April 1997, he was Senior Vice President and
Chief Medical Officer at Aurora Health Care, a regional, vertically
integrated healthcare system. Dr. Fickenscher holds a B.A. in Psychology at
the University of North Dakota, and an M.D. from the University of North
Dakota School of Medicine.
BOARD OF DIRECTORS
The Company's Bylaws provide for a range of one to 11 directors, with
the current authorized number set at eight. The Company's Certificate of
Incorporation provides that the Board is classified into three classes, with
the directors of each class to be elected for a term of three years and to
hold office until their successors are duly elected and qualified. At each
annual meeting of stockholders, the successors to the class of directors
whose term then expires will be elected to hold office for a term expiring at
the annual meeting of stockholders held subsequently in three years. In each
case, a director serves for the designated term and until his or her
respective successor is duly elected and qualified, unless he resigns or his
seat on the Board becomes vacant due to his death, removal or other cause.
In addition to the Class III director nominees to be elected at the
Meeting, Georges J. Daou and Richard B. Jaffe currently serve as Class I
directors (term expiring at the 2001 annual meeting of stockholders) and
Daniel J. Daou, John H. Moragne and Kevin M. Fickenscher, M.D. currently
serve as Class II directors (term expiring at the 2000 annual meeting of
stockholders).
10
<PAGE>
BOARD MEETINGS AND COMMITTEES
During the fiscal year ended December 31, 1998 ("Fiscal 1998"), the
Board held four regular meetings and one special meeting. Each director
attended at least 75% of the meetings held during Fiscal 1998 which occurred
on or after the initiation of his term as a director.
The Board has a compensation committee (the "Compensation Committee")
consisting of Messrs. Moragne, Jaffe and Fickenscher, and an audit committee
(the "Audit Committee") consisting of Messrs. Jahns, Jaffe and Fickenscher.
The Compensation Committee makes recommendations to the Board concerning
salaries and incentive compensation for the Company's officers and employees.
The Audit Committee aids management in the establishment and supervision of
the Company's financial controls, evaluates the scope of the annual audit,
reviews audit results, consults with management and the Company's independent
auditors prior to the presentation of financial statements to the
stockholders and, if appropriate, initiates inquiries into aspects of the
Company's financial affairs. Officers are elected by and serve at the
discretion of the Board. The Company does not have a Nominating Committee
nor a committee that performs equivalent functions of a Nominating Committee.
During Fiscal 1998, the Audit Committee held four meetings, and the
Compensation Committee held four meetings. Each director who served on the
Audit Committee or the Compensation Committee attended at least 75% of such
respective committee's meetings held during Fiscal 1998 which occurred on or
after the initiation of his term as a director.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) under the Securities Exchange Act of 1934, requires the
Company's officers and directors, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than ten percent (10%) stockholders are required by
regulations of the SEC to furnish the Company with copies of all Section
16(a) forms that they file.
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representation that no other
reports were required, the Company's officers, directors and greater than ten
percent (10%) stockholders complied with all applicable Section 16(a) filing
requirements.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of April 9, 1999 by (i) each person who is
known by the Company to own beneficially more than five percent (5%) of the
outstanding shares of Common Stock, (ii) each director and director nominee
of the Company, (iii) each of the Chief Executive Officer and four most
11
<PAGE>
highly compensated executive officers (other than the Chief Executive
Officer) who were serving as executive officers at the end of Fiscal 1998
(collectively, the "Named Executive Officers") set forth below in the Summary
Compensation Table, and (iv) all directors and executive officers of the
Company as a group. Unless otherwise indicated below, to the knowledge of
the Company, all persons listed below have sole voting and investing power
with respect to their shares of Common Stock, except to the extent authority
is shared by spouses under applicable community property laws, and their
address is 5120 Shoreham Place, San Diego, California 92122.
<TABLE>
<CAPTION>
Name and Address of Beneficial Owner Shares Beneficially Owned(1)
Number Percent
<S> <C> <C>
Wellington Management Company, LLP(2) 1,699,700 9.6%
Georges J. Daou(3) 1,212,367 6.9
Chairman of the Board and Chief Executive Officer
Daniel J. Daou(4) 1,157,692 6.5
Vice Chairman of the Board
D. Parker Hinshaw 1,103,032 6.2
Senior Vice President of Sales
Eileen M. Weldon 885,519 5.0
Robert J. McNeill 40,060 *
Executive Vice President and Chief Operating Officer
Larry D. Grandia(5) 47,364 *
President and Director
Fred C. McGee(6) 32,112 *
Executive Vice President, Chief Financial Officer and Secretary
Richard B. Jaffe(7) 21,667 *
Director
David W. Jahns(8) 21,045 *
Director
John H. Moragne(9) 21,569 *
Director
Kevin M. Fickenscher -- *
Director
All directors and executive officers as a group 4,556,670 25.8
(15 persons)(10)
</TABLE>
___________
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "SEC") and generally includes
voting or investment power with respect to securities. Shares of Common
Stock subject to options or warrants exercisable within 60 days of April
9, 1999 are deemed outstanding for computing the percentage of the person
or entity holding such options but are not deemed outstanding for
computing the percentage of any other person.
12
<PAGE>
(2) Data based on information contained in a Schedule 13G/A filed with the
SEC on February 8, 1999 on behalf of Wellington Management Company LLP
("WMC"). The address of WMC is 75 State Street, Boston, Massachusetts
02109. WMC may be deemed to beneficially own 1,699,700 shares of
Common Stock. WMC neither has sole voting power nor sole dispositive
power over these shares of Common Stock.
(3) These shares are owned by the Georges J. Daou Trust dated May 2, 1996,
of which George J. Daou is trustee.
(4) These shares are owned by the Daniel and Robin Daou Family Trust, dated
May 29, 1996, of which Daniel J. Daou and Robin Lyn Daou are trustees.
Mr. Daou's service as President ended on March 15, 1999. He currently
serves as Vice Chairman of the Board.
(5) Includes 33,011 shares issuable under stock options exercisable within
60 days of April 9, 1999.
(6) Includes 31,281 shares issuable under stock options exercisable within
60 days of April 9, 1999.
(7) These shares are owned by the Jaffe Family Trust, dated October 4, 1990,
of which Richard B. Jaffe and Ann L. Jaffe are trustees. Includes
11,667 shares issuable under stock options exercisable within 60 days of
April 9, 1999.
(8) Consists of 21,045 shares issuable under stock options exercisable
within 60 days of April 9, 1999.
(9) Includes 21,045 shares issuable under stock options exercisable within
60 days of April 9, 1999.
(10) Includes 202,942 shares issuable under stock options held by directors
and executive officers exercisable within 60 days of April 9, 1999.
13
<PAGE>
EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors of the Company have not historically and do not currently
receive cash for services that they provide as directors or as committee
members. As consideration for joining the Board, the Company granted to each
of the following outside directors (at the time of grant) options to purchase
shares of Common Stock, in each case exercisable at the date of issuance and
vesting over three years from the date of issuance: Mr. Jaffe (35,000
options); Mr. Grandia (35,000 options); Dr. Fickenscher (10,000 options); Mr.
Moragne (21,045 options); and Mr. Jahns (21,045 options). The Company may
elect to pay cash compensation or grant additional options to directors in
the future.
EXECUTIVE OFFICER COMPENSATION
The following table shows for the three (3) years ended December 31,
1998 the cash and other compensation awarded to, earned by or paid to the
Named Executive Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation All Other
Name and Principal Position Salary Bonus Compensation
<S> <C> <C> <C> <C>
Georges J. Daou 1998 $200,000 $200,000 $10,701(1)
Chairman of the Board and 1997 200,000 4,908(2)
Chief Executive Officer 1996 201,923 35,409 4,774(3)
Daniel J. Daou(4) 1998 200,000 200,000 6,260(5)
Vice Chairman of the Board 1997 200,000 -- 5,994(6)
1996 201,923 41,129 8,244(7)
Robert J. McNeill 1998 175,020 80,000 2,150(8)
Executive Vice President and 1997 175,000 120,000 8,975(9)
Chief Operating Officer 1996 16,827(10) -- 105,000(11)
Fred C. McGee 1998 144,251 65,000 --
Executive Vice President, 1997 109,038 61,500 2,375(12)
Chief Financial Officer and Secretary 1996 44,269(13) -- --
Daniel L. Porter(14) 1998 127,664 40,936 --
Executive Vice President, Human Resources 1997 125,000 10,000 --
1996 105,000 8,000 --
</TABLE>
___________
(1) Includes $8,061 of automobile expenses and $2,640 of health insurance
benefits.
14
<PAGE>
(2) Includes $4,310 of automobile expenses and $598 of health insurance
benefits.
(3) Includes $3,056 of automobile expenses and $1,718 of health insurance
benefits.
(4) Mr. Daou's service as President of the Company ended on March 15, 1999.
He currently serves as Vice Chairman of the Board and a consultant to
the Company.
(5) Includes $5,180 of automobile expenses and $1,080 of health insurance
benefits.
(6) Includes $1,782 of automobile expenses, $1,898 of health insurance
benefits and $2,314 of contributions made by the Company under its
401(k) plan.
(7) Includes $2,480 of automobile expenses, $3,536 of health insurance
benefits and $2,228 of contributions made by the Company under its
401(k) plan.
(8) Consists of $2,150 in health insurance benefits.
(9) Includes $6,600 of automobile expenses and $2,375 of contributions made
by the Company under its 401(k) plan.
(10) The Company hired Mr. McNeill in November 1996 at an annual salary of
$175,000.
(11) Reflects a one-time signing bonus. See "--Compensatory
Arrangements--Robert J. McNeill."
(12) Consists of $2,375 in contributions made by the Company under its 401(k)
plan.
(13) The Company hired Mr. McGee in August 1996 at an annual salary of
$130,000.
(14) Mr. Porter's service as the Company's Executive Vice President, Human
Resources ended on January 1, 1999.
1996 STOCK OPTION PLAN
The 1996 Stock Option Plan (the "1996 Option Plan") provides for the
grant of ISOs to employees and nonstatutory stock options to employees,
directors and consultants. A total of 4,000,000 shares of Common Stock have
been reserved for issuance under the 1996 Option Plan, under which options to
purchase 3,226,794 shares of Common Stock were outstanding as of December 31,
1998. The number of shares of Common Stock underlying options issued under
the 1996 Option Plan cannot exceed twenty-five percent (25%) of the number of
the Company's outstanding shares of Common Stock at the end of the
immediately preceding fiscal quarter. Options granted under the 1996 Option
Plan typically vest over five years. A committee (the "Option Committee")
consisting solely of outside directors within the meaning of Section 162(m)
of the Internal Revenue Code is currently responsible for administering the
1996 Option Plan and determining the exercise price of options granted
thereunder to executive officers of the Company.
15
<PAGE>
The Option Committee has delegated to Daniel J. Daou, the Company's Vice
Chairman of the Board, the administration of the 1996 Option Plan with
respect to employees (except for executive officers) and consultants (except
for directors). The exercise price of ISOs must be at least equal to the
fair market value of the Common Stock on the date of grant. In addition, the
exercise price of any stock option granted to an optionee who owns stock
representing more than 10% of the voting power of all classes of stock of the
Company must equal at least 110% of the fair market value of the Common Stock
on the date of grant. The exercise price may be paid in such consideration as
determined by the Board. No individual may receive options to purchase more
than a total of 150,000 shares of Common Stock under the 1996 Option Plan.
With respect to any participant who owns stock representing more than 10% of
the voting power of all classes of stock of the Company, the term of the
option is limited to five years or less. The term for all other options may
not exceed ten years.
The Board may amend or modify the 1996 Option Plan at any time without
the consent of the optionees, so long as such action does not adversely
affect their outstanding options. The 1996 Option Plan will terminate in
2006, unless terminated earlier by the Board. Each outstanding option
provides that, in the event of a "change in control," including the
dissolution or liquidation of the Company or a merger of the Company with or
into another corporation, each optionee will be entitled to exercise up to
70% of the shares of Common Stock underlying his unvested options immediately
prior to the consummation of such "change in control" event.
16
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options
awarded to each of the Named Executive Officers during Fiscal 1998. All such
options were awarded under the 1996 Option Plan.
<TABLE>
<CAPTION>
Name Individual Grants
Number of Percent of Exercise Fair Expiration Potential Realizable Value at
Securities Total Price Market Date Assumed Annual Rates of Stock Price
Underlying Options ($/SH)(2) Value on Appreciation for Option Term(3)
Options Granted to Date of
Granted Employees in Grant
(#) Fiscal ($/SH)
1998(1)
0%($) 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Georges J. Daou -- - -- -- -- - -- --
Daniel J. Daou(4) -- - -- -- -- - -- --
Robert J. McNeill -- - -- -- -- - -- --
Fred C. McGee -- - -- -- -- - -- --
Daniel L. Porter(5) 5,600 * 21.75 21.75 2008 0 76,599 194,118
</TABLE>
----------
* Less than one percent.
(1) Percentages include options to purchase 2,609,045 shares of Common
Stock.
(2) The exercise price is to be paid in cash, by surrendering shares of
Common Stock held by optionee for more than 12 months, or in any
combination of such consideration or such other consideration and
method of payment permitted under applicable law.
(3) The 0%, 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance that the actual stock price
appreciation over the ten-year option term will be at the assumed
0%, 5% or 10% levels or at any other defined level.
(4) Mr. Daou's service as President of the Company ended on March 15,
1999. He currently serves as Vice Chairman of the Board and a
consultant to the Company.
(5) Mr. Porter's service as the Company's Executive Vice President,
Human Resources ended on January 1, 1999.
The following table sets forth certain information regarding options to
purchase shares of Common Stock held as of December 31, 1998 by each of the
Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1998 AND FISCAL
YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at Options at
December 31, 1998 December 31, 1998(1)
Name (Exercisable/Unexercisable) (Exercisable/Unexercisable)
<S> <C> <C>
Georges J. Daou -- --
Daniel J. Daou(2) -- --
Robert J. McNeill(3) 40,060 / 172,240 $52,641 / $157,922
Fred C. McGee 14,654 / 100,535 $5,603 / $73,561
Daniel L. Porter(4) 19,178 / 87,251 $19,515 / $64,509
</TABLE>
- ----------
17
<PAGE>
(1) Calculated by determining the difference between the closing bid price of
the Common Stock underlying the option as quoted on the Nasdaq National
Market System on December 31, 1998 ($6.1560) and the exercise price of the
option.
(2) Mr. Daou's service as President of the Company ended on March 15, 1999.
He currently serves as Vice Chairman of the Board and a consultant to the
Company.
(3) The Company has agreed to pay to Mr. McNeill a cash bonus in the amount of
the difference, if any, between (i) the net value of the options at the
end of the third anniversary of their date of issuance and (ii)
$1,550,000. See "--Compensatory Arrangements--Robert J. McNeill."
(4) Mr. Porter's service as Executive Vice President, Human Resources ended on
January 1, 1999.
COMPENSATORY ARRANGEMENTS
ROBERT J. McNEILL. Effective November 11, 1996, the Company entered into
an employment agreement with Robert J. McNeill, the Company's Executive Vice
President and Chief Operating Officer. The agreement provides for: (i) a
base salary of $175,000 per year; (ii) a one-time signing bonus not to exceed
$105,000; (iii) up to $120,000 in annual bonus compensation, subject to
achievement by the Company of specified performance goals; and (iv) a grant
of non-qualified stock options to purchase 140,300 shares of Common Stock at
an exercise price of $4.28 per share. With respect to the option grant, the
Company has agreed to pay to Mr. McNeill a cash bonus in the amount of the
difference, if any, between (i) the net value of the options at the end of
the third anniversary of their date of issuance and (ii) $1,550,000. The
agreement also contains provisions designed to ensure that the after-tax
effect of the options issued to Mr. McNeill will be equivalent to the result
that would pertain had such options been issued as incentive stock options
("ISOs") rather than non-qualified stock options. To accomplish this, the
agreement provides that (i) the Company will loan to Mr. McNeill on an
interest-free basis an amount of money equal to the tax liability that he
incurs upon exercise of the options in excess of the amount that would have
been incurred had the options been originally issued as ISOs, and (ii) this
loan will become due and payable at the earlier of (a) the time of sale or
disposition of the shares subject to the options, (b) the termination date of
Mr. McNeill's employment with the Company or (c) January 17, 2002. The loan
amount subject to repayment will be reduced by the amount, if any, by which
the cumulative tax liability upon exercise of the options and upon
disposition of the underlying shares by Mr. McNeill exceeds the tax that
would have been incurred had the options originally been issued as ISOs. In
the event that Mr. McNeill is terminated without cause, he will be entitled
to severance payments in an aggregate amount not to exceed 18 months of
compensation.
18
<PAGE>
LARRY D. GRANDIA. Effective March 15, 1999, the Company entered into a
consulting agreement with Larry D. Grandia for service as the Company's
President. Under the agreement, Mr. Grandia will receive monthly payments of
$30,000 for a term of one year. Mr. Grandia also will receive an aggregate
cash payment of $1,500,000 if a "change in control" of the Company occurs
during the term of the agreement. Furthermore, during the term of the
consulting agreement, Mr. Grandia may elect, under certain circumstances, to
enter into an employment agreement with the Company, which agreement would
provide to Mr. Grandia, among other things: (i) an annual base salary of
$230,000; (ii) a one-time signing bonus of $50,000; (iii) up to $150,000 in
annual bonus compensation; (iv) a grant of options to purchase 400,000 shares
of Common Stock at an exercise price equal to the fair market value per share
on the date of grant; provided that, if a "change in control" of the Company
occurs, then, in most cases, 70% of the unvested stock options would vest
immediately; (v) a $200,000 loan to Mr. Grandia that would be forgiven
depending on the timing of a "change in control;" (vi) payment to Mr. Grandia
of $1,500,000 if the Company either terminates Mr. Grandia without "cause" or
does not offer an employment agreement acceptable to Mr. Grandia on or before
August 15, 2001; (vii) payment of a merger and acquisition success fee
ranging from $500,000 to $750,000 depending on the timing of the merger if he
assists in negotiations related to a "change in control" of the Company; and
(viii) if an acquiring party in a "change in control" transaction does not
offer a position acceptable to Mr. Grandia, then the acquiring party must pay
to Mr. Grandia an amount equal to one and one-half times the aggregate of his
annual base salary and his performance bonus compensation.
DANIEL J. DAOU. In April, 1999, the Company entered into a consulting
agreement and a separation and release agreement with Daniel J. Daou, the
Company's Vice Chairman of the Board and former President, in connection with
the termination of his employment as the Company's President. Under the
consulting agreement, Mr. Daou will provide consulting services to the
Company during the six-month period commencing on April 15, 1999 for a
monthly consulting fee of $16,666.50. The separation and release agreement
provides for, among other things, a severance payment of $300,000, payable in
18 equal monthly installments beginning on November 15, 1999. These payments
will be delayed indefinitely, however, if, for the immediately previous
financial quarter, the Company's financial statements do not reflect (1) net
income of at least $500,000 and (2) "liquid assets" of $10,000,000. For
purposes of this determination, "liquid assets" mean (i) cash and cash
equivalents, plus (ii) short term investments, minus (iii) outstanding
balances under lines of credit and current portions of long-term debt. The
agreement also restricts Mr. Daou from engaging in any activities competitive
to the Company during the severance period.
SECTION 401(k) PLAN
In August 1994, the Company adopted a 401(k) Salary Savings Plan (the
"401(k) Plan") covering the Company's full-time employees located in the
United States. The 401(k) Plan is intended to qualify under Section 401(k) of
the Internal Revenue Code, so that contributions to the 401(k) Plan by
employees or by the Company, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation by up to the statutorily prescribed annual limit
($10,000 in 1999) and to have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan permits, but does not require, additional
matching contributions to the 401(k) Plan by the Company on behalf of all
participants in the 401(k) Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company served on the compensation committee
of another entity or on any other committee of the board of directors of
another entity performing similar functions during Fiscal 1998.
19
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has an employment agreement with Robert J. McNeill, its
Executive Vice President and Chief Operating Officer. See "--Compensatory
Arrangements--Robert J. McNeill."
The Company has a consulting agreement with Larry D. Grandia, its
President and a director. See "--Compensatory Arrangements--Larry D.
Grandia."
The Company has a separation and release agreement and consulting
agreement with Daniel J. Daou, its Vice Chairman of the Board. See
"--Compensatory Arrangements--Daniel J. Daou."
All future transactions, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved
by a majority of the Board, including a majority of the disinterested members
of the Board or, if required by law, a majority of disinterested
stockholders, and will be on terms no less favorable to the Company than
could be obtained from unaffiliated third parties.
20
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee makes recommendations to the Board regarding
compensation of the Company's officers and directors and oversees the
administration of the Company's employee stock option plans and stock
purchase plans, if any. All decisions of the Compensation Committee relating
to compensation of the Company's executive officers are reviewed and approved
by the entire Board.
COMPENSATION POLICY
The Company's executive compensation policy is designed to establish an
appropriate relationship between executive pay and the Company's annual
performance, its long-term growth objectives and its ability to attract and
retain qualified executive officers. The Compensation Committee attempts to
achieve these goals by integrating on an individualized basis competitive
annual base salaries with stock options through the Company's stock option
plan and otherwise. The Compensation Committee believes that cash
compensation in the form of salary and bonus provides the Company's
executives with short term rewards for success in operations, and that long
term compensation through the award of stock options better coordinates the
objectives of management with those of the stockholders with respect to the
long term performance and success of the Company. The Compensation Committee
generally takes into consideration a variety of subjective and objective
factors in determining the compensation packages for executive officers,
including how compensation compares to that paid by competing companies and
the responsibilities and performance by each executive and the Company as a
whole. In making its determinations, the Compensation Committee attempts to
address the unique challenges which are present in the industry in which the
Company competes against a number of public and private companies with
respect to attracting and retaining executives and other key employees.
Furthermore, the Compensation Committee has retained an employment
compensation firm during the current fiscal year to assist the Compensation
Committee in certain matters concerning senior executive compensation.
The Compensation Committee has relied heavily on the equity/option
position of senior executives as an important mechanism to retain and
motivate executives and key employees while at the same time aligning their
interests with those of the stockholders generally. The Compensation
Committee believes that option grants are instrumental in motivating
employees to meet the Company's future goals.
BASE SALARY
The base salary of the Company's executive officers is set at an amount
which the Compensation Committee believes is competitive with the salaries
paid to the executive officers of other companies of comparable size in
similar industries. In evaluating salaries, the Compensation Committee
utilizes publicly available information and surveys of the compensation
practices of information technology companies.
21
<PAGE>
The Compensation Committee also relies on information provided by the
Company's Human Resources Department and its knowledge of local pay
practices. Furthermore, the Compensation Committee considers the executives'
performance of their job responsibilities and the overall financial
performance of the Company. The Compensation Committee recognized the
revenues and earnings generated by the Company during its fiscal year ended
December 31, 1997 when establishing the salaries for Fiscal 1998.
BONUSES
Each of the Company's executive officers is eligible to receive bonus
compensation according to varying performance standards depending on the
specific job function. During Fiscal 1998, the Compensation Committee
determined the bonus compensation based on the following criteria:
- - Chief Executive Officer and President -- certain improvements in balance
sheet results by December 31, 1998, the Company's ability to integrate six
acquisitions and submission and Board approval of a revised budget and
marketing plans before December 31, 1998;
- - Executive Vice President/Chief Operating Officer -- achievement of quarterly
revenue and profit targets; and
- - Executive Vice President/Chief Financial Officer -- completion of the
Company's proposed acquisitions and achievement of certain financial results
and controls.
The other executive officers received bonus compensation under the Company's
corporate bonus plan, except for those executive officers who received bonus
compensation based on sales and project delivery objectives and criteria.
STOCK OPTION GRANTS
The Company provides its executive officers with long-term incentives
through stock option grants of stock options. An initial grant of options is
made at the time an executive is hired and the Compensation Committee
considers periodically additional grants based on the performance of both the
individual executives and the Company as a whole. The Compensation Committee
takes into account the executive's position and level of responsibility,
existing stock and unvested option holdings and the potential reward if the
stock price appreciates in the public market. The exercise price of all
options is equal to the closing market price of the Common Stock on the date
of grant and the options generally vest over a five-year period.
The 1996 Option Plan currently qualifies for exclusion under Section
162(m) of the Internal Revenue Code with respect to new option issuances. The
Compensation Committee has decided at this time not to take any further
action to limit or restructure the elements of other compensation payable to
any of the Named Executive Officers.
22
<PAGE>
The Compensation Committee will reconsider this decision in the event that
the individual compensation of any of the Named Executive Officers approaches
the $1 million level.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Georges J. Daou has served as the Chief Executive Officer of the Company
since its inception in 1987. In setting compensation levels for the Chief
Executive Officer, the Compensation Committee reviews competitive information
reflecting compensation practices for similar technology companies and
examines the Chief Executive Officer's performance relative to the Company's
overall financial results. The Compensation Committee also considers the
Chief Executive Officer's achievements against the same pre-established
objectives and determines whether the Chief Executive Officer's base salary,
target bonus and target total compensation approximate the competitive range
of compensation for chief executive officer positions in the information
technology industry.
In Fiscal 1998, Georges J. Daou received $200,000 in salary and received
a $200,000 bonus based upon the Company's achievement of certain performance
milestones established by the Compensation Committee.
COMPENSATION ARRANGEMENTS GENERALLY
Overall, the Compensation Committee believes that the compensation
arrangements for the Company's executives serve the long term interests of
the Company and its stockholders and that, in particular, equity/option
positions are an important factor in attracting and retaining key executives.
The Compensation Committee intends to continue to review and analyze its
policies in light of the performance and development of the Company and the
environment in which it competes for executives and to retain outside
compensation consultants from time to time to assist the Compensation
Committee in such review and analysis.
Compensation Committee:
John H. Moragne
Richard. B. Jaffe
Kevin M. Fickenscher
23
<PAGE>
May 20, 1999
The foregoing reports of the Compensation Committee shall not be deemed
incorporated by reference by any general statement incorporating by reference
the Proxy Statement into any filing under the Securities Act of 1933, or the
Securities Exchange Act of 1934, except to the extent that the Company
specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such acts.
24
<PAGE>
PERFORMANCE GRAPH
COMPARE CUMULATIVE TOTAL RETURN
AMONG DAOU SYSTEMS, INC.,
NASDAQ MARKET INDEX AND PEER
GROUP INDEX
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
2/13/97 3/31/97 6/30/97 9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
DAOU SYSTEMS, INC. $100.00 75.00 177.78 347.22 347.22 217.33 254.22 63.89 68.44
- ------------------------------------------------------------------------------------------------------------------------
NASDAQ COMPUTER &
DATA PROCESSING
INDEX $100.00 92.61 118.76 129.87 122.57 162.01 179.80 169.48 219.47
- ------------------------------------------------------------------------------------------------------------------------
NASDAQ MARKET INDEX-
U.S. COMPANIES $100.00 93.47 110.61 129.31 121.28 141.65 145.75 131.95 170.18
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMES $100 INVESTED ON FEB. 13, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1998
The above graph assumes that $100.00 was invested in the Common Stock
and in each index on February 13, 1997, the effective date of the Company's
initial public offering. Although the Company has not declared a dividend on
its Common Stock, the total return for each index assumes the reinvestment of
dividends. Stockholder returns over the period presented should not be
considered indicative of future returns. Pursuant to regulations of the SEC,
the graph shall not be deemed to be "soliciting material" or to be "filed"
with the SEC, nor shall it be incorporated by reference into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934.
25
<PAGE>
PROPOSAL TWO
RATIFICATION OF INDEPENDENT AUDITORS
(ITEM 2 ON THE PROXY CARD)
The Board has selected Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending December 31, 1999, and has further
directed that management submit the selection of independent auditors for
ratification by the stockholders at the Meeting. Ernst & Young LLP has
audited the Company's financial statements annually since March 1995. Its
representatives are expected to be present at the Meeting, will have the
opportunity to make a statement if they desire to do so and will be available
to respond to appropriate questions.
Stockholder ratification of the selection of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's By-Laws or
otherwise. The Board is submitting the selection of Ernst & Young LLP to the
stockholders for ratification as a matter of good corporate practice. In the
event that the stockholders fail to ratify the selection, the Board will
reconsider whether or not to retain that firm. Even if the selection is
ratified, the Board in its discretion may direct the appointment of a
different independent accounting firm at any time during the year if the
Board determines that such a change could be in the best interests of the
Company and its stockholders.
THE BOARD RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE SELECTION OF ERNST
& YOUNG LLP TO SERVE AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL
YEAR ENDING DECEMBER 31, 1999.
26
<PAGE>
OTHER BUSINESS
The Company is not aware of any other matters to be presented at the
Meeting. If any other matters are properly brought before the Meeting, it is
the intention of the persons named in the enclosed Proxy Card to vote the
shares that they represent in accordance with their best judgment.
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING
Proposals that stockholders desire to have included in the Company's
proxy materials for next year's Annual Meeting of Stockholders must be
received by the Secretary of the Company at its principal executive offices
(5120 Shoreham Place, San Diego, California 92122) no later than February 23,
2000, and must satisfy the conditions established by the SEC for stockholder
proposals to be included in such proxy materials.
FORM 10-K
A copy of the Company's Annual Report for Fiscal 1998 is being mailed
with this Proxy Statement to stockholders entitled to notice of the Meeting.
At any stockholder's written request, the Company will provide without
charge, a copy of the Annual Report for Fiscal 1998 which incorporates the
Form 10-K as filed with the SEC, including the financial statements and a
list of exhibits. If copies of exhibits are requested, a copying charge of
$0.20 per page will be made. Requests should be sent to Investor Relations,
DAOU Systems, Inc., 5120 Shoreham Place, San Diego, California 92122.
By Order of the Board of Directors
Fred C. McGee
SECRETARY
27
<PAGE>
DAOU SYSTEMS
5120 SHOREHAM PLACE
SAN DIEGO, CALIFORNIA 92122
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Georges J. Daou, Larry D.
Grandia and Fred C. McGee, and each of them, his true and lawful agents and
proxies with full power of substitution in each, to represent the undersigned at
the Annual Meeting of Stockholders of DAOU Systems, Inc. to be held at the
Company's principal executive offices located at 5120 Shoreham Place, San Diego,
California 92122, on Tuesday, June 22, 1999, at 9:30 a.m., local time, and at
any adjournments thereof, and to vote as designated.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" ALL NOMINEES TO THE BOARD OF DIRECTORS, "FOR" THE RATIFICATION OF
INDEPENDENT AUDITORS AND AS THE PROXY HOLDER MAY DETERMINE IN HIS DISCRETION
WITH REGARD TO ANY OTHER MATTER PROPERLY BROUGHT BEFORE THE MEETING.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
YOUR VOTE IS IMPORTANT! PLEASE VOTE.
(Continued on reverse side)
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<S> <C> <C> <C>
1. ELECTION OF CLASS III DIRECTORS
FOR all nominees listed below FOR all nominees listed below WITHHOLD AUTHORITY
/ / EXCEPT AS MARKED TO THE CONTRARY. TO VOTE FOR ALL NOMINEES LISTED BELOW.
/ / / /
</TABLE>
Nominees: 1. David W. Jahns (Class III) 2. Larry D. Grandia (Class III)
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE
THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW)
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2. RATIFICATION OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS
Vote For / / Vote Against / / Abstain / /
and to vote on such other business as may properly come before the meeting.
Dated: ________________________, 1999
_____________________________________
Signature of Stockholder(s)
_____________________________________
Signature of Stockholder(s)
Please sign exactly as name appears
hereon. When shares are held by joint
tenants, both should sign. When
signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by president or other
authorized officer. If a partnership,
please sign in partnership name by
authorized person.
THANK YOU FOR VOTING.
