<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to ,
-------------- -----------
Commission File No.: 000-22073
DAOU SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 330284454
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5120 Shoreham Place
San Diego, California 92122
(Address of principal executive offices) (Zip Code)
(619) 452-2221
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
The number of shares of Registrant's Common Stock outstanding as of July 20,
1999:
17,691,149
<PAGE>
DAOU SYSTEMS, INC.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1999 (unaudited) and
December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited) for the Three
Months and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Three
Months and Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
DAOU Systems, Inc.
Condensed Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED)
-----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,361 $ 6,756
Short-term investments, available-for-sale 1,194 1,024
Accounts receivable, net of allowance for doubtful accounts of $858
and $956 at June 30, 1999 and December 31, 1998, respectively 21,602 24,582
Contract work-in-progress 8,606 12,272
Deferred income taxes 5,077 3,362
Other current assets 1,122 1,306
-----------------------------
Total current assets 46,962 49,302
Equipment, furniture and fixtures, net 4,699 4,735
Other assets 468 480
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$ 52,129 $ 54,517
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities $ 6,185 $ 8,277
Accrued salaries and benefits 5,501 3,907
Current portion of long-term liabilities and line of credit 4,579 5,453
-----------------------------
Total current liabilities 16,265 17,637
Long-term liabilities 724 684
Deferred income taxes 1,576 1,421
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000
Issued and outstanding shares - none - -
Common stock, $.001 par value:
Authorized shares - 50,000
Issued and outstanding shares - 17,691 at June 30, 1999 and
17,689 at December 31, 1998 18 18
Additional paid-in capital 38,430 38,419
Deferred compensation (816) (980)
Accumulated other comprehensive income 458 236
Retained deficit (4,526) (2,918)
-----------------------------
Total stockholders' equity 33,564 34,775
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$ 52,129 $ 54,517
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</TABLE>
SEE ACCOMPANYING NOTES.
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DAOU Systems, Inc.
Condensed Consolidated Statement of Operations
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PERIODS ENDED JUNE 30,
THREE MONTHS SIX MONTHS
1999 1998 1999 1998
------------------- ------------------ ------------------------------------
<S> <C> <C> <C> <C>
Revenues $27,051 $28,043 $54,373 $52,028
Cost of revenues 19,117 18,947 40,936 33,435
------------------- ------------------ ------------------------------------
Gross profit 7,934 9,096 13,437 18,593
Operating expenses:
Sales and marketing 2,414 3,069 5,319 5,802
General and administrative 5,325 3,545 10,661 6,673
Merger and related expenses - 1,029 - 2,825
------------------- ------------------ ------------------------------------
7,739 7,643 15,980 15,300
------------------- ------------------ ------------------------------------
Income (loss) from operations 195 1,453 (2,543) 3,293
Interest income (expense), net (95) 59 (181) 201
------------------- ------------------ ------------------------------------
Income (loss) before income taxes 100 1,512 (2,724) 3,494
Provision (benefit) for income taxes 40 2,200 (1,116) 3,114
------------------- ------------------ ------------------------------------
Net income (loss) $60 $(688) $(1,608) $380
------------------- ------------------ ------------------------------------
------------------- ------------------ ------------------------------------
Net income (loss) per common share:
Basic $0.00 $(0.04) $(0.09) $0.02
------------------- ------------------ ------------------------------------
------------------- ------------------ ------------------------------------
Diluted $0.00 $(0.04) $(0.09) $0.02
------------------- ------------------ ------------------------------------
------------------- ------------------ ------------------------------------
Shares used in computing net income
(loss) per common share:
Basic 17,691 17,645 17,691 17,620
------------------- ------------------ ------------------------------------
------------------- ------------------ ------------------------------------
Diluted 17,918 17,645 17,691 18,513
------------------- ------------------ ------------------------------------
------------------- ------------------ ------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
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DAOU Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
-----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,608) $380
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 734 899
Changes in operating assets and liabilities 5,006 (7,365)
-----------------------------------------
Net cash provided by (used in) operating activities 4,132 (6,086)
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (699) (1,539)
(Purchases) maturities of short-term investments 52 7,166
Changes in other assets 10 (173)
-----------------------------------------
Net cash (used in) provided by investing activities (637) 5,454
FINANCING ACTIVITIES
Proceeds (repayments) of long-term liabilities (901) 869
Proceeds from issuance of common stock 11 1,183
Distributions to stockholders - (3,598)
-----------------------------------------
Net cash (used in) provided by financing activities (890) (1,546)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 2,605 (2,178)
Cash and cash equivalents at beginning of period 6,756 7,973
-----------------------------------------
Cash and cash equivalents at end of period $9,361 $5,795
-----------------------------------------
-----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
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<PAGE>
DAOU SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited condensed consolidated financial statements of DAOU Systems,
Inc. ("DAOU" or the "Company") at June 30, 1999 and for the three and
six-month periods ended June 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information. Accordingly, they do not include all information and
footnotes required by GAAP for a complete set of financial statements. These
financial statements reflect all adjustments, consisting of normal recurring
adjustments, which in the opinion of management are necessary to fairly
present the financial position of the Company at June 30, 1999 and the
results of operations for the three and six-month periods ended June 30, 1999
and 1998. The results of operations for the three and six-months ended June
30, 1999 are not necessarily indicative of the results to be expected for the
year ending December 31, 1999. The Company has experienced significant
quarterly fluctuations in operating results and it expects that these
fluctuations in revenues, expenses and net income or losses will continue.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financials should be read in conjunction with the audited
financial statements and the related notes thereto contained in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC") on March 31, 1999 and in the Company's Annual Report on Form 10-K/A
filed with the SEC on April 30, 1999.
2. Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions about the future that affect the
amounts reported in the financial statements and disclosures made in the
accompanying notes of the financial statements. The actual results could differ
from those estimates.
3. Lines of Credit
During June 1999, the Company secured an $8.0 million revolving line of credit,
which expires on June 29, 2001. The line of credit bears interest at prime plus
1% per annum, is secured by substantially all of the assets of the Company and
contains customary covenants and restrictions. There are no compensating balance
requirements, and borrowings under the line of credit are limited to 80% of
qualifying receivables. As of June 30, 1999, $4.6 million remained outstanding
under this revolving line of credit. Two previous lines of credit expired July
31, 1999. No amounts were outstanding under these previous lines of credit as of
June 30, 1999.
4. Related Party Transactions
The Company has an agreement with an officer of the Company that guarantees a
cash bonus (approximately $664,000 at June 30, 1999) in the amount of any
difference between (i) the net value at November 11, 1999 of the options granted
to the officer during 1996 and (ii) $1,550,000.
5. Net Income (loss) Per Share
The following table details the computation of basic and diluted net income
(loss) per share:
(In thousands, except per share information)
(unaudited)
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------- ------------ --- ------------- -------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss)
$ 60 $(688) $(1,608) $ 380
Denominator:
Denominator for basic net income (loss) per share-
Weighted average common shares outstanding 17,691 17,645 17,691 17,620
Effect of dilutive securities:
Warrants 15 - - 102
Common stock options 213 - - 791
------------- ------------ --- ------------- -------------
228 - - 893
------------- ------------ --- ------------- -------------
Denominator for diluted net income (loss) per share -
adjusted weighted average common shares
outstanding and assumed conversion of preferred
stock 17,918 17,645 17,691 18,513
------------- ------------ --- ------------- -------------
------------- ------------ --- ------------- -------------
Basic net income (loss) per share $0.00 $(0.04) $ (0.09) $ 0.02
------------- ------------ --- ------------- -------------
------------- ------------ --- ------------- -------------
Diluted net income (loss) per share
$0.00 $(0.04) $ (0.09) $ 0.02
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------------- ------------ --- ------------- -------------
</TABLE>
6. Comprehensive Income (loss)
Comprehensive income (loss) for the three months ended June 30, 1999 and 1998
totaled $137,000 and $(708,000), respectively. Comprehensive income (loss) for
the six months ended June 30, 1999 and 1998 totaled $(1,477,000) and $466,000,
respectively. The difference from reported net income (loss) arises from the
unrealized gains and losses on short-term investments.
7. Income Tax Expense
The effective income tax rate for the three and six-months ended June 30, 1999
and 1998 was 40% and 41%, respectively. At June 30, 1999, net deferred tax
assets were approximately $3.5 million. Because the Company incurred an
operating loss for 1998 and through the first quarter for 1999, management will
continue to evaluate the realization of the net deferred tax assets. If
realization becomes doubtful a valuation allowance will be provided.
8. Subsequent Event
On July 27, 1999, DAOU completed a $12 million private placement financing
involving the sale of 2,181,818 shares of Series A Preferred Stock (the
"Shares") to certain investors at the purchase price of $5.50 per share. Each
Share is convertible into one share of DAOU Common Stock, subject to certain
anti-dilution adjustments. Holders of the Shares will be entitled to receive
dividends, on a cumulative basis, at the annual rate of six percent, payable in
shares of Series A Preferred Stock. The Shares are redeemable at DAOU's option
on or after July 27, 2003, and at the option of the holders under specified
terms and conditions. In addition, the Shares are subject to mandatory
conversion in the event that the price per share of DAOU's Common Stock reaches
certain specified price ranges.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. Forward-looking statements usually contain the words "estimate,"
"anticipate," "believe," "expect" or similar expressions. All forward-looking
statements are inherently uncertain as they are based on various expectations
and assumptions concerning future events and are subject to numerous known and
unknown risks and uncertainties. The forward-looking statements included herein
are based on current expectations and entail various risks and uncertainties as
those set forth herein and in the Company's other SEC filings, including those
more fully set forth in the "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other sections of
the Company's Form 10-K for the year ended December 31, 1998 on file with the
SEC. These risks and uncertainties could cause the Company's actual results to
differ materially from those projected in the forward-looking statements. The
Company disclaims any obligation to update or publicly announce revisions to any
such statements to reflect future events or developments.
Overview
The Company provides integrated information technology solutions and services to
the U.S. healthcare industry. DAOU's capabilities range from up-front strategic
consulting to information technology ("IT") system design, implementation and
long-term tactical support. DAOU's IT offerings include application
implementation, communications infrastructure, management consulting and
integration services. The Company's application implementation group supplies
staffing resources to hospitals and other healthcare organizations. DAOU's
vendor certified consultants are capable of installing nearly 90% of the most
common healthcare applications. The Company's communications infrastructure
group focuses on the information superstructure in healthcare enterprises,
including networking, Intranet and Internet, desktop, and voice, video and data
solutions. Management consulting develops business plans and solves problems for
healthcare IT managers, installs and integrates applications, engineers,
installs and integrates infrastructure, and manages IT systems. DAOU's
integration services group analyzes, implements and supports information systems
that meet a customer's business objectives and are designed to reduce the cost
and improve the quality of care. The Company's gross margin with respect to
implementation services varies significantly depending on the percentage of
these services consisting of products (with respect to which the Company obtains
a lower margin) versus professional services. Also, the Company often hires
employees in anticipation of commencement of a project and, if delays in
contract signings occur, then the Company's gross margins could vary due to the
associated loss of revenue to cover the fixed labor costs.
Results of Operations
The Company's revenues were $27.1 million and $28.0 million for the three months
ended June 30, 1999 and 1998, respectively, representing a decrease of 4%.
Revenues decreased primarily from the closure of the Company's cabling division,
DAOU On-Line, Inc., resulting in fewer cabling contracts, and from decreases in
implementation contracts. The Company's revenues were $54.4 million and $52.0
million for the six months ended June 30, 1999 and 1998, respectively,
representing an increase of 5%. Services to DAOU's five largest customers
accounted for $7.8 million and $14.0 million of total revenues for the three and
six-months ended June 30, 1999, respectively, representing 29% and 26% of total
revenues, respectively.
Cost of revenues was $19.1 million and $18.9 million for the three months ended
June 30, 1999 and 1998, respectively, representing an increase of 1%. Gross
margin was 29% and 32% for the three months ended June 30, 1999 and 1998,
respectively. Cost of revenues was $40.9 million and $33.4 million for the six
months ended June 30, 1999 and 1998, respectively, representing an increase of
22%. Gross margin was 25% and 36% for the six months ended June 30, 1999 and
1998, respectively. This decrease in gross margin during the three and
six-months ended June 30, 1999 was primarily due to: (i) an increase in the
product content of the Company's large network implementation contracts; and
(ii) decreases in networking labor utilization rates due to decreases in network
sales within the communications infrastructure group.
-8-
<PAGE>
Sales and marketing expenses were $2.4 million and $3.1 million for the three
months ended June 30, 1999 and 1998, respectively, representing a decrease of
21%. Sales and marketing expenses were $5.3 million and $5.8 million for the six
months ended June 30, 1999 and 1998, respectively, representing a decrease of
8%. This decrease resulted primarily from the centralization of the Company's
sales and marketing functions. Sales and marketing expenses were approximately
9% and 11% of total revenues for the three months ended June 30, 1999 and 1998,
respectively, while sales and marketing expenses were approximately 10% and 11%
of total revenues for the six months ended June 30, 1999 and 1998, respectively.
Although the Company believes that it can achieve a decrease in these expenses
as a percentage of revenue, the Company also believes that sales and marketing
expenses may increase in absolute dollars to support the anticipated growth in
the Company's business.
General and administrative expenses were $5.3 million and $3.5 million for the
three months ended June 30, 1999 and 1998, respectively, representing an
increase of 50%. General and administrative expenses were $10.7 million and $6.7
million for the six months ended June 30, 1999 and 1998, respectively,
representing an increase of 60%. The primary factors contributing to this
increase in general and administrative expenses were costs associated with
additional administrative staffing and other increased infrastructure
requirements to support the growth and integration of acquired companies,
increased legal fees resulting primarily from the stockholder litigation, and
increased recruiting costs. General and administrative expenses were
approximately 20% and 13% of total revenues for the three months ended June 30,
1999 and 1998, respectively, and approximately 20% and 13% of total revenues for
the six months ended June 30, 1999 and 1998, respectively.
Other income (expense), net was $(95,000) and $59,000 for the three months ended
June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999 and
1998, income (expense), net was $(181,000) and $201,000, respectively. Other
income is primarily interest income on cash and cash equivalents, and short-term
investments. Interest expense consists primarily of interest associated with the
Company's business lines of credit. The decrease in net other income (expense),
net was primarily due to lower average cash reserves available for investment
during the three and six month periods ended June 30, 1999 as compared to 1998.
The effective income tax rate for the three and six-months ended June 30, 1999
and 1998 was 40% and 41%, respectively. At June 30, 1999, net deferred tax
assets were approximately $3.5 million. Because the Company incurred an
operating loss for 1998 and for the first quarter of 1999, management will
continue to evaluate the realization of the net deferred tax assets. If
realization becomes doubtful, then a valuation allowance will be provided.
Liquidity and Capital Resources
On June 30, 1999, the Company had working capital of $30.7 million, a decrease
of $1.0 million from $31.7 million on December 31, 1998. For the six months
ended June 30, 1999, cash provided by operating activities was $4.1 million
compared to cash used in operating activities of $6.1 million for the six months
ended June 30, 1998. This change resulted primarily from decreases in trade
accounts receivable and contract work in progress for the six months ended June
30, 1999 as compared to 1998.
Net cash used in investing activities was $637,000 in the six months ended June
30, 1999, compared to net cash provided by investing activities of $5.5 million
in the comparable prior period. This change resulted primarily from $7.2 million
in 1998 of maturing marketable securities that were not reinvested.
Net cash used in financing activities was $890,000 for the six months ended June
30,1999, compared to net cash used in financing activities of $1.5 million in
the comparable prior period.
During June 1999, the Company secured an $8.0 million revolving line of credit,
which expires on June 29, 2001. The line of credit bears interest at prime plus
1% per annum, is secured by substantially all of the assets of the Company and
contains customary covenants and restrictions. There are no compensating balance
requirements, and borrowings under the line of credit are limited to 80% of
qualifying accounts receivable. As of June 30, 1999, $4.6 million remained
outstanding under this revolving line of credit.
-9-
<PAGE>
On July 27, 1999, DAOU completed a $12 million private placement financing
involving the sale of 2,181,818 shares of Series A Preferred Stock (the
"Shares") to certain investors at the purchase price of $5.50 per share. Each
Share is convertible into one share of DAOU Common Stock, subject to certain
anti-dilution adjustments. Holders of the Shares will be entitled to receive
dividends, on a cumulative basis, at the annual rate of six percent, payable in
shares of Series A Preferred Stock. The Shares are redeemable at DAOU's option
on or after July 27, 2003, and at the option of the holders under specified
terms and conditions. In addition, the Shares are subject to mandatory
conversion in the event that the price per share of DAOU's Common Stock reaches
certain specified price ranges.
Although the Company has an accumulated deficit and has used cash in its
operating activities over the past three years, the Company believes that its
available funds together with anticipated cash from operating activities will be
sufficient to meet its capital requirements for the foreseeable future. The
Company may sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity securities or issuance of
equity securities in future acquisitions would result in dilution to the
Company's stockholders and the incurrence of additional debt could result in
additional interest expense.
Business Risks
In addition to the factors addressed in the preceding sections, certain dynamics
of the Company's markets and operations create fluctuations in the Company's
quarterly results. Uncertainty and cost containment in healthcare and
competitive conditions present various other risks to operating results which
are more fully described in the Company's Form 10-K filed with the SEC and other
SEC filings.
YEAR 2000
THIS STATEMENT IS INTENDED AS A YEAR 2000 READINESS DISCLOSURE.
INTRODUCTION
The year 2000 issue creates risks for all companies, particularly those
heavily dependent on or producing information technology products such as the
Company. The "year 2000 issue" is a term used to describe the problems
created by systems that are unable to accurately interpret dates after
December 31, 1999. These problems are derived predominantly from the fact
that software programs, computer equipment and embedded technology
historically have categorized the "year" in a two-digit format.
Management believes that the year 2000 issue creates potential risks that
relate to, among other things, the Company's:
- - Internally-used information technology ("IT") and non-IT systems;
- - Third-party products and sales, service and maintenance agreements; and
- - Software products of its own design.
STATE OF READINESS
The company has centralized its focus on the year 2000 issue through a
cross-functional project team whose task is to identify, assess, test and
remediate, as applicable, the Company's internal use systems, its sales,
service and maintenance agreements and the software products of its own
design. Although the Company's efforts to address year 2000 issues do not
fall precisely into sequential phases, these efforts generally involve an
assessment and testing phase, a deployment or remediation phase and a
contingency planning phase. The Audit Committee of the Board of Directors is
advised periodically on the status of the Company's Year 2000 compliance
program.
INTERNAL USE SYSTEMS. Year 2000 issues relating to the Company's
internally-used IT and non-IT systems, including computer equipment, software
and devices with embedded technology (collectively, "Internal Use Systems"),
could result in the Company's failure or inability to process transactions,
send invoices, conduct communications or engage in similar business
activities, any of which could affect materially and adversely the Company's
business, results of operations and financial condition.
Based upon its assessment and testing efforts through June 30, 1999, the
Company believes that its internal local and wide area network systems are
year 2000 compliant, but that certain PC hardware and software relating to
its Internal Use systems will require replacement or modification through,
for example, ROM-BIOS upgrades to certain hardware components and year 2000
compliant software upgrades. These remaining products are anticipated to be
reviewed and upgraded by September 30, 1999. The Company is also evaluating
contingency plans for its Internal Use Systems with an anticipated completion
date of September 30, 1999. In the ordinary course of replacing computer
equipment and software, the Company also attempts to obtain replacements that
it believes are year 2000 compliant. As of June 30, 1999, the Company had
assembled year 2000 compliance statements from its major vendors and
suppliers. Even where assurances are received from third parties, however,
risks remain that the failure of the Company's Internal Use Systems could
affect materially and adversely the Company's business, results of operations
and financial condition.
The Company estimates that, as of June 30, 1999, it had completed
approximately 93% of the initiatives that it believes will be necessary to
fully address potential year 2000 issues relating to its Internal Use
Systems. The Company currently anticipates that its year 2000
identification, assessment, testing and remediation efforts with respect to
its Internal Use Systems will be completed by September 30, 1999.
Notwithstanding the above assessment, both IT and non-IT systems may contain
embedded technology that could delay the Company's year 2000 identification,
assessment, testing and remediation efforts with respect to its Internal Use
Systems.
THIRD-PARTY PRODUCTS AND SALES, SERVICE AND MAINTENANCE AGREEMENTS.
Third-party products ("Third-Party Products") that are re-sold, installed
and/or maintained by the Company in connection with sales, service and
maintenance agreements with its customers may fail to operate properly or as
expected because of year 2000 issues. These system failures could disrupt
customer operations through a temporary inability to, among other things,
diagnose and treat patients, operate medical communications systems, access
medical information and databases, process transactions, send invoices or
engage in similar medical and business activities.
The Company has completed compiling vendor, manufacturer and service provider
statements and assurances regarding the year 2000 issue from major suppliers
of Third-Party Products. The Company is in the process of notifying key
customers regarding these statements and assurances as they pertain to
Third-Party Products that the Company has sold or installed, or currently
maintains in accordance with its contractual obligations.
If vendors, manufacturers and service providers of Third-Party Products do
not remediate successfully Third-Party Products by the year 2000 or
adequately indemnify or provide pass-through warranties for products re-sold,
installed and maintained by the Company, then the Company may face claims and
increased obligations under its sales, services and maintenance agreements
that could affect materially and adversely its business, results of
operations and financial condition.
The Company currently is assessing its Year 2000 related obligations under
its sales, service and maintenance agreements. To date, the Company has
identified one major sales, service and maintenance agrement under which it
has agreed to repair, modify and replace certain Third-Party Products that
are not year 2000 compliant. Accordingly, the Company's year 2000 liability
under this agreement depends on the year 2000 compliance of Third-Party
Products that are re-sold, installed and/or maintained under the agreement
and the Company's ability to seek adequate indemnification and/or warranty
coverage from the vendors, manufactures and service providers of Third-Party
Products. As of June 30, 1999, the Company has received confirmation from
vendors that more than 95% of the Third-Party Products covered by this
agreement are year 2000 compliant. The customer has advised the Company that
the remaining portion of these Third-Party Products will be replaced for year
2000 compliance prior to the end of this year. Because this process is still
incomplete and because the third-party vendor assurances may be inaccurate,
the Company cannot assure that it will not incur significant expenses under
this agrement that could impact materially and adversely the Company's
business, results of operations and financial condition.
In addition, based on its review to date, the Company has determined that
approximately 15% of its master contracts have no specific liability
limitations including those with regard to Year 2000 issues. The absence of
such limitations could expose the Company to increased claims and obligations
for Year 2000 compliance. Additional liability could result from certain
agreements that were entered into by the Company's subsidiaries. The Company
currently anticipates that its year 2000 identification assessment, testing
and remediation efforts with respect to Third-Party Products and key sales,
service and maintenance agreements will be completed by September 30, 1999.
COMPANY SOFTWARE PRODUCTS. The Company also distributes certain software
products through its subsidiary, DAOU-Sentient, Inc. The Company has
completed its assessment and testing of these products and believes that they
are year 2000 compliant.
COSTS
As of June 30, 1999, the Company had incurred costs of approximately $115,000
related to its year 2000 identification, assessment, testing and remediation,
of which $37,000 was incurred for Internal Use Systems and $80,000 was
incurred for its assessing liability and status of the year 2000 compliance
of Third-Party Products.
The Company currently estimates that the cost of its year 2000 identification,
assessment, remediation, and testing efforts will not exceed $200,000, of
which the Company expects to incur additional costs of $65,000 for year 2000
issues relating to Internal Use Systems and additional costs of $20,000 for
the identification, assessment, and notification to customers of year 2000
issues relating to Third-Party Products that are re-sold, installed or
maintained in accordance with the Company's contractual obligations. These
expenditures will be funded from operating cash flows. Other non-year 2000 IT
efforts have not been materially delayed or impacted by year 2000 initiatives.
The costs of the Company's year 2000 identification, assessment, remediation,
and testing efforts and the dates on which the Company believes it will
complete such efforts are based upon management's best estimates, which are
derived using numerous assumptions regarding future events. There can be no
assurance that these estimates will prove to be accurate and actual results
could differ materially from those currently anticipated. Specific factors
that could cause material differences include, among others, increased
obligations and liability under the Company's contractual obligations, the
availability and cost of personnel trained in year 2000 issues and the
ability to identify, assess and remediate Internal Use Systems and Third
Party Products as appropriate. In addition, if year 2000 issues cause
customers and prospects to defer current projects or prospective purchase
decisions, then the Company's financial, business and operational goals may
be delayed or may not be realized at all, causing the Company's business,
results of operations and financial condition to be affected materially and
adversely.
RISKS
If certain Internal Use Systems and Third-Party Products are not year 2000
compliant, then the Company could experience a negative impact on its
business, results of operations and financial condition relating to factors
that include, among others:
- - diversion of resources by the Company to address and/or remediate year
2000 issues;
- - damage to the Company's reputation;
- - litigation;
- - service delays to the Company's customers arising from the failure of
vendors, manufacturers and service providers to adequately address year 2000
issues;
- - increased warranty and other claims by the Company's customers and/or
increased product and system repair, replacement, service and maintenance
obligations under its existing and future sales, service and maintenance
agreements; and
- - decreased revenues if current and prospective customers devote a
substantial portion of their information systems spending to evaluation and
remediation of Year 2000 issues that could divert money away from
expenditures relating to the Company's services.
The Company currently cannot accurately assess or estimate the possible
impact of the foregoing risks and liability because:
- - there is no uniform definition of "compliance with Year 2000;"
- - the legal standards for year 2000 liability presently are uncertain;
- - the Company's year 2000 obligations will depend on, among other things,
the varying contractual terms contained in its sales, service and
maintenance agreements with respect to the particular customer and the nature
of such customer's year 2000 issue; and
- - there can be no assurance that indemnification or pass-through
arrangements relating to the Company's sales, service and maintenance
agreements will cover all of the Company's liabilities and costs incurred in
year 2000 related claims.
Consequently, the Company cannot provide assurances that the aggregate cost
of defending and resolving the foregoing issues and claims will not affect
materially and adversely the Company's business, results of operations and
financial condition.
CONTINGENCY PLANS
The Company has not yet developed a comprehensive contigency plan to address
situations that may result if the Company or any of the third parties on
which the Company depends is unable to achieve year 2000 readiness. However,
the Company currently expects to complete its contingency planning by
September 30, 1999. This contingency planning will encompass "worst case"
scenarios that assume the failure of significant communications and computing
infrastructures of the Company, its customers and suppliers, together with
failures of governmental infrastructures affecting transportation. The
Company subsequently may identify other factors that could affect materially
and adversely the Company's business, results of operations and financial
condition. Notwithstanding the Company's formation of a comprehensive
contingency plan, it is unlikely that any contingency planning will
adequately address all potential scenarios related to the year 2000 issue.
The foregoing statements are based on management's best estimates at the
present time, which were derived using numerous assumptions of future events
and conditions, including the continued availability of certain resources,
third party modification plans, third party assurances of year 2000
compliance and other factors. There can be no assurance that these
assumptions will be accurate and that the estimates will be achieved, and
actual results could differ materially from those anticipated. Specific
factors that could cause such material differences include, but are not
limited to: the availability and costs of personnel trained in year 2000
remediation; the accuracy of third party assurances; and the success of the
Company's customers and suppliers in addressing the year 2000 issue. The
Company's evaluation and assessment is ongoing and it expects that new or
different information may become available as its assessment and evaluation
continues. Consequently, there is no guarantee that the Company's efforts to
mitigate potential liability will be successful.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates, primarily from its
variable-rate long-term debt arrangements and, to a lesser extent, its
investments in certain available-for-sale marketable securities. Under its
current policies, the Company does not use interest rate derivatives instruments
to manage this exposure to interest rate changes. The Company does have the
option to convert its variable-rate long-term debt arrangements to fixed-rate
debt arrangements for a nominal transaction fee. At June 30, 1999, the Company
had variable-rate debt totaling $4.6 million. A hypothetical 1% adverse move in
interest rates along the entire interest rate yield curve would not materially
affect the fair value of the Company's financial instruments that are exposed to
changes in interest rates.
-10-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On August 24, 1998, August 31, 1998, September 14, 1998 and September
23, 1998, separate complaints were filed against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of California. A group of shareholders has been appointed the lead
plaintiffs and they filed an amended consolidated complaint on February 24,
1999. The new complaint realleges the same theories of liability previously
asserted, namely the alleged improper use of the percentage-of-completion
accounting method for revenue recognition. These complaints were brought on
behalf of a purported class of investors in the Company's Common Stock and do
not allege specific damage amounts. In addition, on October 7, 1998 and October
15, 1998, separate complaints were filed in the Superior Court of San Diego,
California. These additional complaints mirror the allegations set forth in the
federal complaints and assert common law fraud and the violation of certain
California statutes. By stipulation of the parties, the state court litigation
has been stayed pending the resolution of a motion to dismiss the federal court
action, which was filed on April 12, 1999. The Company believes that the
allegations set forth in all of the foregoing complaints are without merit and
intends to defend against these allegations vigorously. No assurance as to the
outcome of this matter can be given, however, and an unfavorable resolution of
this matter could have a material adverse effect on the Company's business,
results of operations and financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on June 22, 1999. At such
meeting the following actions were voted upon:
<TABLE>
<CAPTION>
WITHHELD/ BROKER/
ITEM AFFIRMATIVE NEGATIVE ABSTENTIONS NON-VOTE
- ---------------------------------------------- ------------------ --------------- ------------------ -----------------
<S> <C> <C> <C> <C>
ELECTION OF BOARD MEMBERS
Class III Directors (term expiring at
annual meeting of stockholders in 2002)
David W. Jahns 13,604,333 - 106,824 -
Larry D. Grandia 13,695,028 - 16,129 -
OTHER MATTERS
Ratification of Ernst & Young LLP as independent auditors for fiscal year
1999.
13,603,570 38,271 69,316 -
</TABLE>
NAMES OF EACH OTHER DIRECTOR WHOSE TERM OF OFFICE AS A DIRECTOR CONTINUED AFTER
THE MEETING:
Georges J. Daou
Daniel J. Daou
Richard B. Jaffe
John H. Moragne
Kevin M. Fickenscher
-11-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement, dated as of June 15, 1999, between
Larry D. Grandia and the Registrant.
10.2 Loan and Security Agreement, dated as of June 29, 1999, by and
among HCFP Funding, Inc. and Registrant, DAOU-Sentient, Inc.,
DAOU-RHI, Inc., DAOU-TMI, Inc. and DAOU-Synexus, Inc.
10.3 Revolving Credit Note, dated June 29, 1999, issued to HCFP
Funding, Inc. by Registrant, DAOU-Sentient, Inc., DAOU-RHI,
Inc., DAOU-TMI, Inc. and DAOU-Synexus, Inc.
27 Financial Data Schedule
(b) Current Reports on Form 8-K. The Registrant did not file any Current
Reports on Form 8-K with the Commission during the quarter ended June 30,
1999.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAOU SYSTEMS, INC.
Date: August 16, 1999 By: /s/ Larry D. Grandia
-------------------------------
Larry D. Grandia
Chief Executive Officer and Director
By: /s/ Fred C. McGee
-------------------------------
Fred C. McGee
Executive Vice President, Chief
Financial Officer and Secretary
-13-
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of June 15, 1999 by DAOU
Systems, Inc., a Delaware corporation ("EMPLOYER" or the "COMPANY"), and
Larry D. Grandia, an individual resident of the State of Utah ("EMPLOYEE").
RECITALS
WHEREAS, Employer desires to obtain the services of Employee, and
Employee desires to secure employment from Employer; and
WHEREAS, Employer and Employee desire to set forth in this Agreement
the terms and conditions under which Employee is to be employed by Employer.
NOW THEREFORE, Employer and Employee, in consideration of the mutual
promises set forth herein, hereby agree as follows:
AGREEMENT
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this SECTION 1:
"AAA" as defined in SECTION 10.10.
"AGREEMENT" means this Employment Agreement, including any
attachments hereto, as amended in writing from time to time.
"BENEFITS" as defined in SECTION 3.2.
"BOARD OF DIRECTORS" means the board of directors of Employer.
"CAUSE" means: (a) Employee's material breach of this Agreement; (b)
Employee's material failure to adhere to any written policy of Employer
generally applicable to officers of the Company if Employee has been given a
reasonable opportunity to comply with such policy or cure his failure to
comply (which reasonable opportunity must be granted during the ten-day
period preceding termination of this Agreement); (c) the appropriation (or
attempted appropriation) of a material business opportunity of Employer,
including attempting to secure or securing any personal profit in connection
with any transaction entered into on behalf of Employer; (d) the
misappropriation (or attempted misappropriation) of any of Employer's funds
or property; (e) the conviction of, or the entering of a guilty plea or plea
of no contest with respect to, a felony, the equivalent thereof, or any other
crime with respect to which imprisonment is a possible punishment; (f)
willful misconduct; (g) physical or mental disability or other inability to
perform the essential functions of his position, with or without reasonable
accommodation; or (h) death.
<PAGE>
"CHANGE IN CONTROL" means a transaction whereby (a) substantially
all of the outstanding shares of Employer's Common Stock are exchanged for
cash or the securities (or combination thereof) of another Person, or (b) any
Person becomes the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or indirectly, of more
than fifty percent (50%) of the outstanding shares of Employer's Common Stock
at such time.
"CONSULTING AGREEMENT" means the Consulting Agreement, dated as of
March 1, 1999, by and between Employer and Employee.
"EFFECTIVE DATE" means the date stated in the preamble of this
Agreement.
"EMPLOYEE" as defined in the preamble of this Agreement.
"EMPLOYER" as defined in the preamble of this Agreement.
"EMPLOYER'S COMMON STOCK" means Employer's common stock, $0.001 par
value per share.
"EMPLOYMENT" as defined in SECTION 2.1.
"EMPLOYMENT PERIOD" means the term of the Employment under this
Agreement.
"FAIR MARKET VALUE" of one Stock Option means the amount equal to
(i) the closing selling price per share of Employer's Common Stock on the
date in question, as reported by the National Association of Securities
Dealers on the Nasdaq National Market or any successor system, LESS (ii) the
exercise price of such Stock Option.
"FISCAL YEAR" means Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
"INCENTIVE COMPENSATION PLAN" means Employer's Incentive
Compensation Plan, attached hereto as ATTACHMENT A, as modified from time to
time.
"OPTION PLAN" as defined in SECTION 3.4(a).
"PERFORMANCE BONUS" as defined in SECTION 3.3.
"PERSON" means any individual, corporation (including any nonprofit
corporation), general or limited partnership, limited liability company,
joint venture, estate, trust, association, organization or governmental body.
"POST-EMPLOYMENT PERIOD" as defined in SECTION 7.2.
"RULES" as defined in SECTION 10.10.
"SALARY" as defined in SECTION 3.1.
"STOCK OPTIONS" as defined in SECTION 3.4(a).
2
<PAGE>
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT. Employer hereby employs Employee, and Employee
hereby accepts employment by Employer (the "EMPLOYMENT"), upon the terms and
conditions set forth in this Agreement.
2.2 AT-WILL EMPLOYMENT. Employee's Employment relationship with
Employer is at-will, terminable at any time and for any reason, with or
without Cause, by either Employer or Employee. While certain paragraphs of
this Agreement describe events which could occur at a particular time in the
future, nothing in this Agreement may be construed as a guarantee of
Employment of any length.
2.3 DUTIES. Employee will serve as the Chief Executive Officer of
Employer and have such other duties as are assigned or delegated to Employee
by the Board of Directors. Employee will (i) devote his entire business time,
attention, skill and energy exclusively to the business of Employer (except
for Employee's reasonable, outside board or professional activities), (ii)
use his best efforts to promote the success of Employer's business and (iii)
cooperate fully with the Board of Directors in the advancement of the best
interests of Employer. If Employee continues to serve or is elected as a
director of Employer or as a director or officer of any of its affiliates,
then Employee will fulfill his duties as such director or officer without
additional compensation, except as set forth in SECTION 3.4(a).
2.4 COMPLIANCE WITH EMPLOYER'S POLICIES. Employee acknowledges and
agrees that compliance with Employer's policies, practices and procedures is
a term and condition of the Employment under this Agreement.
3. COMPENSATION
3.1 SALARY. Employee will be paid an annual salary (the "SALARY") of
Two Hundred Thirty Thousand Dollars ($230,000), which will be payable in
equal periodic installments according to Employer's customary payroll
practices. The Board of Directors (or a committee thereof) will review the
Salary no less frequently than annually.
3.2 BENEFITS. Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, hospitalization, major medical and other employee benefit plans of
Employer that may be in effect from time to time, to the extent Employee is
eligible under the terms of those plans (collectively, the "BENEFITS"). In
addition, during the Employment Period, Employer will provide Employee with a
life insurance policy, providing for payment of One Million Dollars
($1,000,000) to the named beneficiaries to be specified by Employee. Employee
hereby represents and warrants that he is in good physical health and has not
been denied medical or life insurance in the past.
3.3 ADDITIONAL COMPENSATION. As additional compensation for the
services to be rendered by Employee pursuant to this Agreement, Employer will
pay to Employee an annual performance bonus (the "PERFORMANCE BONUS") in an
amount up to One Hundred Fifty-Thousand Dollars ($150,000) in accordance with
the Incentive Compensation Plan. Upon commencement of employment, Employer will
pay to Employee a signing bonus in the amount of Fifty Thousand Dollars
($50,000), which signing bonus shall constitute a non-refundable advance
3
<PAGE>
against the Performance Bonus for Fiscal Year 1999. Subject to SECTION 8, in
order to be eligible to receive the Performance Bonus, Employee must be
employed by Employer on the date that the Performance Bonus is distributed by
the Employer.
3.4 STOCK OPTIONS.
(a) GRANT OF OPTIONS. Effective on the Effective Date, Employer
will grant to Employee options representing the right to purchase up to Four
Hundred Thousand (400,000) shares of Employer's Common Stock (collectively, the
"STOCK OPTIONS"). Two Hundred Fifty Thousand (250,000) of the Stock Options
shall be outside of the Company's 1996 Stock Option Plan (the "OPTION PLAN").
One Hundred and Fifty Thousand (150,000) of the Stock Options shall be pursuant
to the Option Plan. The Stock Options granted pursuant to the Option Plan will
consist of incentive stock options as defined in Internal Revenue Code Section
422(b) to the extent permitted by applicable law (generally limited to options
with no more than One Hundred Thousand Dollars ($100,000) in exercise price in a
given year) and the balance will be non-qualified options (non-statutory
options). All of the Stock Options granted outside of the Option Plan will be
non-qualified/non-statutory stock options. The exercise price for the Stock
Options will be the closing price per share of Employer's Common Stock on the
Effective Date. Employee will be entitled to retain and continue to vest his
existing director stock options as long as he remains a director (the "DIRECTOR
OPTIONS"). The Company agrees that, if permitted by law, the exercise price of
the Director Options will be adjusted in the event that the exercise price of
employee stock options granted under the Option Plan is adjusted.
(b) VESTING SCHEDULE. The Stock Options will vest in accordance
with the following schedule: (i) 50,000 of the Stock Options on the Effective
Date, (ii)100,000 of the Stock Options on December 15, 1999, (iii) 100,000 of
the Stock Options on December 15, 2000, and (iv) 150,000 of the Stock Options on
December 15, 2001. However, in the event of a Change in Control of the Company,
70% of the then unvested Stock Options will vest immediately upon the
consummation of such Change in Control, except if such Change in Control is
initiated within six (6) months of the Effective Date and intended to be
consummated as a merger through an exchange of equity securities. Furthermore,
in the event that Employee is terminated without Cause: (i) prior to December
15, 1999, 100,000 of the Stock Options will vest immediately upon such
termination; (ii) on or after December 15, 1999 but prior to December 15, 2000,
an additional 100,000 of the Stock Options will vest immediately upon such
termination; or (iii) on or after December 15, 2000 but prior to December 15,
2001, all of the remaining unvested Stock Options will vest immediately upon
such termination.
(c) OTHER TERMS. The Stock Options granted outside of the Option
Plan shall contain and be subject to such other terms and conditions as are
generally included in the Option Plan and the related stock option agreement
except as set forth herein. In addition, Employer shall register the shares of
Employer's Common Stock underlying the Stock Options by filing a Registration
Statement on Form S-8 (or other available registration statement) with the
Securities and Exchange Commission.
3.5 LOAN. Upon Employee's written request to Employer, Employer will,
within thirty (30) days after receipt of such written request, loan to Employee,
at the minimum interest rate permitted under applicable tax regulations, Two
Hundred Thousand Dollars ($200,000) (the
4
<PAGE>
"LOAN"). The Loan shall be due and payable by Employee to Employer in the
event and on the date of a Change in Control which occurs on or before the
second anniversary of the effective date of the Loan, unless such Change in
Control occurs within the first six (6) months after the Effective Date. In
the event that a Change in Control occurs (i) within the first six (6) months
after the Effective Date or (ii) does not occur before the second anniversary
of the effective date of the Loan, the Loan will be forgiven by the Company.
In the event that Employee is entitled to receive any payment pursuant to
SECTION 8.2 or SECTION 8.5, Employer shall have the right to deduct from any
such payment any outstanding balance with respect to the Loan made pursuant
to this SECTION 3.5. Employee hereby acknowledges that the Loan and any
forgiveness thereof will result in imputed income to Employee and Employee
shall be responsible for payment of all applicable federal and state taxes.
3.6 MERGER AND ACQUISITION SUCCESS FEE. In the event that there is a
Change in Control transaction, Employee will be afforded the opportunity to
assist in the negotiations related thereto if he is still employed by the
Company; and Employee will be entitled to a success fee of (i) $750,000 if
such Change in Control occurs within the first six (6) months after the
Effective Date or (ii) $500,000 if such Change in Control occurs after the
date that is six (6) months after the Effective Date.
4. FACILITIES AND EXPENSES
Employer will furnish to Employee office space, equipment, supplies
and such other facilities and personnel as Employer deems necessary or
appropriate for the performance of Employee's duties under this Agreement,
including the payment of reasonable expenses to equip Employee's home office
(e.g., personal computer and telephonic access) at Employee's Utah residence.
Employer will pay on behalf of Employee (or reimburse Employee for)
reasonable expenses incurred by Employee at the request of, or on behalf of,
Employer in the performance of Employee's duties pursuant to this Agreement,
and in accordance with Employer's employment policies, including reasonable
expenses incurred by Employee in attending conventions, seminars, and other
business meetings, in appropriate business entertainment activities, and for
promotional expenses. Employee must file expense reports with respect to such
expenses in accordance with Employer's policies.
In addition, Employer will: (a) reimburse Employee for the
reasonable travel expenses of Employee's spouse or Employee's children for up
to two (2) trips per month (in the aggregate) from Salt Lake City, Utah to
San Diego, California; (b) provide Employee with membership access to a golf
club within reasonable proximity to Del Mar, California; and (c) to the
extent not previously covered under the Consulting Agreement, reimburse
Employee for the amount that Employee pays to acquire in his name the equity
membership in the golf club to which Employee's previous employer provided
him with access, which reimbursement shall not exceed Twenty Thousand Dollars
($20,000). Employee must file expense reports with respect to such expenses
and reimbursements in accordance with Employer's policies.
5. VACATIONS AND HOLIDAYS
Employee will be entitled to four (4) weeks of paid vacation per year
and holidays in accordance with Employer's policies. Employee will accrue
vacation to a maximum of six (6)
5
<PAGE>
weeks. After Employee reaches this maximum accrual amount, he will cease to
accrue additional vacation until his accrued vacation falls below this
maximum accrual amount.
6. CONFIDENTIALITY; EMPLOYEE INVENTIONS
Employee hereby agrees to comply with the terms and conditions of
Employer's Employee Confidentiality and Inventions Agreement, attached hereto as
ATTACHMENT B.
7. NON-COMPETITION AND NON-INTERFERENCE
7.1 ACKNOWLEDGMENTS BY EMPLOYEE. Employee acknowledges that: (a) the
services to be performed by him under this Agreement are of a special, unique,
unusual, extraordinary and intellectual character; (b) Employer's business is
national in scope and its products and services are marketed throughout the
United States; (c) Employer competes with other businesses that are or could be
located in any part of the United States; and (d) the provisions of this SECTION
7 are reasonable and necessary to protect Employer's business.
7.2 COVENANTS OF EMPLOYEE. In consideration of the acknowledgments by
Employee and the Compensation and the Benefits to be paid or provided to
Employee by Employer, and in recognition of the confidential information that
Employee will obtain related to Employer's business (including its customers and
employees), Employee covenants that he will not, directly or indirectly:
(a) during the Employment Period, except in the course of the
Employment hereunder, engage or invest in, own, manage, operate, finance,
control, or participate in the ownership, management, operation, financing, or
control of, be employed by, associated with, or in any manner connected with,
lend Employee's name or any similar name to, lend Employee's credit to or render
services or advice to, any business whose products or activities compete in
whole or in part with the products or activities of Employer; PROVIDED, HOWEVER,
that Employee may purchase or otherwise acquire up to (but not more than) one
percent (1%) of any class of securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such securities are
listed on any national or regional securities exchange or have been registered
under Section 12(g) of the Securities Exchange Act of 1934, as amended;
(b) whether for Employee's own account or for the account of any
other Person, at any time during the Employment Period and the Post-Employment
Period, solicit business of the same or similar type being carried on by
Employer, from any Person known by Employee to be a customer of Employer and
with whom Employee had personal contact during and by reason of the Employment
with Employer;
(c) whether for Employee's own account or the account of any other
Person (i) at any time during the Employment Period and the Post-Employment
Period, solicit, employ, or otherwise engage as an employee, independent
contractor, or otherwise, any Person who is or was an employee of Employer at
any time during the Employment Period or in any manner induce or attempt to
induce any employee of Employer to terminate his employment with Employer; or
(ii) at any time during the Employment Period and the Post-Employment Period,
interfere with Employer's relationship with any Person, including any Person who
at any
6
<PAGE>
time during the Employment Period was an employee, contractor, supplier, or
customer of Employer; or
(d) at any time during or after the Employment Period, disparage
Employer or any of its shareholders, directors, officers, employees or agents.
For purposes of this SECTION 7.2, the term "POST-EMPLOYMENT PERIOD"
means the one (1) year period beginning on the date of termination of the
Employment with Employer.
If any covenant in this SECTION 7.2 is held to be unreasonable,
arbitrary or against public policy, such covenant will be considered to be
divisible with respect to scope, time and geographic area, and such lesser
scope, time or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary and not against
public policy, will be effective, binding and enforceable against Employee.
The period of time applicable to any covenant in this SECTION 7.2
will be extended by the duration of any violation by Employee of such covenant.
Employee will, while the covenant under this SECTION 7.2 is in effect,
give notice to Employer, within ten (10) days after accepting any other
employment, of the identity of Employee's employer. Employer may notify such
employer that Employee is bound by this Agreement and, at Employer's election,
furnish such employer with a copy of this Agreement or relevant portions
thereof.
8. TERMINATION PAY
Effective upon the termination of this Agreement, Employer will be
obligated to pay to Employee (or, in the event of his death, his designated
beneficiary as defined below) only such compensation as is provided in this
SECTION 8.
8.1 TERMINATION WITH CAUSE. In the event that Employer terminates
Employee with Cause, Employee only will be entitled to receive the portion of
the Salary and the Performance Bonus accrued and owing to Employee only through
the date that such termination is effective, but will not be entitled to any
compensation during any subsequent Fiscal Year.
8.2 TERMINATION WITHOUT CAUSE. In the event that Employer terminates
Employee without Cause, Employee will be entitled to receive a severance payment
of One Million Five Hundred Thousand Dollars ($1,500,000). Payment of this
severance amount will be conditional upon Employee signing a standard form
general release of claims against the Company and its directors, officers,
affiliates and agents. Upon payment of such amount, Employee will not be
entitled to receive any other payment under this SECTION 8.
8.3 [RESERVED.]
8.4 RESIGNATION. In the event that Employee resigns from Employer,
Employee shall not be entitled to any termination pay, other than the portion of
the Salary and the Performance Bonus accrued and owing to Employee only through
the date that such resignation is effective.
7
<PAGE>
8.5 NON-RENEWAL PAYMENT. In the event that, on or before August 15,
2001, the Company does not offer an employment agreement to Employee which is
acceptable to Employee (after reasonable negotiations between Employer and
Employee lasting for at least thirty (30) days), then Employee will be entitled
to payment of One Million Five Hundred Thousand Dollars ($1,500,000); PROVIDED,
HOWEVER, that payment of such amount will be conditional upon Employee signing a
standard form general release of claims against the Company and its directors,
officers, affiliates and agents. Upon payment of such amount, Employee will not
be entitled to receive any other payment under this SECTION 8.
8.6 BENEFITS. Employee's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date of Employee's
termination, and Employee will be entitled to accrued Benefits pursuant to such
plans only as provided in such plans.
8.7 DESIGNATED BENEFICIARY. For purposes of this SECTION 8, Employee's
designated beneficiary will be such individual beneficiary or trust, located at
such address, as Employee may designate by notice to Employer from time to time
or, if Employee fails to give notice to Employer of such a beneficiary,
Employee's estate. Notwithstanding the preceding sentence, Employer will have no
duty, in any circumstances, to attempt to open an estate on behalf of Employee,
to determine whether any beneficiary designated by Employee is alive or to
ascertain the address of any such beneficiary, to determine the existence of any
trust, to determine whether any person or entity purporting to act as Employee's
personal representative (or the trustee of a trust established by Employee) is
duly authorized to act in that capacity, or to locate or attempt to locate any
beneficiary, personal representative or trustee.
8.8 CHANGE IN CONTROL. In the event that (i) there is a Change in
Control of the Company and (ii) the acquiring party in such Change in Control
does not offer to Employee a position acceptable to Employee, such acquiring
party will pay to Employee an amount equal to one and one-half (1 1/2) times the
aggregate of the Salary and the Performance Bonus. The acquiring party will pay
to Employee such amount upon the consummation of such Change in Control.
9. RELOCATION AND OTHER BENEFITS
9.1 AUTOMOBILE. During the Employment Period, Employer will provide to
Employee a leased automobile commensurate with Employee's role as the Chief
Executive Officer of Employer.
9.2 LODGING. During the Employment Period, Employer shall provide to
Employee appropriate lodging in a condominium (available to Employee on a
full-time basis) reasonably satisfactory to Employee, until June 30, 2000, or
longer if Employee is requested by Employer to spend a substantial portion of
his time in San Diego, California.
9.3 HOUSING RELOCATION BENEFITS. Employee will be entitled to the
housing relocation benefits, including reasonable moving expenses and realtor
fees and the current house sales price guarantee described in ATTACHMENT C to
this Agreement.
9.4 COBRA COVERAGE. Employee will be reimbursed by the Company for (i)
insurance premiums paid by Employee for a period of 18 months resulting from
Employee's
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election of COBRA coverage relating to Employee's previous employment and
(ii) any taxes paid by Employee relating to the Company's reimbursement of
such premiums.
9.5 CERTAIN ADDITIONAL PAYMENTS.
(a) Anything in this Agreement to the contrary notwithstanding
and except as set forth below, in the event it shall be determined that any
payment or distribution by Employer or for the benefit of Employee (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise, but determined without regard to any additional
payments required under this Section 9.5) (a "PAYMENT") would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "CODE"), or any interest or penalties are incurred by
Employee with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
"EXCISE TAX"), then Employee shall be entitled to receive an additional
payment (a "GROSS-UP PAYMENT") in an amount such that, after payment by
Employee of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes (and
any interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9.5(c), all
determinations required to be made under this Section 9.5, including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such determination,
shall be made by Ernst & Young LLP (the "ACCOUNTING FIRM"), which shall
provide detailed supporting calculations to Employer and Employee within
fifteen (15) business days of the receipt of notice from Employee that there
has been a Payment, or such earlier time as is requested by Employer. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting Change in Control, Employee shall
appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Employer. Any Gross-Up Payment, as
determined pursuant to this Section 9.5, shall be paid by Employer to
Employee within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Employee, it shall furnish Employee with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal income
tax return should not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon
Employer and Employee. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not have been made by Employer should have been made ("UNDERPAYMENT"),
consistent with the calculations required to be made hereunder. In the event
that Employer exhausts its remedies pursuant to Section 9.5(c) and Employee
thereafter is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by Employer to or for the benefit of
Employee.
(c) Employee shall notify Employer in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment of the
Gross-Up Payment. Such
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notification shall be given as soon as practicable but no later than ten (10)
business days after Employee is informed in writing of such claim and shall
apprise Employer of the nature of such claim and the date on which such claim
is requested to be paid. Employee shall not pay such claim prior to the
expiration of the 30-day period following the date on which it gives such
notice to Employer (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If Employer notifies
Employee in writing prior to the expiration of such period that it desires to
contest such claim, Employee shall:
(i) give Employer any information reasonably requested by
Employer relating to such claim;
(ii) take such action in connection with contesting such
claim as Employer shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by Employer;
(iii) cooperate with Employer in good faith in order
effectively to contest such claim; and
(iv) permit Employer to participate in any proceedings
relating to such claim; PROVIDED, HOWEVER, that Employer shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
Employee harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result
of such representation and payment of costs and expenses. Without limitation
on the foregoing provisions of this Section 9.5(c), Employer shall control
all proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct Employee to pay the tax claimed
and sue for a refund or contest the claim in any permissible manner, and
Employee agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as Employer shall determine; PROVIDED, HOWEVER, that
if Employer directs Employee to pay such claim and sue for a refund, Employer
shall advance the amount of such payment to Employee, on an interest-free
basis and shall indemnify and hold Employee harmless, on an after-tax basis,
from any Excise Tax or income tax (including interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and FURTHER, PROVIDED, that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of Employee with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, Employer's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
Employee shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by Employee of an amount advanced by
Employer pursuant to Section 9.5(c), Employee becomes entitled to receive any
refund with respect to such
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claim, Employee shall promptly pay to Employer the amount of such refund
(together with any interest paid or credited thereon after taxes applicable
thereto). If, after the receipt by Employee of an amount advanced by Employer
pursuant to Section 9.5(c), a determination is made that Employee shall not
be entitled to any refund with respect to such claim and Employer does not
notify Employee in writing of its intent to contest such denial of refund
prior to the expiration of thirty (30) days after such determination, then
such advance shall be forgiven and shall not be required to be repaid and the
amount of such advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
10. GENERAL PROVISIONS
10.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. Employee acknowledges
that the injury that would be suffered by Employer as a result of a breach of
the provisions of this Agreement (including any provision of SECTIONS 6 and 7)
would be irreparable and that an award of monetary damages to Employer for such
a breach would be an inadequate remedy. Consequently, Employer will have the
right, in addition to any other rights it may have, to obtain injunctive relief
to restrain any breach or threatened breach or otherwise to specifically enforce
any provision of this Agreement, and Employer will not be obligated to post bond
or other security in seeking such relief. Without limiting Employer's rights
under this SECTION 10 or any other remedies of Employer, if Employee breaches
any of the provisions of SECTION 6 or 7, Employer will have the right to cease
making any payments otherwise due to Employee under this Agreement.
10.2 COVENANTS OF SECTIONS 6 AND 7 ARE ESSENTIAL AND INDEPENDENT
COVENANTS; ADVICE OF COUNSEL. The covenants by Employee in SECTIONS 6 and 7 are
essential elements of this Agreement, and without Employee's agreement to comply
with such covenants, Employer would not have entered into this Agreement or
employed or continued the Employment of Employee. Employer and Employee have
independently consulted their respective counsel and have been advised in all
respects concerning the terms of this Agreement, including the reasonableness
and propriety of the above referenced covenants, with specific regard to the
nature of the business conducted by Employer. Employee further confirms that he
has been advised by counsel and/or tax professionals with respect to the income
tax effects of the terms of his employment, including, but not limited to,
potential "golden parachute" tax liability. Subject to the final execution and
delivery of this Agreement, Employer will reimburse Employee for all reasonable
legal and tax consulting fees (not to exceed Five Thousand Dollars ($5,000))
associated with Employee's review and negotiation of this Agreement.
Employee's covenants in SECTIONS 6 and 7 are independent covenants and
the existence of any claim by Employee against Employer under this Agreement or
otherwise will not excuse Employee's breach of any covenant in SECTION 6 or 7.
If Employee's Employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or appropriate
to enforce the covenants and agreements of Employee in SECTIONS 6 and 7.
10.3 REPRESENTATIONS AND WARRANTIES BY EMPLOYEE. Employee represents
and warrants to Employer that the execution and delivery by Employee of this
Agreement do not, and the
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performance by Employee of his obligations hereunder will not, with or
without the giving of notice or the passage of time, or both: (a) violate any
judgment, writ, injunction, or order of any court, arbitrator, or
governmental agency applicable to Employee; or (b) conflict with, result in
the breach of any provisions of or the termination of, or constitute a
default under, any agreement to which Employee is a party or by which
Employee is or may be bound.
10.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of
Employer hereunder, including its obligation to pay the compensation provided
for herein, are contingent upon Employee's performance of Employee's
obligations hereunder.
10.5 WAIVER. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any
delay by either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege, and no
single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or
the exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this
Agreement can be discharged by one party, in whole or in part, by a waiver or
renunciation of the claim or right unless in writing signed by the other
party; (b) no waiver that may be given by a party will be applicable except
in the specific instance for which it is given; and (c) no notice to or
demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
10.6 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement
shall inure to the benefit of, and shall be binding upon, the parties hereto
and their respective successors, assigns, heirs, and legal representatives,
including any entity with which Employer may merge or consolidate or to which
all or substantially all of its assets may be transferred. The duties and
covenants of Employee under this Agreement, being personal, may not be
delegated.
10.7 NOTICES. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of receipt),
provided that a copy is mailed by registered mail, return receipt requested
or (c) when received by the addressee, if sent by a nationally recognized
overnight delivery service (receipt requested), in each case to the
appropriate addresses and facsimile numbers set forth below (or to such other
addresses and facsimile numbers as a party may designate by notice to the
other parties):
If to Employer: DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92122
ATTENTION: Chairman of the Board and
Chief Financial Officer
Facsimile No.: (619) 452-2789
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With a copy to: Baker & McKenzie
101 West Broadway, Twelfth Floor
San Diego, California 92101-3890
ATTENTION: John J. Hentrich, Esq.
Facsimile No.: (619) 236-0429
If to Employee: Larry D. Grandia
1934 S. 850 E.
Bountiful, UT 84010
10.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral or written, between the
parties hereto with respect to the subject matter hereof, including the
Consulting Agreement. This Agreement may not be amended orally, but only by an
agreement in writing signed by the parties hereto.
10.9 GOVERNING LAW. This Agreement will be governed by the laws of
the State of California without regard to conflicts of laws principles.
10.10 BINDING ARBITRATION. Subject to the arbitration provisions set
forth below, the parties hereto agree that all disputes arising out of or
related to the terms and conditions of this Agreement or to the performance,
breach or termination thereof, shall be submitted to binding arbitration
pursuant to the Expedited Procedures of the Commercial Arbitration Rules (the
"RULES") of the American Arbitration Association (the "AAA"). The arbitration
will take place in San Diego, California, at the offices of the AAA. The
dispute will be resolved by a single arbitrator appointed by the AAA in
accordance with the list procedure described in Paragraph 13 of the Rules,
except that the AAA will transmit the list within ten (10) Business Days of
the filing of the demand for arbitration, and the parties thereto will have
five (5) Business Days to return the list to the AAA with their objections
and preferences. Discovery will be limited to no more than seven (7)
depositions by each side and written document requests, requesting the
production of specific documents. The parties to the dispute will voluntarily
produce any and all documents that they intend to use at the hearing before
the close of discovery, subject to supplementation for purposes of rebuttal
or good cause shown. The period for taking discovery will be sixty (60)
Business Days, commencing upon the day that the answer is due under the
Rules. The arbitrator will hold a pre-hearing conference within three (3)
Business Days of the close of discovery and will schedule the hearing within
thirty (30) Business Days of the close of discovery. After the arbitrator is
selected, the arbitrator will have sole jurisdiction to hear such
applications, except that any measure ordered by the arbitrator may be
immediately and specifically enforced by a court otherwise having
jurisdiction over the parties. All fees and costs will be allocated to the
parties to the arbitration as determined by the arbitrator. Each party will
pay its own fees and costs associated with the arbitration and each party
will pay one-half the estimated arbitrator's fees up front and if either
party fails to do so a default will be entered against such party solely with
respect to such fees. Any determination of the arbitrator shall be final and
binding on the parties hereto. Nothing in this Agreement will prevent a party
hereto from applying to a court that would otherwise have jurisdiction for
provisional or interim injunctive or other equitable measures.
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10.11 SECTION HEADINGS, CONSTRUCTION. The section headings in this
Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to "section" or "sections"
refer to the corresponding section or sections of this Agreement unless
otherwise specified. All words used in this Agreement will be construed to be
of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words
or terms.
10.12 SEVERABILITY. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any
provision of this Agreement held invalid or unenforceable only in part or
degree will remain in full force and effect to the extent not held invalid or
unenforceable.
10.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the date first above written.
DAOU SYSTEMS, INC. EMPLOYEE:
By: /s/ Georges J. Daou By: /s/ Larry D. Grandia
- ---------------------------------- ----------------------------------
Georges J. Daou, Larry D. Grandia
Chairman of the Board and
Chief Executive Officer
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ATTACHMENT A
INCENTIVE COMPENSATION PLAN
16
<PAGE>
ATTACHMENT B
EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT
17
<PAGE>
ATTACHMENT C
HOUSING AND RELOCATION BENEFITS
Employee will be entitled to the following housing and relocation benefits:
1. In the event that, during the Employment Period, Employee elects to
relocate his personal residence in Salt Lake City, Utah (the "UTAH
RESIDENCE") to San Diego, California, Employee shall provide written notice
of such election to Employer. Within 15 days of the date of such written
notice, Employee shall obtain from three (3) licensed real estate appraisers
in the Salt lake City area three (3) separate appraisals of the fair market
value of the Utah Residence (collectively, the "APPRAISALS"). To the extent
that (i) Employee is unable to sell the Utah Residence within 90 days after
the conclusion of such 15-day period and (ii) Employee subsequently sells the
Utah Residence during the Employment Period and relocates to San Diego,
California to continue his employment with Employer, Employer agrees to pay
to Employee the amount, if any, by which the average value of the Appraisals
exceeds the actual sales price of the Utah Residence.
2. Employer will reimburse Employee for standard closing costs relating
to Employee's sale of the Utah Residence as set forth above in item 1.
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EXHIBIT 10.2
$8,000,000.00
LOAN AND SECURITY AGREEMENT
by and between
DAOU SYSTEMS, INC.
DAOU--SENTIENT, INC.
DAOU--RHI, INC.
DAOU--TMI, INC.
DAOU--SYNEXUS, INC.
("Borrower")
and
HCFP FUNDING, INC.
("Lender")
June 29, 1999
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of
June 29, 1999, by and between DAOU SYSTEMS, INC., DAOU-SENTIENT, INC.,
DAOU-RHI, INC., DAOU-TMI, INC., and DAOU-SYNEXUS, INC., each of which is a
Delaware corporation (collectively, "Borrower"), and HCFP FUNDING, INC., a
Delaware corporation ("Lender").
RECITALS
A. Borrower desires to establish certain financing arrangements
with and borrow funds from Lender, and Lender is willing to establish such
arrangements for and make loans and extensions of credit to Borrower, on the
terms and conditions set forth below.
B. The parties desire to define the terms and conditions of their
relationship and to reduce their agreements to writing.
NOW, THEREFORE, in consideration of the promises and covenants
contained in this Agreement, and for other consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, unless otherwise specified, all references
to "Sections" shall be deemed to refer to Sections of this Agreement, and the
following terms shall have the meanings set forth below:
SECTION 1.1. ACCOUNT. "Account" means any right to payment for goods
sold or leased or services rendered, whether or not evidenced by an
instrument or chattel paper, and whether or not earned by performance.
SECTION 1.2. ACCOUNT DEBTOR. "Account Debtor" means any Person
obligated on any Account of Borrower.
<PAGE>
SECTION 1.3. AFFILIATE. "Affiliate" means, with respect to a
specified Person, any Person directly or indirectly controlling, controlled
by, or under common control with the specified Person, including without
limitation their stockholders and any Affiliates thereof. A Person shall be
deemed to control a corporation or other entity if the Person possesses,
directly or indirectly, the power to direct or cause the direction of the
management and business of the corporation or other entity, whether through
the ownership of voting securities, by contract, or otherwise.
SECTION 1.4. AGREEMENT. "Agreement" means this Loan and Security
Agreement, as it may be amended or supplemented from time to time.
SECTION 1.5. BASE RATE. "Base Rate" means a rate of interest equal
to one percent (1.0%) above the "Prime Rate of Interest".
SECTION 1.6. BORROWED MONEY. "Borrowed Money" means any obligation
to repay money, any indebtedness evidenced by notes, bonds, debentures or
similar obligations, any obligation under a conditional sale or other title
retention agreement and the net aggregate rentals under any lease which under
GAAP would be capitalized on the books of Borrower or which is the
substantial equivalent of the financing of the property so leased.
SECTION 1.7. BORROWER. "Borrower" has the meaning set forth in the
Preamble.
SECTION 1.8. BORROWING BASE. "Borrowing Base" has the meaning set
forth in Section 2.1(d).
SECTION 1.9. BUSINESS DAY. "Business Day" means any day on which
financial institutions are open for business in the State of Maryland,
excluding Saturdays and Sundays.
SECTION 1.10. CHANGE OF CONTROL. "Change of Control" means that,
during any period, individuals who at the beginning of the period constituted
the board of directors of Borrower (together with any new directors whose
election by that board of directors or whose nomination for election by the
stockholders of Borrower was approved by two-thirds of the directors of
Borrower then still in office who were either directors at the beginning of
the period or whose election or nomination for election was previously
approved) cease for any reason to constitute a majority of the board of
directors of Borrower then in office.
SECTION 1.11. CLOSING; CLOSING DATE. "Closing" and "Closing Date"
have the meanings set forth in Section 5.3.
SECTION 1.12. COLLATERAL. "Collateral" has the meaning set forth
in Section 3.1.
SECTION 1.13. COMMITMENT FEE. "Commitment Fee" has the meaning set
forth in Section 2.4(a).
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SECTION 1.14. CONCENTRATION ACCOUNT. "Concentration Account" has
the meaning set forth in Section 2.3.
SECTION 1.15. CONTROLLED GROUP. "Controlled Group" means a
"controlled group" within the meaning of Section 4001(b) of ERISA.
SECTION 1.16. DEFAULT RATE. "Default Rate" means a rate per annum
equal to four percent (4%) above the then applicable Base Rate.
SECTION 1.17. ERISA. "ERISA" has the meaning set forth in
Section 4.12.
SECTION 1.18. EVENT OF DEFAULT. "Event of Default" and "Events of
Default" have the meanings set forth in Section 8.1.
SECTION 1.19. GAAP. "GAAP" means generally accepted accounting
principles applied in a consistent manner.
SECTION 1.20. GOVERNMENTAL AUTHORITY. "Governmental Authority"
means and includes any federal, state, District of Columbia, county,
municipal, or other government and any department, commission, board, bureau,
agency or instrumentality thereof, whether domestic or foreign.
SECTION 1.21. HAZARDOUS MATERIAL. "Hazardous Material" means any
substances defined or designated as hazardous or toxic waste, hazardous or
toxic material, hazardous or toxic substance, or similar term, by any
environmental statute, rule or regulation or any Governmental Authority
applicable to Borrower or its business, operations or assets.
SECTION 1.22. HIGHEST LAWFUL RATE. "Highest Lawful Rate" means the
maximum lawful rate of interest referred to in Section 2.7 that may accrue
pursuant to this Agreement.
SECTION 1.23. LENDER. "Lender" means HCFP Funding, Inc., a
Delaware corporation.
SECTION 1.24. LOAN. "Loan" has the meaning set forth in
Section 2.1(a).
SECTION 1.25. LOAN DOCUMENTS. "Loan Documents" means and includes
this Agreement, the Note and each and every other document now or hereafter
delivered in connection with this Agreement, as any of them may be amended,
modified, or supplemented from time to time.
SECTION 1.26. LOAN MANAGEMENT FEE. "Loan Management Fee" has the
meaning set forth in Section 2.4(c).
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<PAGE>
SECTION 1.27. LOCKBOX. "Lockbox" has the meaning set forth in
Section 2.3.
SECTION 1.28. LOCKBOX ACCOUNT. "Lockbox Account" means an account
maintained by Borrower at the Lockbox Bank into which all collections of
Accounts are paid directly.
SECTION 1.29. LOCKBOX BANK. "Lockbox Bank" has the meaning set
forth in Section 2.3.
SECTION 1.30. MATERIAL ADVERSE EFFECT. "Material Adverse Effect"
shall mean any event or condition which, alone or when taken with other
events or conditions occurring or existing concurrently with such event or
condition (i) has or is reasonably expected to have a material adverse effect
on the business, operations, condition (financial or otherwise), assets,
liabilities, prospects, or properties of Borrower; (ii) has or is reasonably
expected to have any material adverse effect on the validity or
enforceability of this Agreement or any Loan Document; (iii) materially
impairs or is reasonably expected to materially impair the ability of
Borrower to pay and perform the Obligations; (iv) materially impairs or is
reasonably expected to materially impair the ability of Lender to enforce its
rights and remedies under this Agreement or any of the Loan Documents; or
(v) has or is reasonably expected to have any material adverse effect on the
Collateral, the liens of Lender in the Collateral or the priority of such
liens.
SECTION 1.31. MAXIMUM LOAN AMOUNT. "Maximum Loan Amount" has the
meaning set forth in Section 2.1(a).
SECTION 1.32. NOTE. "Note" has the meaning set forth in
Section 2.1(c).
SECTION 1.33. OBLIGATIONS. "Obligations" has the meaning set forth
in Section 3.1.
SECTION 1.34. PERMITTED LIENS. "Permitted Liens" means: (i) liens
for taxes not delinquent, or which are being contested in good faith and by
appropriate proceedings which suspend the collection thereof and in respect
of which adequate reserves have been made (provided that such proceedings do
not, in Lender's reasonable discretion, involve any substantial risk of the
sale, loss or forfeiture of such property or assets or any interest
therein), provided that payroll taxes shall be paid when due; (ii) deposits
or pledges to secure obligations under workmen's compensation, social
security or similar laws, or under unemployment insurance; (iii) deposits or
pledges to secure bids, tenders, contracts (other than contracts for the
payment of money), leases, statutory obligations, surety and appeal bonds and
other obligations of like nature arising in the ordinary course of business;
(iv) mechanic's, workmen's, materialmen's or other like liens arising in the
ordinary course of business with respect to obligations which are not due, or
which are being contested in good faith by appropriate proceedings which
suspend the collection thereof and in respect of which adequate reserves have
been made (provided that such proceedings do not, in Lender's reasonable
discretion, involve any substantial risk of the sale, loss or forfeiture of
such property or assets or any interest therein); (v) liens and encumbrances
in favor of Lender; (vi) liens granted in connection with the lease or
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<PAGE>
purchase of property or assets financed by borrowings permitted by Section 7.1
(provided, however, that no such borrowing permitted by Section 7.1 may be
secured by liens on any of the Collateral); (vii) judgment liens not
affecting the Collateral to the extent the entry of such judgments does not
constitute an Event of Default under the terms of this Agreement;
(viii) statutory landlord's liens not affecting the Collateral under leases
to which the Borrower or any of its Subsidiaries is a party; (ix) zoning
restrictions, easements, rights of way, licenses and restrictions on the use
of real property or minor irregularities in title thereto which do not
materially impair the use or value of any such real property; (x) liens not
affecting the Collateral securing obligations under capital leases to the
extent such capital leases are permitted by the provisions of this Agreement;
and (xi) liens set forth on SCHEDULE 1.34 and refinancings, replacements and
renewals thereof.
SECTION 1.35. PERSON. "Person" means an individual, partnership,
corporation, trust, joint venture, joint stock company, limited liability
company, association, unincorporated organization, Governmental Authority, or
any other entity.
SECTION 1.36. PLAN. "Plan" has the meaning set forth in Section 4.12.
SECTION 1.37. PREMISES. "Premises" has the meaning set forth in
Section 4.14.
SECTION 1.38. PRIME RATE OF INTEREST. "Prime Rate of Interest"
means that rate of interest designated as such by Fleet National Bank of
Connecticut, N.A., or any successor thereto, as the same may from time to
time fluctuate.
SECTION 1.39. PROHIBITED TRANSACTION. "Prohibited Transaction"
means a "prohibited transaction" within the meaning of Section 406 of ERISA
or Section 4975(c)(1) of the Internal Revenue Code.
SECTION 1.40. QUALIFIED ACCOUNT. "Qualified Account" means an
Account of Borrower generated in the ordinary course of Borrower's business
from the sale of goods or rendition of Services which Lender, in its sole
credit judgment, deems to be a Qualified Account. Without limiting the
generality of the foregoing, no Account shall be a Qualified Account if:
(a) the Account remains unpaid more than one hundred fifty (150) days past
the claim or invoice date; (b) the Account is subject to any defense,
set-off, counterclaim, deduction, discount, credit, chargeback, freight
claim, allowance, or adjustment of any kind; (c) any part of any goods the
sale of which has given rise to the Account has been returned, rejected,
lost, or damaged; (d) if the Account arises from the sale of goods by
Borrower, the sale was not an absolute sale, or the sale was made on
consignment or on approval or on a sale-or-return basis, or the sale was made
subject to any other repurchase or return agreement, or the goods have not
been shipped to the Account Debtor or its designee; (e) if the Account arises
from the performance of Services, the Services have not been actually been
performed or the Services were undertaken in violation of any law; (f) the
Account is subject to a lien other than a Permitted Lien; (g) Borrower knows
or should have known of the bankruptcy, receivership, reorganization, or
insolvency of the Account
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Debtor; (h) the Account is evidenced by chattel paper or an instrument of any
kind, or has been reduced to judgment; (i) the Account is an Account of an
Account Debtor having its principal place of business or executive office
outside the United States; (j) the Account Debtor is an Affiliate or
Subsidiary of Borrower; (k) fifty percent (50%) or more of the aggregate
unpaid Accounts from any single Account Debtor are not deemed Qualified
Accounts under this Agreement; (l) any covenant, representation or warranty
contained in the Loan Documents with respect to such Account has been
breached; or (m) the Account fails to meet such other specifications and
requirements which may from time to time be established by Lender. At no time
shall work-in-progress or progress payments be included as Qualified Accounts.
SECTION 1.41. REPORTABLE EVENT. "Reportable Event" means a
"reportable event" as defined in Section 4043(b) of ERISA.
SECTION 1.42. REVOLVING CREDIT LOAN. "Revolving Credit Loan" has
the meaning set forth in Section 2.1(b).
SECTION 1.43. SERVICES. "Services" means the providing of
integrated information technology solutions and services to the healthcare
industry.
SECTION 1.44. TERM. "Term" has the meaning set forth in Section 2.8.
ARTICLE II
LOAN
SECTION 2.1. TERMS.
(a) The maximum aggregate principal amount of credit
extended by Lender to Borrower under this Agreement (the "Loan") that will be
outstanding at any time is Eight Million and No/100 Dollars ($8,000,000.00)
(the "Maximum Loan Amount").
(b) The Loan shall be in the nature of a revolving line of
credit, and shall include sums advanced and other credit extended by Lender
to or for the benefit of Borrower from time to time under this Article II
(each a "Revolving Credit Loan") up to the Maximum Loan Amount depending upon
the availability in the Borrowing Base, the requests of Borrower pursuant to
the terms and conditions of Section 2.2, and on such other basis as Lender
may reasonably determine. The outstanding principal balance of the Loan may
fluctuate from time to time, to be reduced by repayments made by Borrower
(which may be made without penalty or premium), and to be increased by future
Revolving Credit Loans, advances and other extensions
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of credit to or for the benefit of Borrower, and shall be due and payable in
full upon the expiration of the Term. For purposes of this Agreement, any
determination as to whether there is availability within the Borrowing Base
for advances or extensions of credit shall be made by Lender in its
reasonable discretion and is final and binding upon Borrower absent manifest
error.
(c) At Closing, Borrower shall execute and deliver to
Lender a promissory note evidencing Borrower's unconditional obligation to
repay Lender for Revolving Credit Loans, advances, and other extensions of
credit made under the Loan, in the form of EXHIBIT A to this Agreement (as
amended, modified, restated or replaced from time to time, the "Note"), dated
the date of this Agreement, payable to the order of Lender in accordance with
the terms thereof. The Note shall bear interest on the outstanding principal
balance of the Note from the date of the Note until repaid, with interest
payable monthly in arrears on the first Business Day of each month, at a rate
per annum (on the basis of the actual number of days elapsed over a year of
360 days) equal to the Base Rate, provided that after the occurrence and
during the continuance of a payment default (as described in Section 8.1(a)
below), such rate shall be equal to the Default Rate. Each Revolving Credit
Loan, advance and other extension of credit shall be deemed evidenced by the
Note, which is deemed incorporated into and made a part of this Agreement by
this reference.
(d) Subject to the terms and conditions of this Agreement,
advances under the Loan shall be made against a borrowing base equal to
eighty percent (80%) of Qualified Accounts due and owing from any Account
Debtor (the "Borrowing Base").
SECTION 2.2. LOAN ADMINISTRATION. Borrowings under the Loan shall
be as follows:
(a) A request for a Revolving Credit Loan shall be made, or
shall be deemed to be made, in the following manner: (i) Borrower may give
Lender notice of its intention to borrow, in which notice Borrower shall
specify the amount of the proposed borrowing and the proposed borrowing date,
not later than 2:00 p.m. Eastern time two (2) Business Days before the
proposed borrowing date; PROVIDED, HOWEVER, that no such request may be made
at a time when there exists an Event of Default; and (ii) the becoming due of
any amount required to be paid under this Agreement, whether as interest or
for any other Obligation, shall be deemed irrevocably to be a request for a
Revolving Credit Loan on the day after the due date in the amount required to
pay such interest or other Obligation if not paid on the due date.
(b) Borrower hereby irrevocably authorizes Lender to
disburse the proceeds of each Revolving Credit Loan requested, or deemed to
be requested, as follows: (i) the proceeds of each Revolving Credit Loan
requested under subsection 2.2(a)(i) shall be disbursed by Lender by wire
transfer to such bank account as may be agreed upon by Borrower and Lender
from time to time or elsewhere if pursuant to written direction from
Borrower; and (ii) the proceeds of each Revolving Credit Loan requested under
subsection 2.2(a)(ii) shall be disbursed by Lender by way of direct payment
of the relevant interest or other Obligation.
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(c) All Revolving Credit Loans, advances and other
extensions of credit to or for the benefit of Borrower shall constitute one
general Obligation of Borrower, and shall be secured by Lender's lien upon
all of the Collateral.
(d) Lender shall enter all Revolving Credit Loans as debits
to a loan account in the name of Borrower and shall also record in said loan
account all payments made by Borrower on any Obligations and all proceeds of
Collateral which are indefeasibly paid to Lender, and may record therein, in
accordance with customary accounting practice, other debits and credits,
including interest and all charges and expenses properly chargeable to
Borrower. All collections into the Concentration Account pursuant to
Section 2.3 shall be applied first to fees, costs and expenses due and owing
under the Loan Documents, then to interest due and owing under the Loan
Documents, and then to principal outstanding with respect to Revolving Credit
Loans.
(e) Lender will account to Borrower monthly with a
statement of Revolving Credit Loans, charges and payments made pursuant to
this Agreement, and such accounting rendered by Lender shall be deemed final,
binding and conclusive upon Borrower, absent manifest error, unless Lender is
notified by Borrower in writing to the contrary within thirty (30) days of
the date each accounting is mailed to Borrower. Such notice shall be deemed
an objection to those items specifically objected to in the notice.
SECTION 2.3. COLLECTIONS, DISBURSEMENTS, BORROWING AVAILABILITY,
AND LOCKBOX ACCOUNT. Borrower shall maintain a lockbox account (the
"Lockbox") with First Union National Bank (the "Lockbox Bank"), subject to
the provisions of this Agreement, and shall execute with the Lockbox Bank a
Lockbox Agreement in the form attached as EXHIBIT B, and such other
agreements related to the Lockbox Agreement as Lender may require. Borrower
shall ensure that all collections of Accounts are paid directly from Account
Debtors into the Lockbox, and that all funds paid into the Lockbox are
immediately transferred into a depository account maintained by Lender at
Bank One Arizona, N.A. or U.S. Bank N.A., as determined by Lender in its sole
discretion and communicated to Borrower (the "Concentration Account"). Lender
shall apply, on a daily basis, all funds transferred into the Concentration
Account pursuant to this Section 2.3 to reduce the outstanding indebtedness
under the Loan (in accordance with Section 2.2(d)), and all future Revolving
Credit Loans, advances and other extensions of credit to be made by Lender
under the conditions set forth in this Article II. To the extent that any
collections of Accounts or proceeds of other Collateral are not sent directly
to the Lockbox but are received by Borrower, such collections shall be held
in trust for the benefit of Lender and immediately remitted, in the form
received, to the Lockbox Bank for transfer to the Concentration Account
immediately upon receipt by Borrower. Borrower acknowledges and agrees that
its compliance with the terms of this Section 2.3 is essential, and that upon
its failure to comply with any such terms Lender shall be entitled to assess
a non-compliance fee which shall operate to increase the Base Rate by two
percent (2%) per annum during any period of non-compliance; provided,
however, that Borrower shall be deemed in compliance with this Section 2.3
until the collections of Accounts not delivered directly either to the
Lockbox or to Lender exceed $100,000.00 in the aggregate during
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any calendar quarter. Lender shall be entitled to assess such fee whether or
not an Event of Default is declared or otherwise occurs. All funds
transferred from the Concentration Account for application to Borrower's
indebtedness to Lender shall be applied to reduce the Loan balance, but for
purposes of calculating interest shall be subject to a five Business Day
clearance period. If as the result of collections of Accounts pursuant to the
terms and conditions of this Section 2.3 a credit balance exists with respect
to the Concentration Account, such credit balance shall not accrue interest
in favor of Borrower, but shall be available to Borrower at any time or times
for so long as no Event of Default exists.
SECTION 2.4. FEES.
(a) Upon execution of this Agreement, Borrower shall
unconditionally pay to Lender a commitment fee equal to one percent (1.0%) of
the Maximum Loan Amount (the "Commitment Fee").
(b) For so long as the Loan is available to Borrower,
Borrower unconditionally shall pay to Lender a monthly loan management fee
(the "Loan Management Fee") equal to one-twelfth of one percent (0.083%) of
the average amount of the outstanding principal balance of the Revolving
Credit Loans during the preceding month. The Loan Management Fee shall be
payable monthly in arrears on the first day of each successive calendar month.
(c) Borrower shall pay to Lender all out-of-pocket audit
and appraisal fees in connection with audits and appraisals of Borrower's
books and records and such other matters as Lender shall deem appropriate,
which shall be due and payable on the first Business Day of the month
following the date of issuance by Lender of a request for payment thereof to
Borrower. Notwithstanding the foregoing, so long as no Event of Default has
occurred and is continuing, such reimbursable audits and appraisals shall be
limited to two per twelve-month period.
(e) Borrower shall pay to Lender, on demand, any and all
fees, costs or expenses which Lender pays to a bank or other similar
institution arising out of or in connection with (i) the forwarding to
Borrower or any other Person on behalf of Borrower, by Lender, of proceeds of
Revolving Credit Loans made by Lender to Borrower pursuant to this Agreement,
and (ii) the depositing for collection by Lender of any check or item of
payment received or delivered to Lender on account of Obligations.
SECTION 2.5. PAYMENTS. Principal payable on account of Revolving
Credit Loans shall be payable by Borrower to Lender immediately upon the
earliest of (i) the receipt by Borrower or Lender of any proceeds of any of
the Collateral, to the extent of such proceeds, (ii) the occurrence of an
Event of Default if the Revolving Credit Loan and the maturity of the payment
of the Obligations are accelerated by Lender, or (iii) the termination of
this Agreement pursuant
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to Section 2.8 of this Agreement; PROVIDED, HOWEVER, that if any Revolving
Credit Loan made by Lender in excess of the Borrowing Base shall exist at any
time, Borrower shall, immediately upon demand, repay such overadvance.
Interest accrued on the Revolving Credit Loans shall be due on the earliest
of (i) the first Business Day of each month (for the immediately preceding
month), computed on the last calendar day of the preceding month, (ii) the
occurrence of an Event of Default if the Revolving Credit Loan and the
maturity of the payment of the Obligations are accelerated by Lender, or
(iii) the termination of this Agreement pursuant to Section 2.8. Except to
the extent otherwise set forth in this Agreement, all payments of principal
and of interest on the Loan, all other charges and any other obligations of
Borrower under this Agreement, shall be made to Lender to the Concentration
Account, in immediately available funds.
SECTION 2.6. USE OF PROCEEDS. The proceeds of Lender's advances
under the Loan shall be used solely for working capital and for other costs
of Borrower arising in the ordinary course of Borrower's business.
SECTION 2.7. INTEREST RATE LIMITATION. The parties intend to
conform strictly to the applicable usury laws in effect from time to time
during the term of the Loan. Accordingly, if any transaction contemplated by
this Agreement would be usurious under such laws, then notwithstanding any
other provision of this Agreement: (i) the aggregate of all interest that is
contracted for, charged, or received under this Agreement or under any other
Loan Document shall not exceed the maximum amount of interest allowed by
applicable law (the "Highest Lawful Rate"), and any excess shall be promptly
credited to Borrower by Lender (or, to the extent that such consideration
shall have been paid, such excess shall be promptly refunded to Borrower by
Lender); (ii) neither Borrower nor any other Person now or hereafter liable
under this Agreement shall be obligated to pay the amount of such interest to
the extent that it is in excess of the Highest Lawful Rate; and (iii) the
effective rate of interest shall be reduced to the Highest Lawful Rate. All
sums paid, or agreed to be paid, to Lender for the use, forbearance, and
detention of the debt of Borrower to Lender shall, to the extent permitted by
applicable law, be allocated throughout the full term of the Note until
payment is made in full so that the actual rate of interest does not exceed
the Highest Lawful Rate in effect at any particular time during the full term
thereof. If at any time the rate of interest under the Note exceeds the
Highest Lawful Rate, the rate of interest to accrue pursuant to this
Agreement shall be limited, notwithstanding anything to the contrary in this
Agreement, to the Highest Lawful Rate, but any subsequent reductions in the
Base Rate shall not reduce the interest to accrue pursuant to this Agreement
below the Highest Lawful Rate until the total amount of interest accrued
equals the amount of interest that would have accrued if a varying rate per
annum equal to the interest rate under the Note had at all times been in
effect.
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SECTION 2.8. TERM.
(a) Subject to Lender's right to cease making Revolving Credit
Loans to Borrower upon or after any Event of Default, this Agreement shall be in
effect for a period of two (2) years from the Closing Date, unless terminated as
provided in this Section 2.8 (the "Term"), and this Agreement shall be renewed
for one-year periods thereafter upon the mutual written agreement of the
parties.
(b) Notwithstanding anything in this Agreement to the
contrary, Lender may terminate this Agreement without notice upon or after the
occurrence of an Event of Default.
(c) Upon at least thirty (30) days prior written notice to
Lender (the "Termination Notice Period"), Borrower may terminate this Agreement
before the second annual anniversary of the Closing Date, provided that, at the
effective date of such termination, Borrower shall pay to Lender (in addition to
the then outstanding principal, accrued interest and other Obligations owing
under the terms of this Agreement and any other Loan Documents) as liquidated
damages for the loss of bargain and not as a penalty, an amount equal to (i)
three percent (3%) of the Maximum Loan Amount if the effective date of such
termination by Borrower is on or before the first anniversary of the Closing
Date, and (ii) one percent (1%) of the Maximum Loan Amount if the effective date
of such termination by Borrower is after the first anniversary of the Closing
Date and before the second anniversary of the Closing Date.
(d) All of the Obligations shall be immediately due and
payable upon the termination date stated in any notice of termination of this
Agreement (the "Termination Date"); provided that, notwithstanding anything in
Section 2.8(c) to the contrary, the Termination Date shall be effective no
earlier than the first Business Day of the month following the expiration of the
Termination Notice Period. All undertakings, agreements, covenants, warranties,
and representations of Borrower contained in the Loan Documents shall survive
any such termination and Lender shall retain its liens in the Collateral and all
of its rights and remedies under the Loan Documents notwithstanding such
termination until Borrower has paid the Obligations to Lender, in full, in
immediately available funds.
(e) Notwithstanding any provision of this Agreement which
makes reference to the continuance of an Event of Default, nothing in this
Agreement shall be construed to permit Borrower to cure an Event of Default
following the lapse of the applicable cure period, and Borrower shall have no
such right in any instance unless specifically granted in writing by Lender.
SECTION 2.9. JOINT AND SEVERAL LIABILITY; BINDING OBLIGATIONS. Each
entity comprising Borrower and executing this Agreement on behalf of Borrower
shall be jointly and severally liable for all of the Obligations. In addition,
each entity comprising Borrower hereby
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acknowledges and agrees that all of the representations, warranties, covenants,
obligations, conditions, agreements and other terms contained in this Agreement
shall be applicable to and shall be binding upon each individual entity
comprising Borrower, and shall be binding upon all such entities when taken
together.
ARTICLE III
COLLATERAL
SECTION 3.1. GENERALLY. As security for the payment of all liabilities
of Borrower to Lender, including without limitation: (i) indebtedness evidenced
under the Note, repayment of Revolving Credit Loans, advances and other
extensions of credit, all fees and charges owing by Borrower, and all other
liabilities and obligations of every kind or nature whatsoever of Borrower to
Lender, whether now existing or hereafter incurred, joint or several, matured or
unmatured, direct or indirect, primary or secondary, related or unrelated, due
or to become due, including but not limited to any extensions, modifications,
substitutions, increases and renewals thereof, (ii) the payment of all amounts
advanced by Lender to preserve, protect, defend, and enforce its rights under
this Agreement and in the following property in accordance with the terms of
this Agreement, and (iii) the payment of all expenses incurred by Lender in
connection therewith (collectively, the "Obligations"), Borrower hereby assigns
and grants to Lender a continuing first priority lien on and security interest
in, upon, and to the following property (the "Collateral"):
(a) All of Borrower's now-owned and hereafter acquired or
arising Accounts, accounts receivable and rights to payment of every kind and
description, and all of Borrower's contract rights, chattel paper, documents and
instruments with respect thereto, and all of Borrower's rights, remedies,
security and liens, in, to and in respect of the Accounts, including, without
limitation, rights of stoppage in transit, replevin, repossession and
reclamation and other rights and remedies of an unpaid vendor, lienor or secured
party, guaranties or other contracts of suretyship with respect to the Accounts,
deposits or other security for the obligation of any Account Debtor, and credit
and other insurance;
(b) All moneys, securities and other property and the proceeds
thereof, now or hereafter held or received by, in transit to, in possession of,
or under the control of Lender or a bailee or Affiliate of Lender, from or for
Borrower, whether for safekeeping, pledge, custody, transmission, collection or
otherwise, and all of Borrower's deposits (general or special), balances, sums
and credits with Lender at any time existing;
(c) All of Borrower's right, title and interest in, to and in
respect of all goods relating to, or which by sale have resulted in, Accounts,
including, without limitation, all goods described in invoices or other
documents or instruments with respect to, or otherwise representing or
evidencing, any Account, and all returned, reclaimed or repossessed goods;
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(d) All of Borrower's now owned or hereafter acquired deposit
accounts into which Accounts are deposited, including the Lockbox Account;
(e) All of Borrower's now owned and hereafter acquired or
arising general intangibles and other property of every kind and description
with respect to, evidencing or relating to its Accounts, accounts receivable and
other rights to payment, including, but not limited to, all existing and future
customer lists, choses in action, claims, books, records, ledger cards,
contracts, licenses, formulae, tax and other types of refunds, returned and
unearned insurance premiums, rights and claims under insurance policies, and
computer programs, information, software, records, and data, as the same relates
to the Accounts;
(f) All of Borrower's other general intangibles (including,
without limitation, any proceeds from insurance policies after payment of prior
interests), patents, unpatented inventions, trade secrets, copyrights, contract
rights, goodwill, literary rights, rights to performance, rights under licenses,
choses-in-action, claims, information contained in computer media (such as data
bases, source and object codes, and information therein), things in action,
trademarks and trademarks applied for (together with the goodwill associated
therewith) and derivatives thereof, trade names, including the right to make,
use, and vend goods utilizing any of the foregoing, and permits, licenses,
certifications, authorizations and approvals, and the rights of Borrower
thereunder, issued by any governmental, regulatory, or private authority,
agency, or entity whether now owned or hereafter acquired, together with all
cash and non-cash proceeds and products thereof;
(g) All of Borrower's now owned or hereafter acquired
inventory of every description which is held by Borrower for sale or lease or is
furnished by Borrower under any contract of service or is held by Borrower as
raw materials, work in process or materials used or consumed in a business,
wherever located, and as the same may now and hereafter from time to time be
constituted, together with all cash and non-cash proceeds and products thereof;
(h) All of Borrower's now owned or hereafter acquired
machinery, equipment, computer equipment, tools, tooling, furniture, fixtures,
goods, supplies, materials, work in process, whether now owned or hereafter
acquired, together with all additions, parts, fittings, accessories, special
tools, attachments, and accessions now and hereafter affixed thereto and/or used
in connection therewith, all replacements thereof and substitutions therefor,
and all cash and non-cash proceeds and products thereof; and
(i) The proceeds (including, without limitation, insurance
proceeds) of all of the foregoing.
SECTION 3.2. LIEN DOCUMENTS. At Closing and thereafter as Lender deems
necessary in its reasonable discretion, Borrower shall execute and deliver to
Lender, or have executed and delivered (all in form and substance satisfactory
to Lender in its sole discretion):
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(a) UCC-1 Financing Statements pursuant to the Uniform
Commercial Code in effect in the jurisdiction(s) in which Borrower operates,
which Lender may file in any jurisdiction where any Collateral is or may be
located and in any other jurisdiction that Lender deems appropriate; PROVIDED
that a carbon, photographic, or other reproduction or other copy of this
Agreement or of a financing statement is sufficient as and may be filed in lieu
of a financing statement; and
(b) Any other agreements, documents, instruments, and writings
deemed reasonably necessary by Lender or as Lender may otherwise request from
time to time in its reasonable discretion to evidence, perfect, or protect
Lender's lien and security interest in the Collateral required under this
Agreement.
SECTION 3.3. COLLATERAL ADMINISTRATION.
(a) All Collateral (except deposit accounts) will at all times
be kept by Borrower at its principal office(s) as set forth on SCHEDULE 4.15 and
shall not, without the prior written notice to Lender, be moved therefrom.
(b) Borrower shall keep accurate and complete records of its
Accounts and all payments and collections thereon and shall submit to Lender on
such periodic basis as Lender shall reasonably request a sales and collections
report for the preceding period, in form satisfactory to Lender. In addition, if
Accounts in an aggregate face amount in excess of $100,000.00 have become
ineligible because they fall within one of the specified categories of
ineligibility set forth in the definition of Qualified Accounts or otherwise,
Borrower shall notify Lender of such occurrence on the first Business Day
following such occurrence and the Borrowing Base shall thereupon be adjusted to
reflect such occurrence. If requested by Lender, upon an Event of Default,
Borrower shall execute and deliver to Lender formal written assignments of all
of its Accounts weekly or daily, which shall include all Accounts that have been
created since the date of the last assignment, together with copies of claims,
invoices or other information related thereto.
(c) Upon the occurrence and during the continuance of an Event
of Default, any of Lender's officers, employees or agents shall have the right,
at any time or times hereafter, in the name of Lender, or any designee of Lender
or Borrower, to verify the validity, amount or any other matter relating to any
Accounts by mail, telephone, telegraph or otherwise. Borrower shall cooperate
fully with Lender in an effort to facilitate and promptly conclude such
verification process.
(d) To expedite collection, Borrower shall endeavor in the
first instance to make collection of its Accounts for Lender. Lender retains the
right at all times after the occurrence and during the continuance of an Event
of Default to notify Account Debtors that Accounts have been assigned to Lender
and to collect Accounts directly in its own name and to charge the collection
costs and expenses, including attorneys' fees, to Borrower.
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SECTION 3.4. OTHER ACTIONS. In addition to the foregoing, Borrower
shall (i) upon Lender's request, provide prompt written notice to each Account
Debtor that Lender has been granted a first priority lien and security interest
in, upon and to all Accounts applicable to such Account Debtor and directs each
Account Debtor to make payments into the Lockbox, and hereby authorizes Lender,
upon Borrower's failure to send such notices within ten (10) days after the date
of this Agreement (or ten (10) days after the entity becomes an Account Debtor),
to send any and all similar notices to such Account Debtors; and (ii) shall do
anything further that may be lawfully required by Lender to secure Lender and
effectuate the intentions and objects of this Agreement, including but not
limited to the execution and delivery of lockbox agreements, continuation
statements, amendments to financing statements, and any other documents required
under this Agreement. At Lender's request, Borrower shall also immediately
deliver to Lender all items for which Lender must receive possession to obtain a
perfected security interest. Borrower shall, on Lender's demand, deliver to
Lender all notes, certificates, and documents of title, chattel paper, warehouse
receipts, instruments, and any other similar instruments constituting
Collateral.
SECTION 3.5. SEARCHES. Before Closing, and thereafter (as and when
determined by Lender in its sole discretion), Lender will perform the searches
described in clauses (a) and (b) below against Borrower (the results of which
are to be consistent with Borrower's representations and warranties under this
Agreement), all at Borrower's expense:
(a) Uniform Commercial Code searches with the Secretary of
State and local filing offices of each jurisdiction where Borrower maintains its
executive offices, a place of business, or assets;
(b) Judgment, federal tax lien and corporate and partnership
tax lien searches, in each jurisdiction searched under clause (a) above; and
In addition, prior to Closing, at Borrower's expense, Borrower shall
obtain and deliver to Lender good standing certificates showing Borrower to be
in good standing in its state of formation and in each other state in which it
is doing and currently intends to do business for which qualification is
required.
SECTION 3.6. POWER OF ATTORNEY. Each of the officers of Lender is
hereby irrevocably made, constituted and appointed the true and lawful attorney
for Borrower (without requiring any of them to act as such) with full power of
substitution to do the following: (i) endorse the name of Borrower upon any and
all checks, drafts, money orders, and other instruments for the payment of money
that are payable to Borrower and constitute collections on Borrower's Accounts;
(ii) execute in the name of Borrower any financing statements, schedules,
assignments, instruments, documents, and statements that Borrower is obligated
to give Lender under this Agreement; and (iii) do such other and further acts
and deeds in the name of Borrower that Lender may deem necessary or desirable to
enforce any Account or other Collateral or perfect Lender's security interest or
lien in any Collateral. In addition, if Borrower breaches its
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obligation to direct payments of the proceeds of the Collateral to the
Lockbox Account, Lender, as the irrevocably made, constituted and appointed
true and lawful attorney for Borrower pursuant to this paragraph, may, by the
signature or other act of any of Lender's officers (without requiring any of
them to do so), direct any federal, state or private payor or fiscal
intermediary to pay proceeds of the Collateral to Borrower by directing
payment to the Lockbox Account.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each entity comprising Borrower represents and warrants to Lender, and
shall be deemed to represent and warrant on each day on which any Obligations
shall be outstanding under this Agreement, that:
SECTION 4.1. SUBSIDIARIES. Except as set forth in SCHEDULE 4.1,
Borrower has no subsidiaries.
SECTION 4.2. ORGANIZATION AND GOOD STANDING. Borrower is a corporation
duly organized, validly existing, and in good standing under the laws of its
state of incorporation, is in good standing as a foreign corporation in each
jurisdiction in which the failure to do so would have a Material Adverse Effect
on its business as currently conducted, has the corporate power and authority to
own its assets and transact the business in which it is engaged, and has
obtained all certificates, licenses and qualifications required under all laws,
regulations, ordinances, or orders of public authorities necessary for the
ownership and operation of all of its properties and transaction of all of its
business.
SECTION 4.3. AUTHORITY. Borrower has full corporate power and authority
to enter into, execute, and deliver this Agreement and to perform its
obligations under this Agreement, to borrow the Loan, to execute and deliver the
Note, and to incur and perform the obligations provided for in the Loan
Documents, all of which have been duly authorized by all necessary corporate
action. No consent or approval of shareholders of, or lenders to, Borrower and
no consent, approval, filing or registration with any Governmental Authority is
required as a condition to the validity of the Loan Documents or the performance
by Borrower of its obligations under the Loan Documents.
SECTION 4.4. BINDING AGREEMENT. This Agreement and all other Loan
Documents constitute, and the Note, when issued and delivered pursuant to this
Agreement for value received, will constitute, the valid and legally binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms.
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SECTION 4.5. LITIGATION. Except as disclosed in SCHEDULE 4.5, there are
no actions, suits, proceedings or investigations pending or, to Borrower's
knowledge, threatened against Borrower before any court or arbitrator or before
or by any Governmental Authority which, in any one case or in the aggregate, if
determined adversely to the interests of Borrower, could have a Material Adverse
Effect. Borrower is not in default with respect to any order of any court,
arbitrator, or Governmental Authority applicable to Borrower or its properties.
SECTION 4.6. NO CONFLICTS. The execution and delivery by Borrower of
this Agreement and the other Loan Documents do not, and the performance of its
obligations under the Loan Documents will not, violate, conflict with,
constitute a default under, or result in the creation of a lien or encumbrance
upon the property of Borrower (other than for the benefit of Lender) under: (i)
any provision of Borrower's certificate of incorporation or bylaws, (ii) any
provision of any law, rule, or regulation applicable to Borrower, which default
or violation would have a Material Adverse Effect, or (iii) any of the
following: (A) any indenture or other agreement or instrument to which Borrower
is a party or by which Borrower or its property is bound; or (B) any judgment,
order or decree of any court, arbitration tribunal, or Governmental Authority
having jurisdiction over Borrower which is applicable to Borrower, which default
or violation would have a Material Adverse Effect.
SECTION 4.7. FINANCIAL CONDITION. The annual financial statements of
Borrower as of December 31, 1998 audited by Ernst & Young LLP and the unaudited
financial statements of Borrower as of March 31, certified by the chief
financial officer of Borrower, which have been delivered to Lender, fairly
present the financial condition in all material respects of Borrower and the
results of its operations and changes in financial condition as of the dates and
for the periods referred to, and have been prepared in accordance with GAAP.
There are no material unrealized or anticipated liabilities, direct or indirect,
fixed or contingent, of Borrower as of the dates of such financial statements
which are not reflected in such financial statements or in the notes to such
financial statements. There has been no change in the business, properties,
condition (financial or otherwise) or operations (present or prospective) of
Borrower since December 31, 1998 that is likely to have a Material Adverse
Effect. Borrower's fiscal year ends on December 31. The federal tax
identification number of each entity comprising Borrower is as described on
SCHEDULE 4.7.
SECTION 4.8. NO DEFAULT. Borrower is not in default under or with
respect to any obligation in any respect which is likely to have a Material
Adverse Effect. No Event of Default or event which, with the giving of notice or
lapse of time, or both, could become an Event of Default, has occurred and is
continuing.
SECTION 4.9. TITLE TO PROPERTIES. Borrower has good and
marketable title to its properties and assets, including the Collateral and
the properties and assets reflected in the financial statements described in
Section 4.7, subject to no lien, mortgage, pledge, encumbrance
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or charge of any kind, other than Permitted Liens. Borrower has not agreed or
consented to cause any of its properties or assets whether owned now or
hereafter acquired to be subject in the future (upon the happening of a
contingency or otherwise) to any lien, mortgage, pledge, encumbrance or charge
of any kind other than Permitted Liens.
SECTION 4.10. TAXES. Borrower has filed, or has obtained extensions for
the filing of, all federal, state and other tax returns which are required to be
filed, and has paid all taxes shown as due on those returns and all assessments,
fees and other amounts due as of the date of this Agreement, other than taxes
being contested in good faith by appropriate proceedings. All tax liabilities of
Borrower were, as of December 31, 1998 and are now, adequately provided for on
Borrower's books. No tax liability has been asserted by the Internal Revenue
Service or other taxing authority against Borrower for taxes in excess of those
already paid.
SECTION 4.11. SECURITIES AND BANKING LAWS AND REGULATIONS.
(a) The use of the proceeds of the Loan and Borrower's
issuance of the Note will not directly or indirectly violate or result in a
violation of the Securities Act of 1933 or the Securities Exchange Act of 1934,
as amended, or any regulations issued pursuant thereto, including without
limitation Regulations U, T or X of the Board of Governors of the Federal
Reserve System. Borrower is not engaged in the business of extending credit for
the purpose of the purchasing or carrying "margin stock" within the meaning of
those regulations. No part of the proceeds of the Loan under this Agreement will
be used to purchase or carry any margin stock or to extend credit to others for
such purpose.
(b) Borrower is not an investment company within the meaning
of the Investment Company Act of 1940, as amended, nor is it, directly or
indirectly, controlled by or acting on behalf of any Person which is an
investment company within the meaning of that Act.
SECTION 4.12. ERISA. No employee benefit plan (a "Plan") subject to the
Employee Retirement Income Security Act of 1974 ("ERISA") and regulations issued
pursuant to ERISA that is maintained by Borrower or under which Borrower could
have any material liability under ERISA (i) has failed to meet minimum funding
standards established in Section 302 of ERISA, (ii) has failed to comply with
all applicable requirements of ERISA and of the Internal Revenue Code, including
all applicable rulings and regulations thereunder, (iii) has engaged in or been
involved in a prohibited transaction (as defined in ERISA) under ERISA or under
the Internal Revenue Code, or (iv) has been terminated. Borrower has not
assumed, or received notice of a claim asserted against Borrower for, withdrawal
liability (as defined in the Multi-Employer Pension Plan Amendments Act of 1980,
as amended) with respect to any multi-employer pension plan and is not a member
of any Controlled Group (as defined in ERISA). Borrower has timely made when due
all contributions with respect to any multi-employer pension plan in which it
participates and no event has occurred triggering a claim against Borrower for
withdrawal liability with respect to any multi-employer pension plan in which
Borrower participates.
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SECTION 4.13. COMPLIANCE WITH LAW. Except as described in SCHEDULE
4.13, Borrower is not in material violation of any statute, rule or regulation
of any Governmental Authority (including, without limitation, any material
statute, rule or regulation relating to employment practices or to
environmental, occupational and health standards and controls). Borrower has
obtained all licenses, permits, franchises, and other governmental
authorizations necessary for the ownership of its properties and the conduct of
its business other than where the failure to so obtain is likely to have a
Material Adverse Effect. Borrower is current with all material reports and
documents required to be filed with any state or federal securities commission
or similar Governmental Authority and is in material compliance with all
applicable rules and regulations of such commissions.
SECTION 4.14. ENVIRONMENTAL MATTERS. To the best of Borrower's
knowledge, all Hazardous Material used, treated, stored, transported to or from,
generated or handled in any location controlled by Borrower and in which
Borrower is doing business (the "Premises") has been disposed of on or off the
Premises by or on behalf of Borrower in a lawful manner. Borrower has not
received written notice of breach or violation of any law relating to
environmental, public health or safety hazards with respect to the Premises. "
SECTION 4.15. PLACES OF BUSINESS. As of the Closing Date, the only
places of business of Borrower, and the places where it keeps the Collateral and
records concerning the Collateral, are at the addresses set forth in SCHEDULE
4.15.
SECTION 4.16. INTELLECTUAL PROPERTY. Borrower owns or possesses all the
patents, patent applications, trademarks, trademark applications, service marks,
trade names, copyrights, franchises, licenses, and rights with respect to the
foregoing necessary for the current and planned future conduct of its business,
without any conflict with the rights of others, other than where the failure to
own or possess the same would be likely to have a Material Adverse Effect. A
list of all such intellectual property (indicating the nature of Borrower's
interest), as well as all outstanding franchises and licenses given by or held
by Borrower, is attached as SCHEDULE 4.16. Borrower is not in default of any
material obligation or undertaking with respect to such intellectual property or
rights.
SECTION 4.17. STOCK OWNERSHIP. The identity of the stockholders of
record of more than five percent (5%) of any class of the outstanding stock of
Borrower, together with the respective ownership percentages held by such
stockholders, are as set forth on SCHEDULE 4.17.
SECTION 4.18. MATERIAL FACTS. Neither this Agreement nor any other Loan
Document nor any other agreement, document, certificate, or statement furnished
to Lender by or on behalf of Borrower in connection with the transactions
contemplated by this Agreement contains any untrue statement of material fact or
omits to state a material fact necessary to make the statements contained in
this Agreement or other Loan Document not misleading. To Borrower's knowledge,
there is no fact that is likely to have a Material Adverse Effect that has not
been previously disclosed to Lender.
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SECTION 4.19. INVESTMENTS, GUARANTEES, AND CERTAIN CONTRACTS. Borrower
does not own or hold any equity or long-term debt investments in, have any
outstanding advances to, have any outstanding guarantees for the obligations of,
or have any outstanding borrowings from, any Person, except as described on
SCHEDULE 4.19. Assuming compliance by Borrower and its counterparties under
existing contracts or agreements, Borrower is not a party to any contract or
agreement, or subject to any corporate restriction, that is likely to have a
Material Adverse Effect.
SECTION 4.20. BUSINESS INTERRUPTIONS. Within five years before the date
of this Agreement, neither the business, property or assets, or operations of
Borrower has been adversely affected in any way by any casualty, strike,
lockout, combination of workers, or order of the United States of America or
other Governmental Authority, directed against Borrower. There are no pending
or, to Borrower's knowledge, threatened labor disputes, strikes, lockouts, or
similar occurrences or grievances against Borrower or its business.
SECTION 4.21. NAMES. Within five years before the date of this
Agreement, Borrower has not conducted business under or used any other name
(whether corporate, partnership or assumed) other than as shown on SCHEDULE
4.21. Borrower is the sole owner of all names listed on that Schedule and any
and all business done and invoices issued in such names are Borrower's sales,
business, and invoices. Each trade name of Borrower represents a division or
trading style of Borrower and not a separate Person or independent Affiliate.
SECTION 4.22 JOINT VENTURES. As of the Closing Date, Borrower is not
engaged in any joint venture or partnership with any other Person, except as set
forth on SCHEDULE 4.22.
SECTION 4.23 ACCOUNTS. Lender may rely, in determining which Accounts
are Qualified Accounts, on all statements and representations made by Borrower
with respect to any Account or Accounts. Unless otherwise indicated in writing
to Lender, with respect to each Qualified Account, Borrower represents that:
(a) The Account is genuine and in all respects what it
purports to be, and is not evidenced by a judgment;
(b) The Account arises out of a completed, BONA FIDE sale
and delivery of goods or rendition of Services by Borrower in the ordinary
course of its business and in accordance with the terms and conditions of all
purchase orders, contracts, certification, participation, certificate of need,
or other documents relating thereto and forming a part of the contract between
Borrower and the Account Debtor;
(c) The Account is for a liquidated amount maturing as
stated in a duplicate claim or invoice covering such sale or rendition of
services, a copy of which has been furnished or is available to Lender;
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(d) The Account, and Lender's security interest in such
Account, is not, and will not (by voluntary act or omission by Borrower), be in
the future, subject to any offset, lien, deduction, defense, dispute,
counterclaim or any other adverse condition, and each such Account is absolutely
owing to Borrower and is not contingent in any respect or for any reason;
(e) There are no facts, events or occurrences which in
any way impair the validity or enforceability of any Accounts or tend to reduce
the amount payable thereunder from the face amount of the claim or invoice and
statements delivered to Lender with respect thereto;
(f) To the best of Borrower's knowledge, (i) the Account
Debtor under the Account had the capacity to contract at the time any contract
or other document giving rise to the Account was executed and (ii) such Account
Debtor is solvent;
(g) To the best of Borrower's knowledge, there are no
proceedings or actions which are threatened or pending against any Account
Debtor under the Account which might result in any material adverse change in
such Account Debtor's financial condition or the collectibility of such Account;
and
(h) The Account has been billed and forwarded to the
Account Debtor for payment in accordance with applicable laws and compliance
and conformance with any and all requisite procedures, requirements and
regulations governing payment by such Account Debtor with respect to such
Account.
SECTION 4.24. SOLVENCY. Both before and after giving effect to the
transactions contemplated by the terms and provisions of this Agreement,
Borrower (taken as a whole) (i) owns property whose fair saleable value is
greater than the amount required to pay all of Borrower's Indebtedness
(including contingent debts), (ii) was and is able to pay all of its
Indebtedness as such Indebtedness matures, and (iii) had and has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage. For purposes of this Agreement, the
term "Indebtedness" means, without duplication (x) all items which in accordance
with GAAP would be included in determining total liabilities as shown on the
liability side of a balance sheet of such Borrower as of the date on which
Indebtedness is to be determined, (y) all obligations of any other person or
entity which such Borrower has guaranteed, and (z) the Obligations.
SECTION 4.25. YEAR 2000 COMPLIANCE.
(a) Except as set forth on SCHEDULE 4.25, all devices,
systems, machinery, information technology, computer software and hardware, and
other date sensitive technology (collectively, the "Systems") necessary for
Borrower to carry on its business as currently conducted and as contemplated to
be conducted in the future are Year 2000 Compliant or will be Year 2000
Compliant within a period of time calculated to result in no material disruption
of any of Borrower's business operations. For purposes of these provisions,
"Year 2000 Compliant"
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means that such Systems are designed to be used before, during and after the
Gregorian calendar year 2000 A.D. and will operate during each such time
period without error related to date data, specifically including any error
relating to, or the product of, date data that represents or refers to
different centuries or more than one century.
(b) Except as set forth on SCHEDULE 4.25, Borrower has:
(i) undertaken an inventory, review, and assessment of all areas within its
business and operations that could be adversely affected by the failure of
Borrower to be Year 2000 Compliant on a timely basis; (ii) developed a detailed
plan and time line for becoming Year 2000 Compliant on a timely basis; and (iii)
to date, implemented that plan in accordance with the timetable in all material
respects.
ARTICLE V
CLOSING AND CONDITIONS OF LENDING
SECTION 5.1. CONDITIONS PRECEDENT TO AGREEMENT. The obligation of
Lender to enter into and perform this Agreement and to make Revolving Credit
Loans is subject to the following conditions precedent:
(a) Lender shall have received two (2) originals of this
Agreement and all other Loan Documents required to be executed and delivered at
or before Closing (other than the Note, as to which Lender shall receive only
one original), executed by Borrower and any other required Persons, as
applicable.
(b) Lender shall have received all searches and good
standing certificates required by Section 3.5.
(c) Borrower shall have complied and shall then be in
compliance with all the terms, covenants and conditions of the Loan Documents.
(d) There shall have occurred and be continuing no Event
of Default and no event which, with the giving of notice or the lapse of time,
or both, could constitute such an Event of Default.
(e) The representations and warranties contained in
Article IV shall be true and correct.
(f) Lender shall have received copies of all board of
directors resolutions of Borrower and other action taken by Borrower to
authorize the execution, delivery and performance of the Loan Documents and the
borrowing of the Loan under the Loan Documents,
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as well as the names and signatures of the officers of Borrower authorized to
execute documents on its behalf in connection with the Loan, all as also
certified as of the date of this Agreement by Borrower's chief financial
officer, or equivalent, and such other papers as Lender may require.
(g) Lender shall have received copies, certified as true,
correct and complete by a corporate officer of Borrower, of the certificate of
incorporation of Borrower, with any amendments to any of the foregoing, and all
other documents necessary for performance of the obligations of Borrower under
this Agreement and the other Loan Documents.
(h) Lender shall have received a written opinion of
counsel for Borrower, dated the date of this Agreement, substantially in the
form of EXHIBIT C.
(i) Lender shall have received such financial statements,
reports, certifications, and other operational information required to be
delivered under this Agreement, including without limitation an initial
borrowing base certificate calculating the Borrowing Base.
(j) Lender shall have received the Commitment Fee.
(k) The Lockbox, Lockbox Account and the Concentration
Account shall have been established.
(l) Lender shall have received a certificate of
Borrower's chief financial officer, dated the Closing Date, certifying that all
of the conditions specified in this Section have been fulfilled.
SECTION 5.2. CONDITIONS PRECEDENT TO ADVANCES. Notwithstanding any
other provision of this Agreement, no Loan proceeds, Revolving Credit Loans,
advances or other extensions of credit under the Loan shall be disbursed under
this Agreement unless the following conditions have been satisfied or waived
immediately before such disbursement:
(a) The representations and warranties on the part of
Borrower contained in Article IV of this Agreement shall be true and correct in
all respects at and as of the date of disbursement or advance, as though made on
and as of such date (except to the extent that such representations and
warranties expressly relate solely to an earlier date and except that the
references in Section 4.7 to financial statements shall be deemed to be a
reference to the then most recent annual and interim financial statements of
Borrower furnished to Lender pursuant to Section 6.1).
(b) No Event of Default or event which, with the giving
of notice of the lapse of time, or both, could become an Event of Default shall
have occurred and be continuing or would result from the making of the
disbursement or advance.
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(c) No change that is likely to have a Material Adverse
Effect shall have occurred and be continuing with respect to Borrower since the
date of this Agreement.
SECTION 5.3. CLOSING. Subject to the conditions of this Article V, the
Loan shall be made available on the date as is mutually agreed by the parties
(the "Closing Date") at such time as may be mutually agreeable to the parties
upon the execution of this Agreement (the "Closing") at such place as may be
requested by Lender.
SECTION 5.4. WAIVER OF RIGHTS. By completing the Closing under this
Agreement, or by making advances under the Loan, Lender does not waive a breach
of any representation or warranty of Borrower under this Agreement or under any
other Loan Document, and all of Lender's claims and rights resulting from any
breach or misrepresentation by Borrower are specifically reserved by Lender.
ARTICLE VI
AFFIRMATIVE COVENANTS
Each entity comprising Borrower covenants and agrees that for so long
as Borrower may borrow under this Agreement and until payment in full of the
Note and performance of all other obligations of Borrower under the Loan
Documents:
SECTION 6.1. FINANCIAL STATEMENTS AND COLLATERAL REPORTS. Borrower will
furnish to Lender (i) an accounts receivable aging schedule on a form acceptable
to Lender within twenty (20) days after the end of each calendar month; (ii)
payables aging schedules within fifteen (15) days after the end of each calendar
month; (iii) internally prepared monthly financial statements for Borrower,
certified by the chief financial officer of Borrower, within forty-five (45)
days of the end of each calendar month, accompanied by management analysis and
actual versus budget variance reports; (iv) to the extent prepared by Borrower,
annual projected profit and loss statements, balance sheets, and cash flow
reports for the succeeding fiscal year within thirty (30) days before the end of
each of Borrower's fiscal years; (v) internally prepared annual financial
statements for Borrower within sixty (60) days after the end of each of
Borrower's fiscal years; (vi) annual audited financial statements for Borrower
prepared by Ernst & Young LLP, or another firm of independent public accountants
reasonably satisfactory to Lender, within one hundred thirty-five (135) days
after the end of each of Borrower's fiscal years; (vii) promptly upon receipt
thereof, copies of any reports submitted to Borrower by the independent
accountants in connection with any interim audit of the books of Borrower and
copies of each management control letter provided to Borrower by independent
accountants; (viii) as soon as available, copies of all financial statements and
notices provided by Borrower to all of its stockholders; and (ix) such
additional information, reports or statements as Lender may from time to time
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reasonably request. Annual financial statements shall set forth in comparative
form figures for the corresponding periods in the prior fiscal year. All
financial statements shall include a balance sheet and statement of earnings and
shall be prepared in accordance with GAAP. All internally prepared financial
statements shall be preliminary, unaudited and subject to year end adjustments.
SECTION 6.2. PAYMENTS UNDER THIS AGREEMENT. Borrower will make all
payments of principal, interest, fees, and all other payments required under
this Agreement and under the Loan, and under any other Loan Documents as and
when due.
SECTION 6.3. EXISTENCE, GOOD STANDING, AND COMPLIANCE WITH LAWS.
Borrower will do or cause to be done all things necessary (i) to obtain and keep
in full force and effect all corporate existence, rights, licenses, privileges,
and franchises of Borrower necessary to the ownership of its property or the
conduct of its business, and comply with all applicable current and future laws,
ordinances, rules, regulations, orders and decrees of any Governmental Authority
having or claiming jurisdiction over Borrower; and (ii) to maintain and protect
the properties used or useful in the conduct of the operations of Borrower, in a
prudent manner, including without limitation the maintenance at all times of
such insurance upon its insurable property and operations as required by law or
by Section 6.7.
SECTION 6.4. LEGALITY. Borrower shall ensure that the making of the
Loan and each disbursement or advance under the Loan shall not be subject to any
penalty or special tax (other than withholding taxes), shall not be prohibited
by any governmental order or regulation applicable to Borrower, and shall not
violate any rule or regulation of any Governmental Authority, and necessary
consents, approvals and authorizations of any Governmental Authority to or of
any such disbursement or advance shall have been obtained.
SECTION 6.5. LENDER'S SATISFACTION. All instruments and legal documents
and proceedings in connection with the transactions contemplated by this
Agreement shall be satisfactory in form and substance to Lender and its counsel,
and Lender shall have received all documents, including records of corporate
proceedings and opinions of counsel, which Lender may have requested in
connection therewith.
SECTION 6.6. TAXES AND CHARGES. Borrower will timely file all tax
reports and pay and discharge all taxes, assessments and governmental charges or
levies imposed upon Borrower, or its income or profits or upon its properties or
any part thereof, before the same shall be in default and before the date on
which penalties attach thereto, as well as all lawful claims for labor,
material, supplies or otherwise which, if unpaid, would become a lien or charge
upon the properties or any part thereof of Borrower; PROVIDED, HOWEVER, that
Borrower shall not be required to pay and discharge or cause to be paid and
discharged any such tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be contested in good faith
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and by appropriate proceedings by Borrower, and Borrower shall have set aside on
their books adequate reserve therefor; and PROVIDED FURTHER, that such deferment
of payment is permissible only so long as Borrower's title to, and its right to
use, the Collateral is not materially adversely affected thereby and Lender's
lien and priority on the Collateral are not materially adversely affected,
altered or impaired thereby.
SECTION 6.7. INSURANCE. Borrower will carry adequate public liability
and professional liability insurance with responsible companies reasonably
satisfactory to Lender in such amounts and against such risks as is customarily
maintained by similar businesses and by owners of similar property in the same
general area. Lender acknowledges that it has had the opportunity to review the
public liability and professional liability policies currently maintained by
Borrower.
SECTION 6.8. GENERAL INFORMATION. Borrower will furnish to Lender such
information as Lender may, from time to time, reasonably request with respect to
the business or financial affairs of Borrower, and permit upon reasonable notice
and only during business hours, any officer, employee or agent of Lender to
visit and inspect any of the properties, to examine the minute books, books of
account and other records, including management letters prepared by Borrower's
auditors, of Borrower, and make copies thereof or extracts therefrom, and to
discuss its and their business affairs, finances and accounts with, and be
advised as to the same by, the independent accountants for and officers of
Borrower, all at such times and as often as Lender may reasonably require,
provided that Lender shall give Borrower a reasonable opportunity to participate
in any discussions with Borrower's independent accountants..
SECTION 6.9. MAINTENANCE OF PROPERTY. Borrower will maintain, keep and
preserve all of its properties in good repair, working order and condition and
from time to time make all necessary repairs, renewals, replacements,
betterments and improvements thereto, so that the business carried on in
connection therewith may be properly conducted at all times.
SECTION 6.10. NOTIFICATION OF EVENTS OF DEFAULT AND ADVERSE
DEVELOPMENTS. Borrower promptly will notify Lender upon the occurrence of: (i)
any Event of Default; (ii) any event which, with the giving of notice or lapse
of time, or both, would constitute an Event of Default; (iii) any event,
development or circumstance whereby the financial statements previously
furnished to Lender fail in any material respect to present fairly, in
accordance with GAAP, the financial condition and operational results of
Borrower; (iv) any judicial, administrative or arbitration proceeding pending
against Borrower, and any judicial or administrative proceeding known by
Borrower to be threatened against it which, in either case, if adversely
decided, would be likely to have a Material Adverse Effect; (v) any default
claimed by any other creditor for Borrowed Money of Borrower other than Lender
in respect of Borrowed Money in a principal amount exceeding $250,000.00; and
(vi) any other development in the business or affairs of Borrower which is
likely to have a Material Adverse Effect, in each case describing the nature of
the development. In the case of notification under clauses (i) and (ii),
Borrower should set forth the action Borrower proposes to take with respect
thereto.
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SECTION 6.11. EMPLOYEE BENEFIT PLANS. Borrower will (i) comply with the
funding requirements of ERISA with respect to the Plans for its employees, or
will promptly satisfy any accumulated funding deficiency that arises under
Section 302 of ERISA; (ii) furnish Lender, promptly after filing the same, with
copies of all reports or other statements filed with the United States
Department of Labor, the Pension Benefit Guaranty Corporation, or the Internal
Revenue Service with respect to all Plans, or which Borrower, or any member of a
Controlled Group, may receive from such Governmental Authority with respect to
any such Plans, and (iii) promptly advise Lender of the occurrence of any
Reportable Event or Prohibited Transaction with respect to any such Plan and the
action which Borrower proposes to take with respect thereto. Borrower will make
all contributions when due with respect to any multi-employer pension plan in
which it participates and will promptly advise Lender: (x) upon its receipt of
notice of the assertion against Borrower of a claim for withdrawal liability;
(y) upon the occurrence of any event which would trigger the assertion of a
claim for withdrawal liability against Borrower; and (z) upon the occurrence of
any event which would place Borrower in a Controlled Group as a result of which
any member (including Borrower) thereof may be subject to a claim for withdrawal
liability, whether liquidated or contingent.
SECTION 6.12. FINANCING STATEMENTS. Borrower shall provide to Lender
evidence satisfactory to Lender as to the due recording of termination
statements, releases of collateral, and Forms UCC-3, and shall cause to be
recorded financing statements on Form UCC-1, duly executed by Borrower and
Lender, in all places necessary to release all existing security interests and
other liens in the Collateral (other than as permitted by this Agreement) and to
perfect and protect Lender's first priority lien and security interest in the
Collateral, as Lender may request.
SECTION 6.13. FINANCIAL RECORDS. Borrower shall keep current and
accurate books of records and accounts in which full and correct entries will be
made of all of its business transactions, and will reflect in its financial
statements adequate accruals and appropriations to reserves, all in accordance
with GAAP.
SECTION 6.14. COLLECTION OF ACCOUNTS. Borrower shall continue to
collect its Accounts in the ordinary course of business.
SECTION 6.15. PLACES OF BUSINESS. Borrower shall give ten (10) days'
prior written notice to Lender of any change in the location of any of its
places of business, of the places where its records concerning its Accounts are
kept, of the places where the Collateral is kept, or of the establishment of any
new, or the discontinuance of any existing, places of business.
SECTION 6.16. BUSINESS CONDUCTED. Borrower shall continue in the
business currently conducted by it. Borrower shall not engage, directly or
indirectly, in any line of business substantially different from the business
conducted by it immediately before the Closing Date, or engage in business or
lines of business which are not reasonably related thereto.
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SECTION 6.17. LITIGATION AND OTHER PROCEEDINGS. Borrower shall give
prompt notice to Lender of any litigation, arbitration, or other proceeding
before any Governmental Authority against or affecting Borrower where a decision
adverse to Borrower would be likely to have a Material Adverse Effect.
SECTION 6.18. BANK ACCOUNTS. Borrower shall assign to Lender all
of its depository and disbursement accounts into which proceeds of Accounts
are deposited.
SECTION 6.19. SUBMISSION OF COLLATERAL DOCUMENTS. Borrower will, on
demand of Lender, make available to Lender copies of shipping and delivery
receipts evidencing the shipment of goods that gave rise to an Account, medical
records, insurance verification forms, assignment of benefits, in-take forms or
other proof of the satisfactory performance of services that gave rise to an
Account, a copy of the claim or invoice for each Account and copies of any
written contract or order from which the Account arose. Borrower shall promptly
notify Lender if an Account becomes evidenced or secured by an instrument or
chattel paper and upon request of Lender, will promptly deliver any such
instrument or chattel paper to Lender.
SECTION 6.20. LICENSURE. Borrower will maintain all licenses necessary
to conduct its business as currently conducted, and take any steps required to
comply with any such new or additional requirements that may be imposed on
providers of Services.
SECTION 6.21. OFFICER'S CERTIFICATES. Together with the monthly
financial statements delivered pursuant to clause (iii) of Section 6.1, and
together with the audited annual financial statements delivered pursuant to
clause (vi) of that Section, Borrower shall deliver to Lender a certificate of
its chief financial officer, in form and substance satisfactory to Lender:
(a) Setting forth the information (including detailed
calculations) required to establish whether Borrower is in compliance with the
requirements of Articles VI and VII as of the end of the period covered by the
financial statements then being furnished; and
(b) Stating that the signer has reviewed the relevant
terms of this Agreement, and has made (or caused to be made under his
supervision) a review of the transactions and conditions of Borrower from the
beginning of the accounting period covered by the income statements being
delivered to the date of the certificate, and that such review has not disclosed
the existence during such period of any condition or event which constitutes an
Event of Default or which is then, or with the passage of time or giving of
notice or both, could become an Event of Default, and if any such condition or
event existed during such period or now exists, specifying the nature and period
of existence thereof and what action Borrower has taken or proposes to take with
respect thereto.
SECTION 6.22. NET WORTH. Borrower will not at any time allow its
net worth, as computed in accordance with GAAP, to fall below $20,000,000.00.
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ARTICLE VII
NEGATIVE COVENANTS
Each entity comprising Borrower covenants and agrees that so long as
Borrower may borrow under this Agreement and until payment in full of the Note
and performance of all other obligations of Borrower under the Loan Documents:
SECTION 7.1. BORROWING. Borrower will not create, incur, assume or
suffer to exist any liability for Borrowed Money without Lender's prior written
consent, which consent shall not be unreasonably withheld. Notwithstanding the
foregoing, Borrower may incur the following: (i) indebtedness to Lender; (ii)
indebtedness of Borrower secured by mortgages, encumbrances or liens expressly
permitted by section 7.3; (iii) accounts payable to trade creditors and current
operating expenses (other than for borrowed money) which are not aged more than
one hundred twenty (120) days from the billing date and that were incurred in
the ordinary course of business and paid within such time period, unless the
same are being contested in good faith and by appropriate and lawful
proceedings, and Borrower shall have set aside such reserves, if any, with
respect thereto as are required by GAAP and deemed adequate by Borrower and its
independent accountants; (iv) borrowings incurred in the ordinary course of its
business and not exceeding $100,000.00 in the aggregate outstanding at any one
time; (v) borrowed money not to exceed $250,000.00 in the aggregate outstanding
at any one time incurred by Borrower or a subsidiary after the Closing Date;
(vi) purchase money debt, finance or capital leases incurred in the ordinary
course of business with respect to assets acquired by Borrower or a subsidiary
after the Closing Date, provided that (A) each such purchase money, finance or
capital lease arrangement does not exceed the cost of the assets acquired or
leased; and (B) any lien securing such purchase money, finance or capital lease
arrangement does not extend to the Collateral or any assets or property other
than that purchased or leased; (vii) indebtedness for borrowed money as set
forth on SCHEDULE 7.1 of this Agreement and replacements, refinancings and
relendings thereof;. Borrower will not make prepayments on any existing or
future indebtedness for Borrowed Money to any person (other than Lender, to the
extent permitted by this Agreement or any subsequent agreement between Borrower
and Lender).
SECTION 7.2. JOINT VENTURES. Borrower will not invest directly or
indirectly in any joint venture for any purpose without prior written notice
to Lender.
SECTION 7.3. LIENS AND ENCUMBRANCES. Borrower will not create,
incur, assume or suffer to exist any mortgage, pledge, lien or other
encumbrance of any kind (including the charge upon property purchased under a
conditional sale or other title retention agreement) upon, or any security
interest in, any of its Collateral, whether now owned or hereafter acquired,
except for Permitted Liens.
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SECTION 7.4. RESTRICTION ON FUNDAMENTAL CHANGES; NO CHANGE IN OPERATION
OR CONTROL. Without Lender's prior written consent, which consent shall not be
unreasonably withheld, Borrower will not enter into any merger or consolidation
with or acquire all or substantially all of the assets of any Person, and will
not sell, lease, or otherwise dispose of any of the assets except in the
ordinary course of its business except for (i) sales of assets not to exceed
$100,000.00 in any calendar year; (ii) purchases in the ordinary course of
Borrower's business: (iii) sales or dispositions of used or obsolete equipment
no longer useful in the business; (iv) any merger or consolidation of any
subsidiary of Borrower with Borrower, provided that Borrower is the surviving
entity; and (v) any merger by a subsidiary of Borrower with or into any entity
comprising Borrower, provided that the surviving entity shall be a wholly-owned
subsidiary of Borrower. Borrower agrees that compliance with this Section 7.4 is
a material inducement to Lender's advancing credit under this Agreement and that
in addition to all other remedies available to Lender, Lender shall be entitled
to specific enforcement of the covenants in this Section 7.4, including
injunctive relief.
SECTION 7.5. SALE AND LEASEBACK. Borrower will not, directly or
indirectly, enter into any arrangement whereby Borrower sells or transfers all
or any part of its assets and thereupon and within one year thereafter rents or
leases the assets so sold or transferred without the prior written notice to,
and the express written consent of, Lender, which consent may be withheld in
Lender's sole discretion.
SECTION 7.6. DIVIDENDS, DISTRIBUTIONS AND MANAGEMENT FEES. Upon notice
from Lender to Borrower of the existence of an Event of Default under this
Agreement, Borrower will not declare or pay any dividends or other distributions
with respect to, purchase, redeem or otherwise acquire for value any of its
outstanding stock now or hereafter outstanding, or return any capital of its
stockholders.
SECTION 7.7. LOANS. Borrower will not make loans or advances to any
Person, other than (i) trade credit extended in the ordinary course of its
business, and (ii) advances for business travel and similar temporary advances
in the ordinary course of business to officers, stockholders, directors, and
employees.
SECTION 7.8. CONTINGENT LIABILITIES. Borrower will not assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any Person, except (i) by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business, and (ii) for Borrowed Money permitted to be incurred under
Section 7.1.
SECTION 7.9. SUBSIDIARIES. Without prior written notice to
Lender, Borrower will not form any subsidiary, or make any investment in or
any loan in the nature of an investment to, any other Person.
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SECTION 7.10. COMPLIANCE WITH ERISA. Borrower will not permit with
respect to any Plan covered by Title IV of ERISA any Prohibited Transaction or
any Reportable Event.
SECTION 7.11. CERTIFICATES OF NEED. Borrower will not amend, alter or
suspend or terminate or make provisional in any material way, any certificate of
need or provider number without the prior written consent of Lender.
SECTION 7.12. TRANSACTIONS WITH AFFILIATES. Borrower will not enter
into any transaction, including without limitation the purchase, sale, or
exchange of property, or the loaning or giving of funds to any Affiliate or
subsidiary, except in the ordinary course of business and pursuant to the
reasonable requirements of Borrower's business and upon terms substantially the
same and no less favorable to Borrower as it would obtain in a comparable arm's
length transaction with any Person not an Affiliate or subsidiary, and so long
as the transaction is not otherwise prohibited under this Agreement. For
purposes of the foregoing, Lender consents to the transactions described on
SCHEDULE 7.12.
SECTION 7.13. USE OF LENDER'S NAME. Borrower will not use Lender's name
(or the name of any of Lender's affiliates) in connection with any of its
business operations. Borrower may disclose to third parties that Borrower has a
borrowing relationship with Lender. Nothing contained in this Agreement is
intended to permit or authorize Borrower to make any contract on behalf of
Lender.
SECTION 7.14. CHANGE IN CONTROL. There shall occur no Change in
Control of Borrower.
SECTION 7.15. CONTRACTS AND AGREEMENTS. Borrower will not become or be
a party to any contract or agreement which would breach this Agreement, or
breach any other instrument, agreement, or document to which Borrower is a party
or by which it is or may be bound.
SECTION 7.16. MARGIN STOCK. Borrower will not carry or purchase
any "margin security" within the meaning of Regulations U, T or X of the
Board of Governors of the Federal Reserve System.
SECTION 7.17. TRUTH OF STATEMENTS AND CERTIFICATES. Borrower will not
furnish to Lender any certificate or other document that contains any untrue
statement of a material fact or that omits to state a material fact necessary to
make it not misleading in light of the circumstances under which it was
furnished.
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ARTICLE VIII
EVENTS OF DEFAULT
SECTION 8.1. EVENTS OF DEFAULT. Each of the following (individually, an
"Event of Default" and collectively, the "Events of Default") shall constitute
an event of default under this Agreement:
(a) A default in the payment of any installment of
principal of, or interest upon, the Note when due and payable, whether at
maturity or otherwise, or any breach of Section 2.3, which default or breach,
as applicable, shall have continued unremedied for a period of five (5) days
after written notice of the default or breach from Lender to Borrower;
(b) A default in the payment of any other charges,
fees, or other monetary obligations owing to Lender arising out of or
incurred in connection with this Agreement when such payment is due and
payable, which default shall have continued unremedied for a period of five
(5) days after written notice of the default from Lender to Borrower;
(c) A default in the due observance or performance by
Borrower of any other term, covenant or agreement contained in any of the
Loan Documents, which default shall have continued unremedied for a period of
twenty (20) days after written notice of the default from Lender to Borrower;
(d) Any representation or warranty made by Borrower in
this Agreement or in any of the other Loan Documents, any financial
statement, or any statement or representation made in any other certificate,
report or opinion delivered in connection with this Agreement or the other
Loan Documents proves to have been incorrect or misleading in any material
respect when made, which default shall have continued unremedied for a period
of twenty (20) days after written notice of the default from Lender to
Borrower;
(e) Any obligation of Borrower (other than its
Obligations under this Agreement) for the payment of Borrowed Money in excess
of $250,000.00 is not paid when due or within any applicable grace period, or
such obligation becomes or is declared to be due and payable before the
expressed maturity of the obligation, or there shall have occurred an event
which, with the giving of notice or lapse of time, or both, would cause any
such obligation to become, or allow any such obligation to be declared to be,
due and payable;
(f) Borrower makes an assignment for the benefit of
creditors, offers a composition or extension to creditors, or makes or sends
notice of an intended bulk sale of any business or assets now or hereafter
conducted by Borrower;
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(g) (i) Borrower files a petition in bankruptcy, (ii)
Borrower is adjudicated insolvent or bankrupt, petitions or applies to any
tribunal for any receiver of or any trustee for itself or any substantial
part of its property, (iii) Borrower commences any proceeding relating to
itself under any reorganization, arrangement, readjustment or debt,
dissolution or liquidation law or statute of any jurisdiction, whether now or
hereafter in effect, (iv) any such proceeding is commenced against Borrower
and such proceeding remains undismissed for a period of ninety (90) days, (v)
Borrower by any act indicates its consent to, approval of, or acquiescence
in, any such proceeding or the appointment of any receiver of or any trustee
for a Borrower or any substantial part of its property, or suffers any such
receivership or trusteeship to continue undischarged for a period of sixty
(60) days;
(h) One or more final judgments against Borrower or
attachments against its property not fully and unconditionally covered by
insurance shall be rendered by a court of record and shall remain unpaid,
unstayed on appeal, undischarged, unbonded and undismissed for a period of
ninety (90) days;
(i) A Reportable Event which might constitute grounds
for termination of any Plan covered by Title IV of ERISA or for the
appointment by the appropriate United States District Court of a trustee to
administer any such Plan or for the entry of a lien or encumbrance to secure
any deficiency, has occurred and is continuing thirty (30) days after its
occurrence, or any such Plan is terminated, or a trustee is appointed by an
appropriate United States District Court to administer any such Plan, or the
Pension Benefit Guaranty Corporation institutes proceedings to terminate any
such Plan or to appoint a trustee to administer any such Plan, or a lien or
encumbrance is entered to secure any deficiency or claim, in each case where
the potential liability is likely to have a Material Adverse Effect;
(j) There is a Change in Control of Borrower;
(k) There shall occur any uninsured damage to or loss,
theft or destruction of any portion of the Collateral that is likely to have
a Material Adverse Effect;
(l) Borrower breaches or violates the terms of, or a
default or an event which could, whether with notice or the passage of time,
or both, constitute a default, occurs under any other existing or future
agreement (related or unrelated) between Borrower and Lender;
(m) Upon the issuance of any execution or distraint
process against Borrower or any of its property or assets;
(n) Borrower ceases any material portion of its
business operations as currently conducted;
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(o) Any indication or evidence is received by Lender that
Borrower may have directly or indirectly been engaged in any type of activity
which, in Lender's discretion, might result in the forfeiture of any property of
Borrower with an aggregate value over $250,000.00 to any Governmental Authority,
which default shall have continued unremedied for a period of ten (10) days
after written notice from Lender;
(p) Borrower or any Affiliate of Borrower, shall
challenge or contest, in any action, suit or proceeding, the validity or
enforceability of this Agreement, or any of the other Loan Documents, the
legality or the enforceability of any of the Obligations or the perfection or
priority of any Lien granted to Lender;
(q) Borrower shall be criminally indicted or convicted
under any law that could lead to a forfeiture of any Collateral with an
aggregate value of over $250,000.00; or
(r) There shall occur a change that is likely to have
a Material Adverse Effect, which change shall have continued unremedied for a
period of ten (10) days after written notice from Lender.
SECTION 8.2. ACCELERATION. Upon the occurrence of any of the foregoing
Events of Default, the Note shall become and be immediately due and payable upon
declaration to that effect delivered by Lender to Borrower; provided that, upon
the happening of any event specified in Section 8.1(g), the Note shall be
immediately due and payable without declaration or other notice to Borrower.
SECTION 8.3. REMEDIES.
(a) Upon the occurrence and during the continuance of an
Event of Default under this Agreement or the other Loan Documents, Lender, in
addition to all other rights, options, and remedies granted to Lender under
this Agreement or at law or in equity, may take any of the following steps
(which list is given by way of example and is not intended to be an
exhaustive list of all such rights and remedies):
(i) Terminate the Loan, whereupon all
outstanding Obligations shall be immediately due and payable;
(ii) Exercise all other rights granted to it
under this Agreement and all rights under the UCC in effect in the applicable
jurisdiction(s) and under any other applicable law; and
(iii) Exercise all rights and remedies under all
Loan Documents now or hereafter in effect, including but not limited to:
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(A) The right to take possession of, send notices
regarding, and collect directly the Collateral, with or without judicial
process;
(B) The right to (by its own means or with judicial
assistance) enter any of Borrower's premises and take possession of the
Collateral, or render it unusable, or dispose of the Collateral on such
premises in compliance with subsection (C) below, without any liability for
rent, storage, utilities, or other sums, and Borrower shall not resist or
interfere with such action;
(C) The right to require Borrower at Borrower's
expense to assemble all or any part of the Collateral and make it available
to Lender at any place designated by Lender; and
(D) The right to reduce the Maximum Loan Amount or to
use the Collateral and/or funds in the Concentration Account in amounts up to
the Maximum Loan Amount for any reason.
(b) Borrower agrees that a notice received by it at least ten (10)
days before the time of any intended public sale, or the time after which any
private sale or other disposition of the Collateral is to be made, shall be
deemed to be reasonable notice of such sale or other disposition. If
permitted by applicable law, any perishable Collateral which threatens to
speedily decline in value or which is sold on a recognized market may be sold
immediately by Lender without prior notice to Borrower. At any sale or
disposition of Collateral, Lender may (to the extent permitted by applicable
law) purchase all or any part of the Collateral, free from any right of
redemption by Borrower, which right is hereby waived and released. Borrower
covenants and agrees not to interfere with or impose any obstacle to Lender's
exercise of its rights and remedies with respect to the Collateral.
SECTION 8.4. NATURE OF REMEDIES. Lender shall have the right to proceed
against all or any portion of the Collateral to satisfy the liabilities and
Obligations of Borrower to Lender in any order. All rights and remedies granted
Lender under this Agreement and under any agreement referred to in this
Agreement, or otherwise available at law or in equity, shall be deemed
concurrent and cumulative, and not alternative remedies, and Lender may proceed
with any number of remedies at the same time until the Loans, and all other
existing and future liabilities and obligations of Borrower to Lender, are
satisfied in full. The exercise of any one right or remedy shall not be deemed a
waiver or release of any other right or remedy, and Lender, upon the occurrence
of an Event of Default, may proceed against Borrower, and/or the Collateral, at
any time, under any agreement, with any available remedy and in any order.
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ARTICLE IX
MISCELLANEOUS
SECTION 9.1. EXPENSES AND TAXES.
(a) Borrower agrees to pay, whether or not the Closing occurs,
a reasonable documentation preparation fee, together with actual audit and
appraisal fees and all other out-of-pocket charges and expenses incurred by
Lender in connection with the negotiation, preparation, legal review and
execution of each of the Loan Documents, including but not limited to UCC and
judgment lien searches and UCC filings and fees for post-Closing UCC and
judgment lien searches. In addition, Borrower shall pay all such fees associated
with any amendments to the Loan Documents following Closing.
(b) Borrower also agrees to pay all out-of-pocket charges and
expenses incurred by Lender (including the fees and expenses of Lender's
counsel) in connection with the enforcement, protection or preservation of any
right or claim of Lender and the collection of any amounts due under the Loan
Documents. If Lender uses in-house counsel for any of these purposes (i.e., for
any task in connection with the enforcement, protection or preservation of any
right or claim of Lender and the collection of any amounts due under its Loan
Documents), Borrower further agrees that its Obligations under the Loan
Documents include reasonable charges for such work commensurate with the fees
that would otherwise be charged by outside legal counsel selected by Lender for
the work performed.
(c) Borrower shall pay all taxes (other than taxes based upon
or measured by Lender's income or revenues or any personal property tax), if
any, in connection with the issuance of the Note and the recording of the
security documents therefor. The obligations of Borrower under this clause (c)
shall survive the payment of Borrower's indebtedness under this Agreement and
the termination of this Agreement.
SECTION 9.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the other
Loan Documents constitute the full and entire understanding and agreement among
the parties with regard to their subject matter and supersede all prior written
or oral agreements, understandings, representations and warranties made with
respect thereto. No amendment, supplement or modification of this Agreement nor
any waiver of any provision thereof shall be made except in writing executed by
the party against whom enforcement is sought.
SECTION 9.3. NO WAIVER; CUMULATIVE RIGHTS. No waiver by any party to
this Agreement of any one or more defaults by the other party in the performance
of any of the provisions of this Agreement shall operate or be construed as a
waiver of any future default or defaults, whether of a like or different nature.
No failure or delay on the part of any party in exercising any right, power or
remedy under this Agreement shall operate as a waiver of such
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right, power or remedy nor shall any single or partial exercise of any such
right, power or remedy preclude any other or further exercise of such right,
power or remedy or the exercise of any other right, power or remedy. The
remedies provided for in this Agreement are cumulative and are not exclusive of
any remedies that may be available to any party to this Agreement at law, in
equity or otherwise.
SECTION 9.4. NOTICES. Any notice or other communication required or
permitted under this Agreement shall be in writing and personally delivered,
mailed by registered or certified mail (return receipt requested and postage
prepaid), sent by telecopier (with a confirming copy sent by regular mail), or
sent by prepaid overnight courier service, and addressed to the relevant party
at its address set forth below, or at such other address as such party may, by
written notice, designate as its address for purposes of notice under this
Agreement:
(a) If to Lender, at:
HCFP Funding, Inc.
2 Wisconsin Circle, 4th Floor
Chevy Chase, Maryland 20815
Attention: Steven M. Curwin, Senior Vice President and
General Counsel
Telephone: (301) 961-1640
Telecopier: (301) 664-9860
(b) If to Borrower, at:
DAOU Systems, Inc.
5120 Shoreham Place
San Diego, California 92122
Attention: Chief Financial Officer
Telephone: (619) 646-2930
Telecopier: (619) 452-2789
If mailed, notice shall be deemed to be given five (5) days after being sent, if
sent by personal delivery, telecopier or prepaid courier, notice shall be deemed
to be given when delivered.
SECTION 9.5. SEVERABILITY. If any term, covenant or condition of this
Agreement, or the application of such term, covenant or condition to any party
or circumstance shall be found by a court of competent jurisdiction to be, to
any extent, invalid or unenforceable, the remainder of this Agreement and the
application of such term, covenant, or condition to parties or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant or condition shall be valid and
enforced to the fullest extent permitted by law. Upon determination that any
such term is invalid, illegal or
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unenforceable, Lender may, but is not obligated to, advance funds to Borrower
under this Agreement until the parties to this Agreement amend this Agreement
so as to effect the original intent of the parties as closely as possible in
a valid and enforceable manner.
SECTION 9.6. SUCCESSORS AND ASSIGNS. This Agreement, the Note, and the
other Loan Documents shall be binding upon and inure to the benefit of Borrower
and Lender and their respective successors and assigns. Notwithstanding the
foregoing, Borrower may not assign any of its rights or delegate any of its
obligations under this Agreement without the prior written consent of Lender,
which may be withheld in its sole discretion. Lender may sell, assign, transfer,
or participate any or all of its rights or obligations under this Agreement
without notice to or consent of Borrower.
SECTION 9.7. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute but one instrument.
SECTION 9.8. INTERPRETATION. No provision of this Agreement or any
other Loan Document shall be interpreted or construed against any party because
that party or its legal representative drafted that provision. The titles of the
paragraphs of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement. Any pronoun used in this
Agreement shall be deemed to include singular and plural and masculine, feminine
and neuter gender as the case may be. The words "herein," "hereof," and
"hereunder" shall be deemed to refer to this entire Agreement, except as the
context otherwise requires.
SECTION 9.9. SURVIVAL OF TERMS. All covenants, agreements,
representations and warranties made in this Agreement, any other Loan Document,
and in any certificates and other instruments delivered in connection with this
Agreement shall be considered to have been relied upon by Lender and shall
survive the making by Lender of the Loans contemplated by this Agreement and the
execution and delivery to Lender of the Note, and shall continue in full force
and effect until all liabilities and obligations of Borrower to Lender are
satisfied in full.
SECTION 9.10. RELEASE OF LENDER. Borrower releases Lender, its
officers, employees, and agents, of and from any claims for loss or damage
resulting from acts or conduct of any or all of them, unless caused by Lender's
recklessness, gross negligence, or willful misconduct.
SECTION 9.11. TIME. Whenever Borrower is required to make any payment
or perform any act on a Saturday, Sunday, or a legal holiday under the laws of
the State of Maryland (or other jurisdiction where Borrower is required to make
the payment or perform the act), the payment may be made or the act performed on
the next Business Day. Time is of the essence in Borrower's performance under
this Agreement and all other Loan Documents.
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SECTION 9.12. COMMISSIONS. The transaction contemplated by this
Agreement was brought about by Lender and Borrower acting as principals and
without any brokers, agents, or finders being the effective procuring cause.
Borrower represents that it has not committed Lender to the payment of any
brokerage fee, commission, or charge in connection with this transaction. If any
such claim is made on Lender by any broker, finder, or agent or other person,
Borrower will indemnify, defend, and hold Lender harmless from and against the
claim and will defend any action to recover on that claim, at Borrower's cost
and expense, including Lender's counsel fees. Borrower further agrees that until
any such claim or demand is adjudicated in Lender's favor, the amount demanded
will be deemed a liability of Borrower under this Agreement, secured by the
Collateral.
SECTION 9.13. THIRD PARTIES. No rights are intended to be created under
this Agreement or under any other Loan Document for the benefit of any third
party donee, creditor, or incidental beneficiary of Borrower. Nothing contained
in this Agreement shall be construed as a delegation to Lender of Borrower's
duty of performance, including without limitation Borrower's duties under any
account or contract in which Lender has a security interest.
SECTION 9.14. DISCHARGE OF BORROWER'S OBLIGATIONS. Lender, in its sole
discretion, shall have the right at any time, and from time to time, without
prior notice to Borrower if Borrower fails to do so, to: (i) obtain insurance
covering any of the Collateral as required under this Agreement; (ii) pay for
the performance of any of Borrower's obligations under this Agreement; (iii)
discharge taxes, liens, security interests, or other encumbrances at any time
levied or placed on any of the Collateral in violation of this Agreement unless
Borrower is in good faith with due diligence by appropriate proceedings
contesting those items; and (iv) pay for the maintenance and preservation of any
of the Collateral. Expenses and advances shall be added to the Loan, until
reimbursed to Lender and shall be secured by the Collateral. Any such payments
and advances by Lender shall not be construed as a waiver by Lender of an Event
of Default.
SECTION 9.15. INFORMATION TO PARTICIPANTS. Lender may divulge to any
participant it may obtain in the Loan, or any portion of the Loan, all
information, and furnish to such participant copies of reports, financial
statements, certificates, and documents obtained under any provision of this
Agreement or any other Loan Document.
SECTION 9.16. INDEMNITY. Borrower hereby agrees to indemnify and hold
harmless Lender, its partners, officers, agents and employees (collectively,
"Indemnitee") from and against any liability, loss, cost, expense, claim,
damage, suit, action or proceeding ever suffered or incurred by Lender
(including reasonable attorneys' fees and expenses) arising from Borrower's
failure to observe, perform or discharge any of its covenants, obligations,
agreements or duties under this Agreement, or from the breach of any of the
representations or warranties contained in Article IV of this Agreement unless
caused by Lender's recklessness, gross negligence or willful misconduct.
Borrower shall defend Indemnitee against and save it harmless from all claims of
39
<PAGE>
any Person with respect to the Collateral unless caused by Lender's
recklessness, gross negligence or willful misconduct. Notwithstanding any
contrary provision in this Agreement, the obligation of Borrower under this
Section 9.16 shall survive the payment in full of the Obligations and the
termination of this Agreement.
SECTION 9.17. CHOICE OF LAW; CONSENT TO JURISDICTION. THIS AGREEMENT
AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF MARYLAND, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF
CONFLICTS OF LAWS. IF ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE NOTE IS
COMMENCED BY LENDER IN THE STATE COURTS OF THE STATE OF MARYLAND OR IN THE U.S.
DISTRICT COURT FOR THE DISTRICT OF MARYLAND, BORROWER HEREBY CONSENTS TO THE
JURISDICTION OF ANY SUCH COURT IN ANY SUCH ACTION AND TO THE LAYING OF VENUE IN
THE STATE OF MARYLAND. ANY PROCESS IN ANY SUCH ACTION SHALL BE DULY SERVED IF
MAILED BY REGISTERED MAIL, POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS DESCRIBED
IN SECTION 9.4.
SECTION 9.18. WAIVER OF TRIAL BY JURY. BORROWER HEREBY (A) COVENANTS
AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY,
AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH
RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS
SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER, AND THIS WAIVER IS
INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE
RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED AND
REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING JURISDICTION OVER THE
SUBJECT MATTER AND THE PARTIES TO THIS AGREEMENT, SO AS TO SERVE AS CONCLUSIVE
EVIDENCE OF BORROWER'S WAIVER OF THE RIGHT TO JURY TRIAL. FURTHER, BORROWER
HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER (INCLUDING LENDER'S
COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO BORROWER THAT LENDER WILL
NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION.
[SIGNATURES FOLLOW]
40
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the date first written above.
LENDER:
HCFP FUNDING, INC.
a Delaware corporation
By: /s/ Jeffrey P. Hoffman
---------------------------------------------
Name: Jeffrey P. Hoffman
Title: Vice President
BORROWER:
DAOU SYSTEMS, INC.
a Delaware corporation
By: /s/ Fred McGee
---------------------------------------------
Name: Fred McGee
Title: Executive Vice President, Chief
Financial Officer
DAOU-SENTIENT, INC.
a Delaware corporation
By: /s/ Fred McGee
---------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
DAOU-RHI, INC.
a Delaware corporation
By: /s/ Fred McGee
---------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
[SIGNATURES CONTINUE]
41
<PAGE>
DAOU-TMI, INC.
a Delaware corporation
By: /s/ Fred McGee
---------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
DAOU-SYNEXUS, INC.
a Delaware corporation
By: /s/ Fred McGee
---------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
42
<PAGE>
LIST OF EXHIBITS
Exhibit A - Form of Revolving Credit Note
Exhibit B - Form of Lockbox Agreement
Exhibit C - Form of Legal Opinion
43
<PAGE>
REVOLVING CREDIT NOTE
$8,000,000.00 JUNE 29, 1999
FOR VALUE RECEIVED, the undersigned, DAOU SYSTEMS, INC., DAOU--
SENTIENT, INC., DAOU--RHI, INC., DAOU--TMI, INC., and DAOU--SYNEXUS, INC., each
of which is a Delaware corporation (collectively "Borrower"), jointly and
severally, promise to pay, in lawful money of the United States, to the order of
HCFP FUNDING, INC., a Delaware corporation (together with its successors and
assigns, "Lender"), the principal sum of Eight Million and No/100 Dollars
($8,000,000.00), or so much of such principal sum as shall be advanced or
readvanced and shall remain unpaid under the Loan established pursuant to that
certain Loan and Security Agreement dated as of even date with this Note by and
between the undersigned and Lender (as amended, modified, restated or replaced
from time to time, the "Loan Agreement"), plus interest on the unpaid balance
thereof, computed on a 360-day basis, at the rate per annum that is set forth in
the Loan Agreement.
1. All capitalized terms used and not otherwise specifically defined in
this Revolving Credit Note (as amended, modified, restated or replaced from time
to time, the "Note") shall have the meanings given to them in the Loan
Agreement.
2. This Note shall evidence the undersigned's obligation to repay all
sums advanced by Lender from time to time under the Loan Agreement and as part
of the Loan. The actual amount due and owing from time to time under this Note
shall be evidenced by Lender's records of receipts and disbursements with
respect to the Loan, which shall be conclusive evidence of that amount, absent
manifest error.
3. Interest due pursuant to this Note shall be payable monthly, in
arrears, on the first Business Day of each month after the date of this Note
(for the previous month). For purposes of this Note, a "Business Day" shall mean
any day on which banks are open for business in Maryland, excluding Saturdays
and Sundays.
4. This Note shall become due and payable upon the earlier to occur of
(i) the expiration of the Term, or (ii) the occurrence of any Event of Default
under the Loan Agreement, or any other event under any other Loan Documents
which would result in this Note becoming due and payable. At such time, the
entire principal balance of this Note and all other fees, costs and expenses, if
any, shall be due and payable in full. Lender shall then have the option at any
time and from time to time to exercise all of the rights and remedies set forth
in this Note and in the other Loan Documents, as well as all rights and remedies
otherwise available to Lender at law or in equity, to collect the unpaid
indebtedness under this Note and the other Loan Documents. This Note is secured
by the Collateral, as defined in and described in the Loan Agreement.
<PAGE>
5. Whenever any principal and/or interest and/or fee under this Note
shall not be paid when due, whether at the stated maturity or by acceleration,
interest on such unpaid amounts shall thereafter be payable at a rate per annum
equal to four (4) percentage points above the stated rate of interest on this
Note until such amounts shall be paid.
6. The undersigned and Lender intend to conform strictly to the
applicable usury laws in effect from time to time during the term of the Loan.
Accordingly, if any transaction contemplated by the Loan Agreement or this Note
would be usurious under such laws, then notwithstanding any other provision
hereof: (i) the aggregate of all interest that is contracted for, charged, or
received under this Note or under any other Loan Document shall not exceed the
maximum amount of interest allowed by applicable law, and any excess shall be
promptly credited to the undersigned by Lender (or, to the extent that such
consideration shall have been paid, such excess shall be promptly refunded to
the undersigned by Lender); (ii) neither the undersigned nor any other Person
(as defined in the Loan Agreement) now or hereafter liable hereunder shall be
obligated to pay the amount of such interest to the extent that it is in excess
of the maximum interest permitted by applicable law; and (iii) the effective
rate of interest shall be reduced to the Highest Lawful Rate (as defined in the
Loan Agreement). All sums paid, or agreed to be paid, to Lender for the use,
forbearance, and detention of the debt of Borrower to Lender shall, to the
extent permitted by applicable law, be allocated throughout the full term of
this Note until payment is made in full so that the actual rate of interest does
not exceed the Highest Lawful Rate in effect at any particular time during the
full term thereof. If at any time the rate of interest under this Note exceeds
the Highest Lawful Rate, the rate of interest to accrue pursuant to this Note
shall be limited, notwithstanding anything to the contrary in this Note, to the
Highest Lawful Rate, but any subsequent reductions in the Base Rate shall not
reduce the interest to accrue pursuant to this Note below the Highest Lawful
Rate until the total amount of interest accrued equals the amount of interest
that would have accrued if a varying rate per annum equal to the interest rate
under the Note had at all times been in effect. If the total amount of interest
paid or accrued pursuant to this Note under the foregoing provisions is less
than the total amount of interest that would have accrued if a varying rate per
annum equal to the interest rate under this Note had been in effect, then the
undersigned agrees to pay to Lender an amount equal to the difference between
(x) the lesser of (A) the amount of interest that would have accrued if the
Highest Lawful Rate had at all times been in effect, or (B) the amount of
interest that would have accrued if a varying rate per annum equal to the
interest rate under the Note had at all times been in effect, and (y) the amount
of interest accrued in accordance with the other provisions of this Note and the
Loan Agreement.
7. This Note is the "Note" referred to in the Loan Agreement, and is
issued pursuant to the Loan Agreement. Reference is made to the Loan Agreement
for a statement of the additional rights and obligations of the undersigned and
Lender. In the event of any conflict between the terms of this Note and the
terms of the Loan Agreement, the terms of the Loan Agreement shall prevail. All
of the terms, covenants, provisions, conditions, stipulations, promises and
agreements contained in the Loan Documents to be kept, observed and/or performed
by the undersigned are made a part
2
<PAGE>
of this Note and are incorporated into this Note by this reference to the
same extent and with the same force and effect as if they were fully set
forth in this Note; the undersigned promises and agrees to keep, observe and
perform them or cause them to be kept, observed and performed, strictly in
accordance with the terms and provisions thereof.
8. Each party liable on this Note in any capacity, whether as maker,
endorser, surety, guarantor or otherwise, (i) waives presentment for payment,
demand, protest and notice of presentment, notice of protest, notice of
non-payment and notice of dishonor of this debt and each and every other notice
of any kind respecting this Note and all lack of diligence or delays in
collection or enforcement hereof; (ii) agrees that Lender at any time or times,
without notice to the undersigned or its consent, may grant extensions of time,
without limit as to the number of the aggregate period of such extensions, for
the payment of any principal, interest or other sums due hereunder; (iii) to the
extent permitted by law, waives all exemptions under the laws of the State of
Maryland and/or any state or territory of the United States; (iv) to the extent
permitted by law, waives the benefit of any law or rule of law intended for its
advantage or protection as an obligor under this Note or providing for its
release or discharge from liability on this Note, in whole or in part, on
account of any facts or circumstances other than full and complete payment of
all amounts due under this Note; and (v) agrees to pay, in addition to all other
sums of money due, all cost of collection and attorney's fees, whether suit be
brought or not, if this Note is not paid in full when due, whether at the stated
maturity or by acceleration.
9. No waiver by Lender of any one or more defaults by the undersigned
in the performance of any of its obligations under this Note shall operate or be
construed as a waiver of any future default or defaults, whether of a like or
different nature. No failure or delay on the part of Lender in exercising any
right, power or remedy under this Note (including, without limitation, the right
to declare this Note due and payable) shall operate as a waiver of such right,
power or remedy nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise of such right, power or
remedy or the exercise of any other right, power or remedy.
10. If any term, provision, covenant or condition of this Note or the
application of any term, provision, covenant or condition of this Note to any
party or circumstance shall be found by a court of competent jurisdiction to be,
to any extent, invalid or unenforceable, then the remainder of this Note and the
application of such term, provision, covenant, or condition to parties or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby, and each term, provision, covenant or condition
shall be valid and enforced to the fullest extent permitted by law. Upon
determination that any such term, provision, covenant or condition is invalid,
illegal or unenforceable, Lender may, but is not obligated to, advance funds to
Borrower under this Note until Borrower and Lender amend this Note so as to
effect the original intent of the parties as closely as possible in a valid and
enforceable manner.
11. No amendment, supplement or modification of this Note nor any
waiver of any provision of this Note shall be made except in writing executed by
the party against whom enforcement is sought.
3
<PAGE>
12. This Note shall be binding upon the undersigned and its successors
and assigns. Notwithstanding the foregoing, the undersigned may not assign any
of its rights or delegate any of its obligations under this Note without the
prior written consent of Lender, which may be withheld in its sole discretion.
13. THIS NOTE IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF MARYLAND WITHOUT RESPECT TO ANY OTHERWISE APPLICABLE
CONFLICTS-OF-LAWS PRINCIPLES, BOTH AS TO INTERPRETATION AND PERFORMANCE, AND THE
PARTIES EXPRESSLY CONSENT AND AGREE TO THE NON-EXCLUSIVE JURISDICTION OF THE
COURTS OF THE STATE OF MARYLAND AND THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF MARYLAND AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND,
WAIVING ALL CLAIMS OR DEFENSES BASED ON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE, INCONVENIENT FORUM OR THE LIKE. BORROWER HEREBY CONSENTS TO SERVICE OF
PROCESS BY MAILING A COPY OF THE SUMMONS TO BORROWER, BY CERTIFIED OR REGISTERED
MAIL, POSTAGE PREPAID, TO BORROWER'S ADDRESS SET FORTH IN SECTION 9.4 OF THE
LOAN AGREEMENT. BORROWER FURTHER WAIVES ANY CLAIM FOR CONSEQUENTIAL DAMAGES IN
RESPECT OF ANY ACTION TAKEN OR OMITTED TO BE TAKEN BY LENDER IN GOOD FAITH.
14. THE UNDERSIGNED HEREBY (A) COVENANTS AND AGREES NOT TO ELECT A
TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY A JURY, AND (B) WAIVES ANY RIGHT
TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND VOLUNTARILY
BY THE UNDERSIGNED, AND THIS WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH
INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE
ACCRUE. LENDER IS HEREBY AUTHORIZED AND REQUESTED TO SUBMIT THIS NOTE TO ANY
COURT HAVING JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES HERETO, SO AS
TO SERVE AS CONCLUSIVE EVIDENCE OF THE UNDERSIGNED'S WAIVER OF THE RIGHT TO JURY
TRIAL. FURTHER, THE UNDERSIGNED HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT
OF LENDER (INCLUDING LENDER'S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
TO ANY BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO
JURY TRIAL PROVISION.
[SIGNATURES ON FOLLOWING PAGE]
4
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first above written.
BORROWER:
DAOU SYSTEMS, INC.
a Delaware corporation
By: /s/ Fred McGee
-----------------------------------------------
Name: Fred McGee
Title: Executive Vice President, Chief Financial
Officer
DAOU--SENTIENT, INC.
a Delaware corporation
By: /s/ Fred McGee
-----------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
DAOU--RHI, INC.
a Delaware corporation
By: /s/ Fred McGee
-----------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
DAOU--TMI, INC.
a Delaware corporation
By: /s/ Fred McGee
-----------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
[SIGNATURES CONTINUE]
5
<PAGE>
DAOU--SYNEXUS, INC.
a Delaware corporation
By: /s/ Fred McGee
-----------------------------------------------
Name: Fred McGee
Title: Vice President, Secretary, Treasurer
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY RESPONSE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 9,361
<SECURITIES> 1,194
<RECEIVABLES> 22,460
<ALLOWANCES> 858
<INVENTORY> 8,606
<CURRENT-ASSETS> 1,122
<PP&E> 9,779
<DEPRECIATION> (5,080)
<TOTAL-ASSETS> 52,129
<CURRENT-LIABILITIES> 16,265
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 33,546
<TOTAL-LIABILITY-AND-EQUITY> 52,129
<SALES> 27,051
<TOTAL-REVENUES> 27,051
<CGS> 19,117
<TOTAL-COSTS> 19,117
<OTHER-EXPENSES> 7,739
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92
<INCOME-PRETAX> 100
<INCOME-TAX> 40
<INCOME-CONTINUING> 60
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 60
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
