<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 September 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 33-0284454
(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)
(858) 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 November 12,
1999:
17,696,687
<PAGE>
DAOU SYSTEMS, INC.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Condensed Consolidated Financial Statements Page
<S> <C> <C>
Condensed Consolidated Balance Sheets at September 30, 1999 (unaudited) and
December 31, 1998 1
Condensed Consolidated Statements of Operations (unaudited) for the Three
Months and Nine Months Ended September 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended
September 30, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
DAOU SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
(UNAUDITED)
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,503 $ 6,756
Short-term investments, available-for-sale 5 1,024
Accounts receivable, net 21,444 24,582
Contract work in progress 8,496 12,272
Deferred income taxes 5,077 3,362
Other current assets 1,381 1,306
----------------- -----------------
Total current assets 51,906 49,302
Equipment, furniture and fixtures, net 4,698 4,735
Other assets 501 480
----------------- -----------------
$ 57,105 $ 54,517
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities $ 4,166 $ 8,277
Accrued salaries and benefits 5,521 3,907
Current portion of long-term liabilities and line of credit - 5,453
----------------- -----------------
Total current liabilities 9,687 17,637
Long-term liabilities 743 684
Deferred income taxes 1,576 1,421
Redeemable convertible preferred stock, $.001 par value. Authorized
3,520 shares; issued and outstanding 2,182 at September 30, 1999 11,256 -
Stockholders' equity:
Common stock, $.001 par value. Authorized 50,000 shares;
issued and outstanding 17,690 at September 30, 1999 and
17,689 at December 31, 1998 18 18
Additional paid-in capital 38,501 38,419
Deferred compensation (734) (980)
Accumulated other comprehensive income (loss) (41) 236
Retained deficit (3,901) (2,918)
----------------- -----------------
Total stockholders' equity 33,843 34,775
Commitments and contingencies
----------------- -----------------
$ 57,105 $ 54,517
----------------- -----------------
----------------- -----------------
</TABLE>
SEE ACCOMPANYING NOTES.
1
<PAGE>
DAOU SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Periods Ended September 30,
---------------------------------------------------------------
Three Months Nine months
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues $ 25,382 $ 27,351 $ 79,755 $ 79,379
Cost of revenues 17,701 22,905 58,638 56,340
-------------- -------------- -------------- --------------
Gross profit 7,681 4,446 21,117 23,039
Operating expenses:
Sales and marketing 2,233 3,536 7,552 9,338
General and administrative 4,790 5,606 15,449 12,279
Merger and related expenses - - - 2,825
-------------- -------------- -------------- --------------
7,023 9,142 23,001 24,442
-------------- -------------- -------------- --------------
Income (loss) from operations 658 (4,696) (1,884) (1,403)
Interest income (expense), net 614 (177) 433 (50)
-------------- -------------- -------------- --------------
Income (loss) before income taxes 1,272 (4,873) (1,451) (1,453)
Provision (benefit) for income taxes 519 (1,785) (596) 1,325
-------------- -------------- -------------- --------------
Net income (loss) 753 (3,088) (855) (2,778)
Dividends on preferred stock (128) - (128) -
-------------- -------------- -------------- --------------
Net income (loss) available to common stockholders $ 625 $ (3,088) $ (983) $ (2,778)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net income (loss) per common share:
Basic $ 0.04 $ (0.17) $ (0.06) $ (0.16)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted $ 0.04 $ (0.17) $ (0.06) $ (0.16)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Shares used in computing net income (loss)
per common share:
Basic 17,695 17,681 17,692 17,640
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted 17,805 17,681 17,692 17,640
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
SEE ACCOMPANYING NOTES.
2
<PAGE>
DAOU SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months Ended September 30,
---------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (855) $ (2,778)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,173 1,217
Changes in operating assets and liabilities 3,113 (10,723)
------------------ ------------------
Net cash provided by (used in) operating activities 3,431 (12,284)
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (1,136) (2,012)
Maturities of short-term investments 742 7,344
Changes in other assets (21) 93
------------------ ------------------
Net cash (used in) provided by investing activities (415) 5,425
FINANCING ACTIVITIES
Proceeds (repayments) of long-term liabilities (5,479) 3,251
Proceeds from issuance of common stock 82 1,368
Proceeds from issuance of preferred stock 11,128 -
Distributions to stockholders - (3,601)
------------------ ------------------
Net cash (used in) provided by financing activities 5,731 1,018
Increase (decrease) in cash and cash equivalents 8,747 (5,841)
Cash and cash equivalents at beginning of period 6,756 7,981
------------------ ------------------
Cash and cash equivalents at end of period $ 15,503 $ 2,140
------------------ ------------------
------------------ ------------------
</TABLE>
See accompanying notes.
3
<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 September 30, 1999 and for the three and nine-month
periods ended September 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 September 30, 1999 and the results of operations for
the three and nine-month periods ended September 30, 1999 and 1998. The results
of operations for the three and nine months ended September 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
On June 29, 1999, the Company secured an $8.0 million revolving line of credit,
which expires June 29, 2001. The line of credit bears interest at prime plus 1%
per annum and 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. No amounts were outstanding under this revolving line of
credit as of September 30, 1999.
4. Related Party Transactions
The Company has an agreement with an officer that guarantees a cash bonus
(approximately $704,000 at September 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.
4
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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)
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) available to common stockholders $ 625 $ (3,088) $ (983) $ (2,778)
Denominator:
Denominator for basic net income (loss) per share -
weighted average common shares outstanding 17,695 17,681 17,692 17,640
Effect of dilutive securities:
Common stock options 110 - - -
Denominator for diluted net income (loss) per share -
adjusted weighted average common shares
outstanding 17,805 17,681 17,692 17,640
Basic net income (loss) per share $ 0.04 $ (0.17) $ (0.06) $ (0.16)
-------------------------------------------------------
-------------------------------------------------------
Diluted net income (loss) per share $ 0.04 $ (0.17) $ (0.06) $ (0.16)
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
6. Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended September 30, 1999 and
1998 totaled $254,000 and $(3,316,000), respectively. Comprehensive income
(loss) for the nine months ended September 30, 1999 and 1998 totaled
$(1,132,000) and $(2,920,000), 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 nine months ended September 30,
1999 was 41%. At September 30, 1999, net deferred tax assets were approximately
$3.5 million. Because the Company incurred an operating loss for 1998 and the
first quarter of 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. Preferred Stock
On July 26, 1999, 2,181,818 shares of Series A Preferred Stock were issued at
$5.50 per share to a related party. Holders of the Series A Preferred Stock are
entitled to receive cumulative dividends at the rate of six percent per annum,
payable in the form of shares of Series A Preferred Stock. Such dividend rate
shall increase an additional one-percent per annum for each successive year
after the second anniversary of the purchase date. The Series A Preferred Stock
has a liquidation preference of $5.50 per share plus any accrued (whether or not
declared) but unpaid dividends and is convertible, at the option of the holder,
into 2,181,818 shares of common stock, subject to certain antidilution
adjustments. The Company may be required to redeem the Series A Preferred Stock
for cash upon occurrence of certain events outside of the control of the
Company. The Series A Preferred Stock is also
5
<PAGE>
redeemable at the option of the Company four years after the date of
issuance. In addition, the Series A Preferred Stock is subject to mandatory
conversion in the event the Company's common stock price reaches certain
predetermined price targets.
6
<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 filed with the SEC on March 31, 1999, and Form 10-K/A
filed with the SEC April 30, 1999, for the year ended December 31, 1998. 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 such
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 the Company's gross margins could vary due to the associated loss
of revenue to cover the fixed labor costs.
Results of Operations
The following table sets forth for the periods indicated, certain statement of
operations data as a percentage of net revenues.
<TABLE>
<CAPTION>
Periods Ended September 30,
Three Months Nine months
1999 1998 1999 1998
--------------- ----------------- ----------------------------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of revenues 70 84 74 71
Gross profit 30 16 26 29
Operating expenses 28 33 29 31
Income (loss) from operations 2 (17) (3) (2)
Interest income (expense), net 3 (1) 1 -
Income (loss) before income taxes 5 (18) (2) (2)
Provision (benefit) for income taxes 2 (7) 1 1
Net income (loss) 3 (11) (1) (3)
</TABLE>
7
<PAGE>
Three Months Ended September 30, 1999 and 1998
The Company's revenues were $25.4 million and $27.4 million for the three months
ended September 30, 1999 and 1998, respectively, representing a decrease of 7%.
Revenues decreased primarily due to decreases in revenue from cabling contracts
as a result of the closure of the Company's cabling division, DAOU On-line,
Inc., and due to decreases in implementation contracts offset by increases in
revenue from contract management services as compared to the three months ended
September 30, 1998. Services to DAOU's five largest customers accounted for $7.1
million of total revenues for the three months ended September 30, 1999,
representing 28% of total revenues.
Cost of revenues was $17.7 million and $22.9 million for the three months ended
September 30, 1999 and 1998, respectively, representing a decrease of 23%. Gross
margin was 30% and 16% for the three months ended September 30, 1999 and 1998,
respectively. This increase in gross margin during the three months ended
September 30, 1999 was primarily due to the closure of the Company's cabling
division, DAOU On-line, Inc., and a revenue mix shift to higher margin business.
Sales and marketing expenses were $2.2 million and $3.5 million for the three
months ended September 30, 1999 and 1998, respectively, representing a decrease
of 37%. Sales and marketing expenses were approximately 9% and 13% of total
revenues for the three months ended September 30, 1999 and 1998, respectively.
The decrease is primarily attributable to a reduction in sales staff and related
expenditures.
General and administrative expenses were $4.8 million and $5.6 million for the
three months ended September 30, 1999 and 1998, respectively, representing a
decrease of 14%. The primary factors contributing to this decrease relate to
lower expenses caused by the integration of acquired companies and decreases in
legal, travel and recruiting costs. General and administrative expenses were
approximately 19% and 20% of total revenues for the three months ended September
30, 1999 and 1998, respectively.
Other income (expense), net, was $614,000 and $(177,000) for the three months
ended September 30, 1999 and 1998, 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 increase in other income (expense), net was
primarily due to a $540,000 gain from the sale of investments, higher average
cash reserves available for investment and reduced interest expense after the
payoff of outstanding debt during the three months ended September 30, 1999 as
compared to 1998.
The effective income tax rate for the three months ended September 30, 1999 and
1998 was 41% and 37%, respectively. Because the Company incurred an operating
loss for 1998 and the first quarter of 1999, management will continue to
evaluate the realization of the net deferred tax assets. If realization becomes
doubtful, a valuation allowance will be provided.
Nine Months Ended September 30, 1999 and 1998
The Company's revenues were $79.8 million and $79.4 million for the nine months
ended September 30, 1999 and 1998, respectively, representing an increase of 1%.
The change is the net result of an increase in revenues from contract management
services offset by a decrease in revenues from the closure of the Company's
cabling division, DAOU On-line, Inc.. Services to DAOU's five largest customers
accounted for $20.2 million of total revenues for the nine months ended
September 30, 1999, representing 25% of total revenues.
Cost of revenues was $58.6 million and $56.3 million for the nine months ended
September 30, 1999 and 1998, respectively, representing an increase of 4%. Gross
margin was 26% and 29% for the nine months ended September 30, 1999 and 1998,
respectively. This decrease in gross margin percentage during the nine months
ended September 30, 1999 was primarily due to lower labor utilization rates
within the communications infrastructure group and integration services group
resulting from decreases in network sales.
Sales and marketing expenses were $7.6 million and $9.3 million for the nine
months ended September 30, 1999 and 1998, respectively, representing a decrease
of 18%. This decrease was primarily due to a reduction in sales staff
8
<PAGE>
and related expenditures as the sales and marketing has been consolidated on
a corporate level. Sales and marketing expenses were approximately 9% and 12%
of total revenues for the three months ended September 30, 1999 and 1998,
respectively.
General and administrative expenses were $15.4 million and $12.3 million for the
nine months ended September 30, 1999 and 1998, respectively, representing an
increase of 25%. The primary factors contributing to this increase in costs were
associated with additional administrative staffing and other increased
infrastructure requirements at the beginning of the year to support growth and
integration of acquired companies, increased legal fees resulting from the
stockholder litigation and severance costs in the second quarter. As a
percentage of total revenues, general and administrative expenses were
approximately 19% and 15% for the nine months ended September 30, 1999 and 1998,
respectively.
Other income (expense), net, was $433,000 and $(50,000) for the nine months
ended September 30, 1999 and 1998, 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 increase in net other income (expense), net was
primarily due to a $540,000 gain from the sale of investments, higher average
cash reserves available for investment and reduced interest expense after the
payoff of outstanding debt during the nine months ended September 30, 1999 as
compared to 1998.
The effective income tax rate for the nine months ended September 30, 1999 was
41%. The effective income tax rate for the nine months ended September 30, 1998
was (91)% due to the non-deductibility of certain merger and related costs and
adjustments made to convert the former S corporation status of certain acquired
businesses to the C corporation status of the Company.
Liquidity and Capital Resources
On September 30, 1999, the Company had working capital of $42.2 million, an
increase of $10.5 million from $31.7 million on December 31, 1998. For the nine
months ended September 30, 1999, cash provided by operating activities was $3.4
million compared to cash used in operating activities of $12.3 million for the
nine months ended September 30, 1998. This change resulted primarily from
decreases in trade accounts receivable and contract work in progress for the
nine months ended September 30, 1999 as compared to 1998.
Net cash used in investing activities was $0.4 million for the nine months ended
September 30, 1999, compared to net cash provided by investing activities of
$5.4 million in the comparable prior period. This change was primarily from $7.3
million in 1998 of maturing marketable securities, which were not reinvested.
Net cash provided by financing activities was $5.7 million for the nine months
ended September 30,1999, compared to net cash provided by financing activities
of $1.0 million in the comparable prior period. The increase is due to the
issuance of preferred stock offset by repayments on the line of credit.
On June 29, 1999, the Company secured an $8.0 million revolving line of credit,
which expires June 29, 2001. The line of credit bears interest at prime plus 1%
per annum and 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. No amount remained outstanding under the revolving line
of credit as of September 30, 1999. On July 27, 1999, the Company completed a
$12 million private placement financing.
Although the Company has an accumulated deficit as of September 30, 1999, 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
9
<PAGE>
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 Company is preparing for the impact of the year 2000 issue on its business
and the businesses of its customers and suppliers. 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.
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 on its assessment and testing efforts to date, the Company believes that
its LAN and WAN networks and its standard LAN/WAN and PC software packages and
configurations are year 2000 ready, but certain PC hardware products will
require replacement or modification through, for example, ROM-BIOS upgrades to
certain hardware components and year 2000 compliant software upgrades. These
remaining products have been reviewed and all upgrades have been received. The
Company is in the process of ensuring that all upgrades have been applied for
these remaining products. The Company expects to complete its confirmation with
respect to these products by November 30, 1999. In the ordinary course of
replacing computer equipment and software, the Company has attempted to obtain
replacements that it believes are year 2000 compliant. The Company has compiled
information relating to the year 2000 readiness of 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.
Except as disclosed above, the Company estimates that it has completed
substantially all of the initiatives that it believes will be necessary to fully
address potential year 2000 issues relating to its Internal Use Systems.
10
<PAGE>
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 Third-Party Product 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 the following initiatives regarding Third-Party
Products that it has sold or installed, or currently maintains in accordance
with its contractual obligations:
- - Compilation of vendor, manufacturer and service provider statements and
assurances regarding the year 2000 issue from major suppliers;
- - Notification of current customers regarding the availability of these
statements and assurances from major suppliers at the suppliers'
individual web sites;
Despite these initiatives, the Company may nonetheless face claims and increased
obligations under its sales, service and maintenance agreements with its
customers if vendors, manufacturers and service providers of Third-Party
Products do not: (i) remediate successfully Third-Party Products by the year
2000, or (ii) adequately indemnify the Company or provide pass-through
warranties to its customers for products re-sold, installed and maintained by
the Company. These increased claims could affect materially and adversely the
Company's business, results of operations and financial condition.
The Company has completed assessment of its year 2000 related obligations under
its sales, service and maintenance agreements. The Company has entered into a
number of sales, service and maintenance agreements that contain differing terms
and conditions with respect to the products and/or services provided by the
Company which are not year 2000 ready. Some of these obligations are described
below:
- - For at least two major customers, the Company has agreed to repair,
modify and replace certain Third-Party Products that are not year 2000
ready, at no cost to the customer.
- - For several customers, the Company has represented that the services and
products recommended and sold are year 2000 compliant. The Company has
agreed to work 24 hours per day, seven days per week to remediate or
repair any of these customers' Third-Party Products that are not year
2000 ready. If the Company is unable to remediate any Third-Party
Products that are not year 2000 ready within 10 days, the Company has
agreed to refund the purchase price for non-compliant Third-Party
Products.
- - For several customers, the Company has agreed that the services and
products recommended and sold by the Company are year 2000 ready. While
the Company has attempted to limit the customer's remedy to assistance in
pursuing remedies, including manufacturer's warranties, for any
Third-Party Products that are not year 2000 ready, such limits on the
customer's remedies may be challenged in the event that any year 2000
issues are not successfully remedied.
- - For several customers, the Company has agreed that the services and
products recommended and sold are year 2000 ready, but has provided no
exclusive remedy or limitation on damages.
- - Several of the Company's master agreements contain general limitations on
damages and remedies, but also include express warranties that the
services and products supplied by the Company are year 2000 ready.
11
<PAGE>
- - Many of the Company's master agreements require the Company to indemnify
its customers for any third-party claims related to any work performed by
the Company.
- - Several of the Company's master agreements have no specific liability
limitations, including limitations with regard to year 2000 issues. These
agreements include several contracts for year 2000 remediation services,
as well as certain agreements that were completed and closed by the
Company or by its subsidiaries before they were merged into the Company.
For example, DAOU-Synexus, Inc. did not use formal contracts prior to
internal merging of operations and DAOU-Integrex, Inc. and DAOU-TMI, Inc.
pre-merger agreements did not include liability limitations.
The agreements referenced above expose the Company legally to increased claims
from the Company's customers, including defense and indemnity of third-party
claims against customers related to year 2000 readiness, as well as direct
claims by third-parties. The Company also has potential and similar legal
exposure with respect to its agreements and terms and conditions of sale not
specifically referenced above. Therefore, the Company could incur significant
expenses, costs and damages under these agreements that could impact materially
and adversely the Company's business, results of operations and financial
condition. The Company's actual year 2000 liability under these agreements
depends in large part on the year 2000 readiness of Third-Party Products that
are re-sold, installed and/or maintained under these agreements, and the
Company's ability to seek adequate indemnification and/or warranty coverage from
the vendors, manufacturers and service providers of Third-Party Products. The
Company has compiled information related to the year 2000 readiness of the
third-party vendors, manufacturers and service providers to these contracts, and
believes that the vast majority of the Third-Party Products covered by these
agreements are year 2000 ready. However, the Company cannot assure that the
information provided by the third-party vendors, manufacturers and service
providers is accurate.
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 September 30, 1999, the Company had incurred costs of approximately
$125,000 related to its year 2000 identification, assessment, testing and
remediation, of which $40,000 was incurred for Internal Use Systems and $85,000
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 $60,000 for year 2000 issues
relating to Internal Use Systems and additional costs of $15,000 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
12
<PAGE>
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 and personnel by the Company to address and/or
remediate year 2000 issues;
- - 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;
- - availability of adequately trained personnel to meet the service and
support obligations of the Company with respect to express warranties
regarding year 2000 readiness under its existing and future sales,
service and maintenance agreements; and
- - damage to the Company's reputation;
- - 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
resolving and/or defending 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 is in the process of developing a comprehensive contingency 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. The Company
currently expects to complete its contingency planning by November 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
13
<PAGE>
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 resources, third party
modification plans and third party assurances of year 2000 compliance. 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. Factors that could cause 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, the Company's efforts to mitigate potential liability
may not 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 September 30, 1999, the
Company had no outstanding balance on its variable-rate debt. A hypothetical 1%
adverse move in interest rates along the entire interest rate yield curve would
not materially effect the fair value of the Company's financial instruments that
are exposed to changes in interest rates.
14
<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 pursuant to the Private Securities Litigation Reform Act (the
"PSLRA"). 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 theory 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, which was filed on April 12, 1999 in the
federal litigation. The Company has been informed that this motion to dismiss
will not be decided by the district court in its current form because of a
recent decision by the Ninth Circuit of Appeals interpreting the PSLRA, Instead,
the plaintiffs will file a second amended consolidated complaint that will be
challenged by way of a motion to dismiss. 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 2. Changes in Securities and Use of Proceeds
The Company registered 2,750,000 shares of Common Stock for issuance upon
conversion of 2,181,818 shares of Series A Preferred Stock on the Registration
Statement on Form S-3 (File No. 33-87103), as declared effective by the
Commission on October 25, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C>
4.1 Certificate of Designations of DAOU, as filed with the Secretary
of State of the State of Delaware on July 23, 1999.*
4.2 Registration Rights Agreement, dated as of July 26, 1999, by and
among DAOU, Galen Partners III, L.P., a Delaware limited
partnership ("Galen III"), Galen Partners International III, L.P.,
a Delaware limited partnership ("Galen International"), and Galen
Employee Fund III, L.P., a Delaware limited partnership ("Galen
Employee Fund").*
10.1 Letter Agreement to Separation and Release Agreement and
Consulting Agreement, effective as of July 26, 1999, by and
between DAOU and Daniel J. Daou.
10.2 Separation and Release Agreement, dated as of July 2, 19999, by
and between DAOU and Frederick C. McGee.
10.3 Employment Agreement, dated as of September 8, 1999, by and
between DAOU and Donald R. Myll.
10.4 Voting Agreement, dated as of July 26, 1999, by and among DAOU,
Daniel J. Daou, Georges J. Daou, Galen III, Galen International
and Galen Employee Fund.*
10.5 Stock Purchase Agreement, dated as of July 26, 1999, by and among
DAOU, Galen III, Galen
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
International, and Galen Employee Fund.*
27.1 Financial Data Schedule
</TABLE>
--------
* Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K with the Commission filed on July
29, 1999.
(b) Current Reports on Form 8-K. The Registrant filed the following Current
Report on Form 8-K with the Commission during the quarter ended September
30, 1999:
On July 29, 1999, the Company filed a Current Report on Form 8-K
announcing that it had completed a $12 million private placement
financing involving the sale of 2,181,818 shares of Series A Preferred
Stock to certain investors at the purchase price of $5.50 per share.
16
<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.
Date: November 12, 1999
DAOU SYSTEMS, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Larry D. Grandia Chief Executive Officer and Director November 12, 1999
- --------------------
Larry D. Grandia
/s/ Donald R. Myll Executive Vice President, Chief Financial Officer and Secretary November 12, 1999
- --------------------
Donald R. Myll
</TABLE>
17
<PAGE>
Exhibit 10.1
[LETTERHEAD OF DAOU SYSTEMS, INC.]
October 13, 1999
Mr. Daniel J. Daou
P.O. Box 1982
Rancho Santa Fe, CA 92067
Dear Mr. Daou:
This letter will confirm our understanding and agreement as of July 26,
1999 pursuant to which you and DAOU Systems, Inc., a Delaware corporation (the
"COMPANY"), agreed to amend the Separation and Release Agreement and Consulting
Agreement, each dated as of April 15, 1999, (collectively, the "AGREEMENT"),
between you and the Company. Both you and the Company agreed to amend the
Agreement in exchange for the consideration set forth below and with reference
to the following recitals, each of which constituted a material term of our
letter agreement:
- On July 26, 1999, the Company entered into a private placement
financing with Galen Partners III, L.P. and its affiliated entities
(collectively, the "INVESTORS");
- As a condition to closing of the private placement financing, the
Investors have requested that you and the Company amend the Agreement
in the manner set forth in this letter agreement;
- Both you, as a beneficial owner of shares of Common Stock of the
Company, and the Company believe that the closing of such private
placement financing is in each of our best interests; and
- Therefore, for the consideration set forth in this letter agreement
and to facilitate the closing of the private placement financing with
the Investors, you and the Company desire to amend the Agreement in
the manner set forth in this letter agreement.
To the extent that you agree with the terms contained in this letter agreement,
please indicate your agreement and acceptance thereof by countersigning this
letter in the space provided below:
1. In exchange for the consideration set forth in this letter and your
interest in closing the private placement financing, you agree to waive all
rights to Severance Payments and Consulting Payments under the Agreement. As of
July 26, 1999, the Consulting Agreement between you and the Company was deemed
terminated in its entirety.
<PAGE>
Page 2 of 3
2. In exchange for the consideration set forth in this letter and your
interest in closing the private placement financing, you may retain certain
property given to you by the Company, including a cell phone, personal computer
and printer, all of which is valued at approximately Seven Thousand Dollars
($7,000).
3. The Company will continue to pay the monthly premium for
continuation of your COBRA coverage for a period of eighteen (18) months from
the Effective Date of the Agreement; PROVIDED, HOWEVER, that nothing in this
letter agreement may be construed to continue your insurance beyond the period
allowed by COBRA, nor may it be construed to create any obligation on the part
of the Company with respect to your responsibilities for formally electing to
continue coverage under COBRA.
4. Both you and the Company agree that neither party will adversely
interfere with the business affairs of the other, including, without limitation,
making critical or disparaging remarks, either orally or in writing, to any
person concerning the other party's business.
5. The terms and conditions contained in this letter agreement may not
be amended or modified except in writing and will be governed by and construed
in accordance with the laws of California without regard to conflicts of laws.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Page 3 of 3
6. Except as set forth in this letter agreement, the Agreement shall
remain in full force and effect. By the execution below, you and the Company
agree to continue to be bound by the terms and conditions of the Agreement as
amended by this letter agreement, including, without limitation, the release set
forth in Section 4 of the Agreement.
DAOU SYSTEMS, INC:
/s/ Larry D. Grandia
- -------------------------------------
Larry D. Grandia
President and Chief Executive Officer
If the foregoing correctly sets forth the understanding and agreement between
you and the Company, please sign and return one original executed copy of this
letter.
Confirmed and Agreed as of
____________, 1999:
/s/ Daniel J. Daou
- -------------------------------------
Daniel J. Daou
[SIGNATURE PAGE TO LETTER AGREEMENT, DATED OCTOBER 13, 1999]
<PAGE>
Exhibit 10.2
SEPARATION AND RELEASE AGREEMENT
This Separation and Release Agreement (this "AGREEMENT") is made as of
July 2, 1999 ("EFFECTIVE DATE") by and between DAOU Systems, Inc., a Delaware
corporation (the "COMPANY"), and Frederick C. McGee, an individual residing in
California ("MR. MCGEE").
RECITALS
A Mr. McGee currently is employed by the Company as Chief Financial
Officer ("CFO").
B. The Company and Mr. McGee desire to settle and dispose of, fully and
completely, all claims, demands, and causes of action which they may have
against each other, known or unknown, including those claims, demands and causes
of action arising out of the employment relationship and its termination.
AGREEMENT
The parties to this Agreement, intending to be legally bound, agree as
follows:
1. DEFINITIONS. For purposes of this Agreement, the following
terms have the meanings specified or referred to in this Section 1:
"AGREEMENT" means this Separation and Release Agreement,
including any exhibits hereto, as amended in writing from time to
time.
"BOARD OF DIRECTORS" means the board of directors of the Company.
"Company" as defined in the Preamble.
"CONFIDENTIAL INFORMATION" means: (i) any and all trade secrets
concerning the business and affairs of the Company, product
specifications, data, know-how, formulae, compositions, processes,
designs, sketches, photographs, graphs, drawings, samples,
inventions and ideas, past, current and planned research and
development, current and planned manufacturing and distribution
methods and processes, customer lists, current and anticipated
customer requirements, price lists, market studies, business
plans, computer software and programs (including object code and
source code), computer software and database technologies,
systems, structures and architectures and related processes,
formulae, compositions, improvements, devices, know-how,
inventions, discoveries, concepts, ideas, designs, methods and
information of the Company and any other information, however
documented, of the Company that is a trade secret within the
meaning of the Uniform Trade Secrets Act (California Civil Code
Sections 3426 through 3426.11). Of particular importance to the
Company is the protection of the confidentiality of its manner and
method of integrating and managing healthcare technology networks
and information technology to increase
1
<PAGE>
productivity and profit and to reduce cost; the particular
combination of network products which the Company utilizes is not
used by any other business or entity and is solely the product of
research and development by the Company.
"CORE BUSINESS" means (1) IT software application
implementation; (2) communication infrastructure services; (3) IT
management consulting; and (4) IT design, implementation, support
services for healthcare enterprises, as further detailed in the
Company Form 10-K, for the period ending December 31, 1999, as
filed with the Securities and Exchange Commission.
"DIRECT COMPETITOR" means any company engaged in the Company's
"Core Business."
"EFFECTIVE DATE" means the date stated in the first paragraph of
this Agreement.
"PERSON" means any individual, corporation (including any
non-profit corporation), general or limited partnership, limited
liability company, joint venture, estate, trust, association,
organization or governmental body.
"SEPARATION DATE" as defined in Section 2.1.
"SEVERANCE PAYMENTS" as defined in Section 5.
"SEVERANCE PERIOD" as defined in Section 5.
2. EMPLOYMENT DURING RECRUITING OF CFO.
2.1 EMPLOYMENT DURING RECRUITING. Mr. McGee and the Company
agree that from the Effective Date, the Company will begin a search to recruit
and employ a new CFO ("RECRUITING PERIOD"), Mr. McGee and the Company agree that
Mr. McGee may continue to perform his current duties as CFO during the
recruiting period for a period at the discretion of the Company, but no later
than August 31, 1999 ("SEPARATION DATE").
2.2 SALE OF THE COMPANY DURING RECRUITING PERIOD. In the event
the Company engages in a negotiation for the sale of the Company during the
Recruiting Period and prior to the Separation Date defined in Section 2.1 above,
Mr. McGee agrees that the Separation Date may be extended at the Company's
discretion. Mr. McGee agrees that if the Company desires to extend the
Separation Date through the negotiation of the sale, he will agree to perform
his duties as CFO through the date designated by the Company.
2.3 VESTING OF OPTIONS. Mr. McGee's options to purchase shares of
the Company's Common Stock will continue to vest, be exercisable and otherwise
be according to the terms and conditions of the Company's 1996 Stock Option Plan
(the "PLAN") and his Stock Option Agreement(s) ("OPTION AGREEMENT") through the
Separation Date. After the Separation Date, Mr. McGee's options to purchase
shares of Company common stock issued pursuant to the Plan will be controlled in
all respects by the terms and conditions of the Plan and the Option
Agreement(s).
2
<PAGE>
2.4 AT-WILL-EMPLOYMENT. Nothing in this Agreement may be
construed to contradict or amend Mr. McGee's at-will employment relationship
with the Company. While certain paragraphs of this Agreement describe events
which could occur at a particular time in the future or discuss the effect of a
termination for "cause", nothing in this Agreement may be construed as a
guarantee of employment of any length. Both Mr. McGee and the Company have the
right to terminate the employment relationship at any time and for any reason,
with or without notice.
3. PAYMENT OF FINAL WAGES. On the Separation Date, the Company will
provide Mr. McGee with a final paycheck which includes final wages through the
Separation Date, less all applicable federal, state and local income, social
security and other payroll deductions ("FINAL WAGES"). Final Wages include any
accrued but unused vacation and sick leave benefits. The Company will pay Mr.
McGee reasonable and customary business expenses, if any, incurred through the
Separation Date.
4. RELEASE OF ALL CLAIMS. In exchange for the continuation of
employment and benefits described in Section 2 above, Mr. McGee agrees as
follows
4.1 TERMS OF RELEASE. Mr. McGee, for himself and his heirs,
successors and assigns, each fully releases, and discharges Company, its
officers, directors, employees, shareholders, attorneys, accountants, other
professionals, insurers and agents of the other (collectively "AGENTS"), and all
entities related to each party, including, but not limited to, heirs, executors,
administrators, personal representatives, assigns, parent, subsidiary and sister
corporations, affiliates, partners and co-venturers (collectively "RELATED
ENTITIES"), from all rights, claims, demands, actions, causes of action,
liabilities and obligations of every kind, nature and description whatsoever,
Mr. McGee now has, owns or holds or has at anytime had, owned or held or may
have against the Company, Agents or Related Entities from any source whatsoever,
whether or not arising from or related to the facts recited in this Release and
through the Effective Date. Mr. McGee specifically releases and waives any and
all claims arising under any express or implied contract, rule, regulation or
ordinance, including, without limitation, Title VII of the Civil Rights Act of
1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the
California Fair Employment and Housing Act, and the Age Discrimination in
Employment Act, as amended ("ADEA").
4.2 SECTION 1542 WAIVER. This Release is intended as a full
and complete release and discharge of any and all claims that Mr. McGee may
have against the Company, Agents or Related Entities through the Effective
Date. In making this release, Mr. McGee intends to release the Company,
Agents and Related Entities from liability of any nature whatsoever for any
claim of damages or injury or for equitable or declaratory relief of any
kind, whether the claim, or any facts on which such claim might be based, is
known or unknown to him. Mr. McGee expressly waives all rights under
Section 1542 of the Civil Code of the State of California, which Mr. McGee
understands provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
3
<PAGE>
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Mr. McGee acknowledges that he may discover facts different from or in
addition to those which he now believes to be true with respect to this Release.
Mr. McGee agrees that this Release shall remain effective notwithstanding the
discovery of any different or additional facts.
4.3 WAIVER OF CERTAIN CLAIMS. Mr. McGee acknowledges that he has
been advised in writing of his right to consult with an attorney prior to
executing the waivers set out in this Release, and that he has been given a
21-day period in which to consider entering into the release of ADEA claims, if
any. In addition, Mr. McGee acknowledges that he has been informed that he may
revoke a signed waiver of the ADEA claims for up to seven (7) days after
executing this Release.
5. SEVERANCE PAYMENT UPON TERMINATION OF EMPLOYMENT.
5.1 AMOUNT OF SEVERANCE. In exchange for Mr. McGee's agreement
to Sections 6, 7, 8 and 9 of this Agreement, Mr. McGee is entitled to severance
in equal payments, each in an amount equal to the most recent, regular monthly
rate of pay received by Mr. McGee during the Employment Period ("SEVERANCE
PAYMENTS"). Severance Payments will be less all applicable federal, state and
local income, social security and other payroll deductions.
5.2 SEVERANCE PERIOD. Mr. McGee will be entitled to Severance Pay
for a period of twelve (12) months from the Separation Date ("SEVERANCE
PERIOD"). Mr. McGee's Severance Payments will cease if he (a) violates Sections
6, 7, 8 or 9 of this Agreement; (b) resigns his employment prior to the
Separation Date; or (c) is terminated by the Company for "CAUSE" prior to the
Separation Date. For purposes of this Agreement, Cause is defined as (i) Mr.
McGee's material breach of this Agreement or the Confidentiality Agreement which
he signed on June 28, 1996, which is attached as Exhibit A to this Agreement;
(ii) Mr. McGee's failure or refusal to substantially and materially perform
according to or to comply with the reasonable policies and directions
established by the Company or the Board; (iii) the appropriation (or attempted
appropriation) of a material business opportunity of the Company including
attempting to secure or securing any personal profit in connection with any
transaction entered into on behalf of the Company; (iv) the misappropriation (or
attempted misappropriation) of any of the Company's funds or property; (v) 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; (vi) willful misconduct or
incompetence; (vii) physical or mental disability or other inability to perform,
with or without reasonable accommodation, the essential functions of his
position; or (viii) death.
6. RELEASE. Mr. McGee's right to Severance Payments will be contingent
upon his execution of a release and discharge of the Company, its present and
former agents, employees, officers, directors, shareholders, principals,
predecessors, alter egos, partners, parents, subsidiaries, affiliates,
attorneys, insurers, successors and assigns, from any and all claims, demands,
grievances, causes of action or suit of any kind arising out of, or in any way
connected with, the dealings between the parties through the Separation Date,
including claims arising out of the employment relationship and its termination.
This release would include any and all legal
4
<PAGE>
or administrative claims arising under any express or implied contract, law,
rule, regulation, or ordinance, including, but not limited to, Title VII of
the Civil Rights Act of 1964, the Fair Labor Standards Act, the Americans
with Disabilities Act, the California Fair Employment and Housing Act, the
Family Rights' Act, the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") or the Age Discrimination in Employment Act of 1967, as
amended ("ADEA"). The release will be substantially the form attached to this
Agreement as Exhibit "B."
7. CONTINUED REPRESENTATION. Unless a conflict of interest arises
which mandates the engagement of separate counsel, Mr. McGee will consent to be
represented by counsel for the Company in the matter of In RE DAOU SYSTEMS
SECURITIES LITIGATION, United States District Court, Southern District, Case No.
98-CV-1537 TW. Mr. McGee will forfeit his right to benefits under Sections 2 and
5 of this Agreement in the event he violates this Section 7.
8. NON COMPETITION THROUGH SEVERANCE PERIOD. During the Term of this
Agreement, including the Severance Period, if any, Mr. McGee is prohibited from
engaging in any activity which is competitive with the Company's Core Business.
Mr. McGee will forfeit his right to benefits under Sections 2 and 5 of this
Agreement in the event he violates this Section 8.
9. NON-SOLICITATION OF EMPLOYEES. For a period of two years following
his Separation Date, Mr. McGee agrees he will not solicit for employment other
individuals who are the Company's employees or induce the Company's employees to
terminate their employment with the Company for the purpose of competing with
the Company.
10. CONTINUING OBLIGATIONS UNDER CONFIDENTIALITY AGREEMENT. Mr.
McGee understands and agrees that after the Separation Date he has a continuing
obligation to protect the Company's Confidential Information according to the
terms and conditions of the Employee Confidentiality and Inventions Agreement
which Mr. McGee signed on June 28, 1996 and which is attached as Exhibit A to
this Agreement.
11. CONFIDENTIALITY OF AGREEMENT. Mr. McGee further agrees to keep
confidential the terms of this Agreement and to refrain from disclosing any
information regarding this Agreement and its terms to any third party, unless
required to do so (a) by a regulatory body (e.g. filings with the Securities
Exchange Commission ("SEC") or the ASE); (b) in financial disclosures to
auditors or in audited financial statements; or (c) under oath, if properly
ordered, in a court of competent jurisdiction. Mr. McGee agrees to notify the
Company in writing upon first notification that he may be required by law to
disclose any information deemed confidential by this Agreement. Notice must be
provided in sufficient time for the party receiving notice to oppose or
otherwise respond to the request.
12. NON-DISPARAGEMENT. Mr. McGee and the Company agree they will not
adversely interfere with each others business affairs, including, without
limitation, making disparaging remarks, either orally or in writing, to any
person disparaging, criticizing or speaking ill of the other party's business or
reputation, management or employees in any way and for any reason.
5
<PAGE>
13. DISPUTES OR CONTROVERSIES. Mr. McGee recognizes that should a
dispute or controversy arising from or relating to this Agreement be submitted
for adjudication to any court, arbitration panel, or other third party, the
preservation of the secrecy of Confidential Information may be jeopardized. All
pleadings, documents, testimony, and records relating to any such adjudication
will be maintained in secrecy and will be available for inspection by the
Company, Mr. McGee, and their respective attorneys and experts, who will agree,
in advance and in writing, to receive and maintain all such information in
secrecy, except as may be limited by them in writing.
14. WAIVER OF CERTAIN CLAIMS. Mr. McGee acknowledges that with this
Agreement he has been advised in writing of his right to consult with an
attorney prior to executing the waivers set out in this Agreement, and that he
has been given a 21-day period in which to consider entering into the release of
ADEA claims, if any. In addition, Mr. McGee acknowledges that he has been
informed that he may revoke a signed waiver of the ADEA claims for up to seven
(7) days after executing this Release.
15. GENERAL PROVISIONS.
15.1 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.
15.2 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 the Company may merge or
consolidate or to which all or substantially all of its assets may be
transferred. The duties and covenants of Consultant under this Agreement, being
personal, may not be delegated,
15.3 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):
6
<PAGE>
If to the Company: DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92122
ATTENTION: President
Facsimile No.: (619) 452-2789
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 Mr. McGee: Frederick McGee
4786 Sun Valley
Del Mar, CA 92014
15.4 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the
entire agreement between the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings, oral or written, between
the parties hereto with respect to the subject matter hereof. This Agreement may
not be amended orally, but only by an agreement in writing signed by the parties
hereto.
15.5 GOVERNING LAW. This Agreement shall be interpreted and
enforced in accordance with the laws of the State of California.
15.6 BINDING ARBITRATION. Any dispute or claim arising out of
this agreement shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS) and will be governed by the Model Employment Arbitration rules
of AAA. The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. Notwithstanding any rule of
AAA to the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will apply California substantive law in
all respects. The party prevailing in the resolution of any such claim will be
entitled, in addition to such other relief as may be granted, to an award of all
actual attorneys fees and costs incurred in pursuit of the claim, without regard
to any statute, schedule, or rule of court purported to restrict such award.
15.7 ATTORNEYS' FEES. Unless otherwise specifically provided in
this Agreement, in the event of any controversy, claim or dispute between any of
the parties arising out of or relating to this Agreement, or the breach thereof,
the prevailing party shall be entitled to recover, from the losing party,
reasonable attorneys' fees, expenses and costs actually incurred in
7
<PAGE>
the case of arbitration of any such controversy, claim or dispute, or by the
court in which any such controversy, claim or dispute is resolved.
15.8 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.
15.9 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.
15.10 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.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
DAOU SYSTEMS, INC.: MR. FREDERICK MCGEE:
By: /s/ Larry Grandia By: /s/ Frederick C. McGee
------------------------------ -------------------------
Larry Grandia, President Frederick C. McGee
8
<PAGE>
EXHIBIT A
GENERAL RELEASE
This GENERAL RELEASE ("Release") is entered into effective as of July
2, 1999 ("Effective Date") by and between DAOU Systems, Inc., a Delaware
corporation (the "COMPANY"), and Frederick C, McGee, an individual resident of
the State of California ("Mr. McGee") with reference to the following facts:
RECITALS
A. The parties hereto entered into a Separation and Release
Agreement on July 2, 1999 ("AGREEMENT"). Pursuant to the terms and conditions of
the Agreement, and contingent upon satisfaction of the conditions described in
that Agreement, Mr. McGee would become eligible for severance payments for up to
twelve (12) months (the "SEVERANCE PERIOD") beginning on the Separation Date in
exchange for Employee's release of the Company from all claims which Employee
may have against the Company as of the Separation Date.
B. The parties desire to dispose of, fully and completely, all
claims which Mr. McGee may have against the Company in the manner set forth in
this Release.
AGREEMENT
1. RELEASE. In exchange for the consideration described in the
Agreement, receipt of which is acknowledged, Mr. McGee, for himself and his
heirs, successors and assigns, each fully releases, and discharges Company, its
officers, directors, employees, shareholders, attorneys, accountants, other
professionals, insurers and agents of the other (collectively "AGENTS"), and all
entities related to each party, including, but not limited to, heirs, executors,
administrators, personal representatives, assigns, parent, subsidiary and sister
corporations, affiliates, partners and co-venturers (collectively "RELATED
ENTITIES"), from all rights, claims, demands, actions, causes of action,
liabilities and obligations of every kind, nature and description whatsoever,
Mr. McGee now has, owns or holds or has at anytime had, owned or held or may
have against the Company, Agents or Related Entities from any source whatsoever,
whether or not arising from or related to the facts recited in this Release. Mr.
McGee specifically releases and waives any and all claims arising under any
express or implied contract, rule, regulation or ordinance, including, without
limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of
1991, the Americans with Disabilities Act, the California Fair Employment and
Housing Act, and the Age Discrimination in Employment Act, as amended ("ADEA").
2. SECTION 1542 WAIVER. This Release is intended as a full and
complete release and discharge of any and all claims that Mr. McGee may have
against the Company, Agents or Related Entities through the Separation Date.
In making this release, Mr. McGee intends to release the Company, Agents and
Related Entities from liability of any nature whatsoever for any claim of
damages or injury or for equitable or declaratory relief of any kind, whether
the claim, or any facts on which such claim might be based, is known or
unknown to him- Mr. McGee expressly waives all rights under Section 1542 of
the Civil Code of the State of California, which Mr. McGee understands
provides as follows:
9
<PAGE>
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Mr. McGee acknowledges that he may discover facts different from or in addition
to those which he now believes to be true with respect to this Release. Mr.
McGee agrees that this Release shall remain effective notwithstanding the
discovery of any different or additional facts.
3. WAIVER OF CERTAIN CLAIMS. Mr. McGee acknowledges that with
this Release he has been advised in writing of his right to consult with an
attorney prior to executing the waivers set out in this Release, and that he has
been given a 21-day period in which to consider entering into the release of
ADEA claims, if any. In addition, Mr. McGee acknowledges that he has been
informed that he may revoke a signed waiver of the ADEA claims for up to seven
(7) days after executing this Release.
4. NO UNDUE INFLUENCE. This Release is executed voluntarily and
without any duress or undue influence. Mr. McGee acknowledges he has read this
Release and executed it with his full and free consent. No provision of this
Release shall be construed against any party by virtue of the fact that such
party or its counsel drafted such provision or the entirety of this Release.
5. CONFIDENTIALITY OF AGREEMENT AND RELEASE. Mr. McGee further
agrees to keep confidential the terms of the Agreement and this Release and to
refrain from disclosing any information regarding this Agreement and its terms
to any third party, unless required to do so (a) by a regulatory body (e.g.
filings with the Securities Exchange Commission ("SEC") or the ASE); (b) in
financial disclosures to auditors or in audited financial statements; or (c)
under oath, if properly ordered, in a court of competent jurisdiction. Mr. McGee
agrees to notify the Company in writing upon first notification that he may be
required by law to disclose any information deemed confidential by this
Agreement. Notice must be provided in sufficient time for the party receiving
notice to oppose or otherwise respond to the request.
6. GOVERNING LAW. This Release is made and entered into in the
State of California and accordingly the rights and obligations of the parties
hereunder shall in all respects be construed, interpreted, enforced and governed
in accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California.
7. SEVERABILITY. If any provision of this Release is held to be
invalid, void or unenforceable, the balance of the provisions of this Release
shall, nevertheless, remain in full force and effect and shall in no way be
affected, impaired or invalidated.
8. COUNTERPARTS. This Release may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute
10
<PAGE>
one and the same instrument. This Release may be executed by facsimile, with
originals to follow by overnight courier.
9. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising
out of this Release shall be subject to final and binding arbitration. The
arbitration will be conducted by one arbitrator who is a member of the American
Arbitration Association (AAA) or of the Judicial Arbitration and Mediation
Services (JAMS) and will be governed by the Model Employment Arbitration rules
of AAA. The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. Notwithstanding any rule of
AAA to the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure Section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will apply California substantive law in
all respects. The party prevailing in the resolution of any such claim will be
entitled, in addition to such other relief as may be granted, to an award of all
actual attorneys fees and costs incurred in pursuit of the claim, without regard
to any statute, schedule, or rule of court purported to restrict such award.
10. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter of this Agreement,
and supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written.
11. MODIFICATION; WAIVERS. No modification, termination or
attempted waiver of this Agreement will be valid unless in writing, signed by
the party against whom such modification, termination or waiver is sought to be
enforced.
12. AMENDMENT. This Agreement may be amended or supplemented only
by a writing signed by Mr. McGee and the Company.
Dated: July 2, 1999 /s/ Frederick C. McGee
----------------------------------- -------------------------------
Frederick C. McGee
DAOU SYSTEMS, INC.
Dated: /s/ Larry Grandia
---------------------------------- --------------------------------
By: Larry Grandia, President
11
<PAGE>
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made as of September 8,
1999 by and between DAOU Systems, Inc., a Delaware corporation ("EMPLOYER"), and
Donald R. Myll, an individual resident of the State of California ("EMPLOYEE").
AGREEMENT
The parties to this Agreement, intending to be legally bound, hereby
agree as follows:
1. EFFECTIVE DATE. Employee's employment with Employer will
commence effective as of September 8, 1999 (the "EFFECTIVE DATE").
2. EMPLOYMENT TERMS AND DUTIES.
2.1 EMPLOYMENT. Employer employs Employee, and Employee
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 by either Employer or Employee. Employer may terminate Employee with
or without Cause (as defined below in Section 7.1). Although certain
provisions of this Agreement describe events that could occur at a particular
time in the future, nothing in this Agreement may be construed as a guarantee
of Employee's employment for any length of time.
2.3 DUTIES. Effective upon his appointment by
Employer's Board of Directors, Employee will serve as Executive Vice
President, Chief Financial Officer and Secretary of Employer and will have
such duties as are assigned or delegated to Employee by the President of
Employer (the "PRESIDENT"). Employee will: (i) devote his entire business
time, attention, skill, and energy exclusively to the business of Employer;
(ii) use his best efforts to promote the success of Employer's business; and
(iii) cooperate fully with the President and the Board of Directors of
Employer in the advancement of the best interests of Employer.
2.4 PARTICIPATION ON OUTSIDE BOARDS; HEARING SCIENCE.
(a) Notwithstanding the provisions of Section
2.3, Employee shall be permitted to participate as a member of the Board of
Directors of other corporations provided that (i) such participation does not
interfere with or diminish the performance by Employee of his duties set forth
in Section 2.3, and (ii) Employee obtains the prior written consent of the Board
of Directors of Employer (which consent will not unreasonably be withheld).
Employee agrees to resign from any such Boards of Directors at the request of
Employer's Board of Directors if they conclude, in their discretion, that the
participation of Employee on such Board is not in the best interest of Employer.
<PAGE>
(b) Employer acknowledges that it has been
informed by Employee that he is currently serving as Chief Executive Officer of
Hearing Science, which currently occupies less that five hours per month of his
time. As an accommodation to Employee, Employer agrees that Employee may
continue to serve in this capacity until October 31, 1999. In the event that
Employee continues to serve in an executive, employee or consultant capacity to
Hearing Science beyond this date without Employer's prior approval, Employer may
immediately terminate this Agreement for Cause.
2.5 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.
Employee agrees to comply with the terms and conditions of Employer's Employee
Confidentiality and Inventions Agreement, a copy of which is attached hereto as
EXHIBIT A and is incorporated herein by this reference.
3. COMPENSATION.
3.1 SALARY. Employee will be paid an annual salary of
One Hundred and Ninety Thousand Dollars ($190,000) (the "SALARY"), less any
applicable state and federal taxes or other payroll deductions. The Salary will
be payable in equal periodic installments according to Employer's customary
payroll practices. Any adjustment to the Salary is at the sole discretion of
Employer.
3.2 BENEFITS. Employee will be permitted to participate
in such sick leave, pension, profit sharing, life insurance, hospitalization,
long term disability, major medical and other employee benefit plans of Employer
(collectively, the "BENEFITS"), that may be in effect from time to time for
management level employees, to the extent that Employee is eligible under the
terms of those plans.
3.3 ADDITIONAL COMPENSATION. As additional compensation
for the services rendered by Employee pursuant to this Agreement, Employee is
eligible for a quarterly bonus of up to $20,000 in accordance with Employer's
Incentive Compensation Plan (the "ADDITIONAL COMPENSATION"). Employee is
eligible for a pro-rated portion of the Additional Compensation for the period
of 1999 after the Effective Date. In order to be eligible for the Additional
Compensation, Employee shall be employed by Employer on the date that the
Additional Compensation, if any, is customarily distributed by Employer.
4. GROWTH INCENTIVE.
4.1 GRANT OF OpTIONS. On the Effective Date, Employer
will grant to Employee stock options for the right to purchase up to Three
Hundred Thousand (300,000) shares of Employer's Common Stock (the "OPTIONS"), of
which 150,000 options shall be issuable under Employer's 1996 Stock Option Plan
(the "PLAN"), and 150,000 options shall be issuable outside of the Plan. The
Options will consist of 61,536 incentive stock options and 238,464 non-qualified
stock options, each exercisable at a price of $4.875 per share of Common Stock,
which price is the fair market value of Employer's Common Stock on September 8,
1999. In addition to the terms set forth in this Section 4, all of the Options
(whether or not issued pursuant to the Plan) will be subject to such other
terms, conditions and limitations as generally are included in
<PAGE>
the Plan and in any related stock option agreement, as well as applicable
state and federal laws including, but not limited to, tax and securities
laws. The Options will vest as set forth below in Section 4.2.
4.2 VESTING OF THE OPTIONS. The Options will vest as
follows:
(a) 61,536 incentive stock options will vest in
three (3) equal annual increments of 20,512 shares of Common Stock on the first,
second and third anniversaries, respectively, of the Effective Date;
(b) 138,464 non-qualified options will vest in
two (2) equal increments of 46,155 shares of Common Stock on the first and
second anniversaries, respectively, of the Effective Date and 46,154 shares of
Common Stock will vest on the third anniversary of the Effective Date;
(c) the remaining 100,000 non-qualified options
(the "PERFORMANCE-BASED OPTIONS") will vest on the earlier of: (i) the sixth
anniversary of the Effective Date; or (ii) the achievement of the price targets
of Employer's Common Stock set forth in EXHIBIT B to this Agreement; and
(d) all unvested options will vest and become
exercisable in the event that Employee is terminated without Cause as defined
in Section 7.1(c).
4.3 CONTINUED EMPLOYMENT. Except as described in
Section 7.1(e) of this Agreement, vesting of the Options pursuant to this
Agreement is earned only by continuing as an employee of Employer at the will of
Employer (not through the act of being granted the Option or acquiring shares
hereunder). This Agreement, the transactions contemplated under it and the
vesting schedule set forth in this Agreement do not constitute an express or
implied promise of continued engagement for the vesting period, for any period,
or at all.
5. FACILITIES AND EXPENSES. 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 (a) while attending
conventions, seminars and other business meetings, (b) for appropriate business
entertainment activities, and (c) for appropriate promotional expenses. In
addition, Employer will reimburse Employee for the reasonable costs of equipping
a home office (e.g. computer, phone line, printer and facsimile). Employee shall
file expense reports with respect to such expenses in accordance with Employer's
policies.
6. VACATIONS AND HOLIDAYS. Employee will be entitled to paid
vacation in an amount of four weeks per year. Employee may carry-over from one
year to the next any accrued but unused vacation up to a maximum of six weeks of
vacation. Once Employee accrues the maximum vacation, he will not accrue
additional vacation until he takes enough vacation to bring his accrual below
the maximum. Employee may take vacation at such time or times as approved by the
President. Employee is entitled to holidays in accordance with the holiday
policies of Employer in effect for its employees from time to time.
<PAGE>
7. PAYMENT UPON TERMINATION OF EMPLOYMENT. Upon termination of
Employee's Employment, Employer will be obligated to pay to Employee only such
compensation as is provided in this Section 7.
7.1 TERMINATION OF EMPLOYEE WITHOUT CAUSE OR
RESIGNATION BY EMPLOYEE FOR GOOD REASON FOLLOWING A CHANGE IN CONTROL. In the
event of (i) the termination of Employee without Cause or (ii) a Change in
Control Termination (as defined below), Employee will be eligible for payment of
the Salary and accrued but unused vacation through the date of such termination
and severance payments (the "SEVERANCE PAYMENT") in an aggregate amount equal to
(a) the Salary plus (b) an amount equal to the Additional Compensation, if any,
paid to Employee during the twelve (12) month period preceding termination. The
Severance Payment, if any, will be paid in a lump sum within 45 days of
termination. In addition, Employer will reimburse the Employee for COBRA
payments, if COBRA coverage is elected by Employee, for a twelve (12) month
period. Employee's receipt of the Severance Payment and COBRA payment is
conditioned upon his execution of a release of all claims effective as of the
termination date, in substantially the form attached to this Agreement as
EXHIBIT C.
(a) A "CHANGE IN CONTROL TERMINATION" of the
employment relationship occurs if Employee resigns for Good Reason (as defined
below) within twelve (12) months following a CHANGE IN CONTROL (as defined
below).
(b) "CHANGE IN CONTROL" is defined to have
occurred if, and only if:
(i) any individual, partnership, firm,
corporation, association, trust, unincorporated organization or other entity
or person, or any syndicate or group deemed to be a person under Section
14(d)(2) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), is or becomes the "beneficial owner" (as defined in Rule 13d-3 of the
General Rules and Regulations under the Exchange Act), directly or indirectly,
of securities of Employer representing 50% or more of the combined voting power
of Employer's then outstanding securities entitled to vote in the election of
directors of Employer;
(ii) there occurs a reorganization,
merger, consolidation or other corporate transaction involving Employer
("TRANSACTION"), in each case, with respect to which the stockholders of
Employer immediately prior to such Transaction do not, immediately after the
Transaction, own more than fifty percent (50%) of the combined voting power of
Employer or other corporation resulting from such Transaction; or
(iii) all or substantially all of the
assets of Employer are sold, liquidated or distributed.
(c) DEFINITION OF CAUSE. A termination for
"CAUSE" occurs if Employee is terminated for any one of the following reasons:
(i) Employee's material breach of this Agreement; (ii) Employee's material
failure to adhere to any written policy of Employer generally applicable to
officers of Employer 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);
(iii) the appropriation (or attempted appropriation) of a material business
opportunity of Employer,
<PAGE>
including attempting to secure or securing any personal profit in connection
with any transaction entered into on behalf of Employer; (iv) the
misappropriation (or attempted misappropriation) of any of Employer's funds
or property; (v) 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; (vi)
willful misconduct; (vii) physical or mental disability or other inability to
perform the essential functions of his position, with or without reasonable
accommodation; (viii) death; or (ix) as stated in Section 2.4(b).
(d) RESIGNATION BY EMPLOYEE FOR GOOD REASON.
Employee shall have the right to terminate his employment with Employer, and
such termination shall, for purposes of this Agreement, be considered a
resignation by Employee for "GOOD REASON" if Employer: (i) changes Employee's
position and title from Executive Vice President and Chief Financial Officer to
a title and position of decreased responsibility or salary; or (ii) Employee's
place of employment is located more than 50 miles from the current corporate
location in San Diego, California. An event described in this Section 7.1(d)
will not constitute Good Reason unless it is (i) communicated by Employee to
Employer in writing and (ii) not corrected by Employer in a manner which is
reasonably satisfactory to Employee within thirty (30) days of Employer's
receipt of such written notice.
(e) VESTING OF THE OPTIONS UPON A CHANGE IN
CONTROL. In the event of a Change in Control, seventy percent (70%) of all of
the unvested Options will vest immediately upon the consummation of such Change
in Control.
7.2 TERMINATION OF EMPLOYEE FOR CAUSE. In the event that
Employer terminates Employee for Cause, Employee will be entitled to receive the
portion of the Salary accrued and owing to Employee only through the date of
such termination. In addition, at the option of Employer in its sole discretion,
Employee may be eligible for the Severance Payments as described in Section 7.1
in exchange for his execution of a release of all claims effective as of the
termination date, in substantially the form attached to this Agreement as
EXHIBIT C.
7.3 TERMINATION OF EMPLOYMENT FOLLOWING DEATH OR
DISABILITY. Where the Employment is terminated following Employee's death or
where the Employment is terminated as a result of Employee suffering a
disability which cannot be reasonably accommodated and which renders him unable
to perform the essential functions of his position for 120 days, Employee is
eligible for payment of the Salary and accrued but unused vacation through the
date of such termination.
7.4 TERMINATION FOR ANY OTHER REASON. Except as
provided in this Section 7, if Employee terminates his employment for any other
reason, then Employee only will be entitled to receive the portion of the Salary
accrued and owing to Employee through the date of such termination.
7.5 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. TAX ADJUSTMENT.
<PAGE>
8.1 RIGHT TO GROSS-UP PAYMENTS. Notwithstanding
anything in this Agreement to the contrary and except as set forth below, if it
is determined that by reason of any payment or distribution occurring pursuant
to the terms of this Agreement (or otherwise under any other agreement, plan or
program) upon a Change in Control (collectively, the "PAYMENT") Employee becomes
subject to the excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "EXCISE TAX") imposed
by Section 4999 of the Internal Revenue Code of 1986, as amended (the "CODE"),
then Employee shall be entitled to receive from Employer an additional payment
(a "GROSS-UP PAYMENT") in an amount such that, after payment by Employee of all
taxes (including, without limitation, the Excise Tax and any interest or
penalties imposed with respect to such taxes) imposed upon the Gross-Up Payment,
Employee retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the Payment.
8.2 DETERMINATION OF GROSS-UP PAYMENTS. Subject to the
provisions of Section 8.3, all determinations required to be made under this
Section 8, 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 or such other
nationally recognized accounting firm mutually selected by Employer and Employee
(the "ACCOUNTING FIRM"). The Accounting Firm shall provide its preliminary
determination and detailed supporting calculations to Employer and Employee
within fifteen (15) business days of the receipt of notice from Employee that
there has been the Payment, or such earlier time as is requested by Employer.
All fees and expenses of the Accounting Firm shall be borne solely by Employer.
Any Gross-Up Payment determined pursuant to this Section 8 shall be paid by
Employer to Employee within five (5) days of the receipt of the Accounting
Firm's determination, and such determination 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 (the "UNDERPAYMENT"), consistent with the
calculations required to be made hereunder. In the event that Employer exhausts
its remedies pursuant to Section 8.3 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.
8.3 GROSS-UP PAYMENT PROCEDURES. Employee shall notify
Employer in writing of any claim by the Internal Revenue Service that, if
successful, would require the payment of a Gross-Up Payment. Such 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, then 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)
<PAGE>
cooperate with Employer in good faith in order to contest effectively 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 limiting the foregoing, Employer shall
control all proceedings taken in connection with such contest (which control
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder) 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, then Employer shall advance, on an interest-free basis, the amount
of such payment to Employee 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 PROVIDED,
FURTHER, 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.
8.4 REFUNDS. If, after the receipt by Employee of an
amount advanced by Employer pursuant to Section 8.3, Employee becomes entitled
to receive any refund with respect to such claim, then 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 8.3, 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.
9. GENERAL PROVISIONS.
9.1 REPRESENTATIONS AND WARRANTIES BY EMPLOYEE.
Employee represents and warrants to Employer that the execution of this
Agreement and the performance by Employee of his obligations under this
Agreement will not: (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.
<PAGE>
9.2 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.
9.3 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.
9.4 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.
9.5 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: President
Facsimile No.: (619) 452-2789
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: Donald R. Myll
14558 Wildgrove Road
Poway, CA 92064
Facsimile No.: (858) 486-6678
<PAGE>
9.6 ENTIRE AGREEMENT; AMENDMENTS. This Agreement,
including its exhibits, contains the entire agreement between the parties with
respect to the subject matter of this Agreement and supersedes all prior
agreements and understandings, oral or written, between the parties with respect
to the subject matter of this Agreement. This Agreement may not be amended
orally, but only by an agreement in writing signed by the parties to this
Agreement.
9.7 GOVERNING LAW. This Agreement will be governed by
the laws of the State of California without regard to conflicts of law
principles.
9.8 JURISDICTION. Subject to Section 9.10 of this
Agreement, any proceeding seeking to enforce any provision of, or based on any
right arising out of, this Agreement will be brought against any of the parties
in the courts of the state in which the defendant in such action or proceeding
resides or is domiciled, or, if it has or can acquire jurisdiction, in the
United States District Court for the district of the state in which such
defendant resides or is domiciled, and each of the parties hereto consents to
the jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party hereto anywhere in the world.
9.9 NO UNDUE INFLUENCE. This Agreement is executed
voluntarily and without any duress or undue influence. Employee acknowledges
that he has read this Agreement and executed it with his full and free consent.
No provision of this Agreement shall be construed against any party by virtue of
the fact that such party or its counsel drafted such provision or the entirety
of this Agreement.
9.10 ARBITRATION. Employee agrees that any controversy
between Employer and Employee arising from the Employment or termination of
Employment, including, without limitation, any controversy related to the
construction or application of any of the terms of this Agreement, arbitrability
of this Agreement, claims for statutory violations, including claims for
violation of the Civil Rights Act of 1991 (Title VII), the Age Discrimination in
Employment Act, the Americans with Disabilities Act, the Fair Employment and
Housing Act, or any amendments to those statutes, claims for wages or other
compensation, or other claims arising out of the Employment, shall, on the
written request of Employee or Employer, be submitted to final and binding
arbitration. Arbitration shall be pursuant to the Employment 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.
All fees and costs will be allocated to the parties to the arbitration as
determined by the arbitrator; PROVIDED, HOWEVER, that each party will pay
one-half of the estimated arbitrator's fees up front and, if either party fails
to do so, then 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. 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.
9.11 SECTION HEADINGS, CONSTRUCTION. The section
headings in this Agreement are provided for convenience only and will not affect
its construction or interpretation.
<PAGE>
9.12 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.
9.13 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.
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/ LARRY D. GRANDIA By: /s/ DONALD R. MYLL
---------------------------------------- --------------------------
Larry D. Grandia, Donald R. Myll
President and Chief Executive Officer
<PAGE>
EXHIBIT A
EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT
<PAGE>
EXHIBIT B
PRICE TARGETS
If the closing stock price for Daou as reported by NASDAQ averages $7.40 or
higher for a period of 30 trading days prior to October 1, 2000, or Employer
consummates a change of control transaction at or above $7.40 per share before
such date, then 33,000 performance based options become immediately vested.
Prices to be adjusted for stock splits.
If the closing stock price for Daou as reported by NASDAQ averages $10.20 or
higher for a period of 30 trading days prior to October 1, 2001, or Employer
consummates a change of control transaction at or above $10.20 per share before
such date, then 33,000 performance based options become immediately vested.
Prices to be adjusted for stock splits.
If the closing stock price for Daou as reported by NASDAQ averages $13.00 or
higher for a period of 30 trading days prior to October 1, 2002, or Employer
consummates a change of control transaction at or above $13.00 per share before
such date, then 34,000 performance based options become immediately vested.
Prices to be adjusted for stock splits.
<PAGE>
EXHIBIT C
GENERAL RELEASE
THIS GENERAL RELEASE (this "RELEASE") is entered into effective as of
_________________ ("EFFECTIVE DATE") by and between DAOU Systems, Inc., a
Delaware corporation (the "COMPANY"), and Donald R. Myll, an individual resident
of the State of California ("EMPLOYEE"), with reference to the following facts:
RECITALS
A. The parties hereto entered into an Employment Agreement dated\
as of September 8, 1999 (the "AGREEMENT"). Pursuant to the terms and conditions
of the Agreement, and contingent upon satisfaction of the conditions described
in the Agreement, Employee would become eligible for severance payments for up
to twelve (12) months beginning on the date of the termination of Employee's
employment relationship (the "SEPARATION DATE"), in exchange for Employee's
release of the Company from all claims which Employee may have against the
Company as of the Separation Date.
B. The parties desire to dispose of, fully and completely, all
claims which Employee may have against the Company in the manner set forth in
this Release.
AGREEMENT
1. RELEASE. In exchange for the consideration described in the
Agreement, receipt of which is hereby acknowledged, Employee, for himself and
his heirs, successors and assigns, fully releases, and discharges the Company
and its officers, directors, employees, shareholders, attorneys, accountants,
other professionals, insurers and agents (collectively "AGENTS"), and all
entities related to the Company and its Agents, including, but not limited to,
heirs, executors, administrators, personal representatives, assigns, parent,
subsidiary and sister corporations, affiliates, partners and co-venturers
(collectively, "RELATED ENTITIES"), from all rights, claims, demands, actions,
causes of action, liabilities and obligations of every kind, nature and
description whatsoever, Employee now has, owns or holds or has at anytime had,
owned or held or may have, own or hold against the Company, Agents or Related
Entities from any source whatsoever, whether or not arising from or related to
the facts recited in this Release. Employee specifically releases and waives any
and all claims arising under any express or implied contract, rule, regulation
or ordinance, including, without limitation, Title VII of the Civil Rights Act
of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the
California Fair Employment and Housing Act, and the Age Discrimination in
Employment Act, as amended ("ADEA").
2. SECTION 1542 WAIVER. This Release is intended as a full and
complete release and discharge of any and all claims that Employee may have
against the Company, Agents or Related Entities through the Separation Date. In
making this release, Employee intends to release the Company, Agents and Related
Entities from liability of any nature whatsoever for any claim of damages or
injury or for equitable or declaratory relief of any kind, whether the claim, or
any facts on which such claim might be based, is known or unknown to him.
Employee expressly
<PAGE>
waives all rights under Section 1542 of the Civil Code of the State of
California, which Employee understands provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR
AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY
HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR.
Employee acknowledges that he may discover facts different from or in addition
to those which he now believes to be true with respect to this Release. Employee
agrees that this Release shall remain effective notwithstanding the discovery of
any different or additional facts.
3. WAIVER OF CERTAIN CLAIMS. Employee acknowledges that, with
this Release, he has been advised in writing of his right to consult with an
attorney prior to executing the waivers set out in this Release, and that he has
been given a 21-day period in which to consider entering into the release of
ADEA claims, if any. In addition, Employee acknowledges that he has been
informed that he may revoke a signed waiver of the ADEA claims for up to seven
(7) days after executing this Release.
4. NO UNDUE INFLUENCE. This Release is executed voluntarily and
without any duress or undue influence. Employee acknowledges he has read this
Release and executed it with his full and free consent. No provision of this
Release shall be construed against any party by virtue of the fact that such
party or its counsel drafted such provision or the entirety of this Release.
5. CONFIDENTIALITY OF AGREEMENT AND RELEASE. Employee further
agrees to keep confidential the terms of the Agreement and this Release and to
refrain from disclosing any information regarding the Agreement, this Release
and their respective terms to any third party, unless required to do so (a) by a
regulatory body (e.g. filings with the Securities Exchange Commission); (b) in
financial disclosures to auditors or in audited financial statements; or (c)
under oath, if properly ordered, in a court of competent jurisdiction. Employee
agrees to notify the Company in writing upon first notification that he may be
required by law to disclose any information deemed confidential by the Agreement
or this Release. Notice must be provided in sufficient time for the party
receiving notice to oppose or otherwise respond to the request.
6. GOVERNING LAW. This Release is made and entered into in
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of California as applied to contracts entered into by
and between residents of California to be wholly performed within California.
7. SEVERABILITY. If any provision of this Release is held to be
invalid, void or unenforceable, the balance of the provisions of this Release
shall, nevertheless, remain in full force and effect and shall in no way be
affected, impaired or invalidated.
<PAGE>
8. COUNTERPARTS. This Release may be executed simultaneously in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. This Release may be
executed by facsimile, with originals to follow by overnight courier.
9. ARBITRATION. Any dispute or claim arising out of this Release
shall be subject to final and binding arbitration. The arbitration will be
conducted by one arbitrator who is a member of the American Arbitration
Association (the "AAA") and will be governed by the Model Employment Arbitration
rules of the AAA. All fees and costs will be allocated to the parties to the
arbitration as determined by the arbitrator; PROVIDED, HOWEVER, that each party
will pay one-half of the estimated arbitrator's fees up front; and, if either
party fails to do so, then 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. Nothing in this Release will prevent a party hereto
from applying to a court that would otherwise have jurisdiction for provisional
or interim injunctive or other equitable measures.
10. ENTIRE AGREEMENT. This Release constitutes the entire
agreement of the parties with respect to the subject matter of this Release, and
supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written.
11. MODIFICATION; WAIVERS. No modification, termination or
attempted waiver of this Release will be valid unless in writing, signed by the
party against whom such modification, termination or waiver is sought to be
enforced.
12. AMENDMENT. This Release may be amended or supplemented only
by a writing signed by Employee and the Company.
Dated:_________________ _____________________________
Donald R. Myll
DAOU Systems, Inc.
Dated:_________________ _____________________________
By: Larry D. Grandia, President and
Chief Executive Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,503
<SECURITIES> 5
<RECEIVABLES> 22,554
<ALLOWANCES> 1,110
<INVENTORY> 8,496
<CURRENT-ASSETS> 51,906
<PP&E> 10,215
<DEPRECIATION> 5,517
<TOTAL-ASSETS> 57,105
<CURRENT-LIABILITIES> 9,687
<BONDS> 0
11,256
0
<COMMON> 18
<OTHER-SE> 33,825
<TOTAL-LIABILITY-AND-EQUITY> 57,105
<SALES> 79,755
<TOTAL-REVENUES> 79,755
<CGS> 58,638
<TOTAL-COSTS> 58,638
<OTHER-EXPENSES> 22,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288
<INCOME-PRETAX> (1,451)
<INCOME-TAX> (596)
<INCOME-CONTINUING> (855)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (855)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
