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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 March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ______________ to
___________,
Commission File No.: 000-22073
DAOU SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 330284454
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5120 Shoreham Place
San Diego, California 92122
(Address of principal executive offices) (Zip Code)
(619) 452-2221
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
The number of shares of Registrant's Common Stock outstanding as of April 14,
1999:
17,689,728
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DAOU SYSTEMS, INC.
Index to Form 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Condensed Consolidated Financial Statements Page
<S> <C>
Condensed Consolidated Balance Sheets at March 31, 1999
(unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations (unaudited)
for the Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
DAOU Systems, Inc.
Condensed Consolidated Balance Sheets
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
(UNAUDITED)
-------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,617 $ 6,756
Short-term investments, available-for-sale 1,113 1,024
Accounts receivable, net of allowance for doubtful accounts of
$1,054 and $956 at March 31, 1999 and December 31, 1998,
respectively 25,098 24,582
Contract work in progress 8,059 12,272
Deferred income taxes 4,520 3,362
Other current assets 1,476 1,306
-------------------------
Total current assets 44,883 49,302
Equipment, furniture and fixtures, net 4,696 4,735
Other assets 410 480
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$ 49,989 $ 54,517
-------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities $ 6,336 $ 8,277
Accrued salaries and benefits 4,092 3,907
Current portion of long-term liabilities and lines of credit 4,158 5,453
-------------------------
Total current liabilities 14,586 17,637
Long-term liabilities 702 684
Deferred income taxes 1,421 1,421
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares - 5,000
Issued and outstanding shares - none -- --
Common stock, $.001 par value:
Authorized shares - 50,000
Issued and outstanding shares - 17,689 at March 31, 1999 and at
December 31, 1998 18 18
Additional paid-in capital 38,419 38,419
Deferred compensation (898) (980)
Accumulated other comprehensive income 327 236
Retained deficit (4,586) (2,918)
-------------------------
Total stockholders' equity 33,280 34,775
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$ 49,989 $ 54,517
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-------------------------
</TABLE>
SEE ACCOMPANYING NOTES
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DAOU Systems, Inc.
Condensed Consolidated Statements of Operations
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
-------- -------
<S> <C> <C>
Revenues $ 27,323 $23,985
Cost of revenues 21,820 14,488
-------- -------
Gross profit 5,503 9,497
Operating expenses:
Sales and marketing 2,905 2,733
General and administrative 5,336 3,128
Merger and related expenses -- 1,796
-------- -------
8,241 7,657
-------- -------
Income (loss) from operations (2,738) 1,840
Interest income (expense), net (86) 142
-------- -------
Income (loss) before income taxes (2,824) 1,982
Provision (benefit) for income taxes (1,156) 914
-------- -------
Net income (loss) $ (1,668) $ 1,068
-------- -------
-------- -------
Net income (loss) per common share:
Basic $ (0.09) $ 0.06
-------- -------
-------- -------
Diluted $ (0.09) $ 0.06
-------- -------
-------- -------
Shares used in computing net income (loss) per common share:
Basic 17,689 17,596
-------- -------
-------- -------
Diluted 17,689 18,576
-------- -------
-------- -------
</TABLE>
SEE ACCOMPANYING NOTES.
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DAOU Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,668) $ 1,068
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 458 436
Changes in operating assets and liabilities 658 (10,512)
------------------------
Net cash used in operating activities (552) (9,008)
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures (337) (947)
(Purchases) maturities of short-term investments 2 3,161
Changes in other assets 70 35
------------------------
Net cash (used in) provided by investing activities (265) 2,249
FINANCING ACTIVITIES
Repayments of long-term liabilities and lines of credit (1,322) (278)
Proceeds from issuance of common stock -- 820
Distributions to stockholders -- (152)
Other -- (4)
------------------------
Net cash (used in) provided by financing activities (1,322) 386
------------------------
------------------------
Decrease in cash and cash equivalents (2,139) (6,373)
Cash and cash equivalents at beginning of period 6,756 7,981
------------------------
Cash and cash equivalents at end of period $ 4,617 $ 1,608
------------------------
------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
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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 March 31, 1999 and for the three-month periods
ended March 31, 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 March 31, 1999 and the results of operations for the three month
periods ended March 31, 1999 and 1998. The results of operations for the three
months ended March 31, 1999 are not necessarily indicative of the results to be
expected for the year ending December 31, 1999. The Company has experienced
significant quarterly fluctuations in operating results and it expects that
these fluctuations in revenues, expenses and net income or losses will continue.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financials should be read in conjunction with the audited
financial statements and the related notes thereto contained in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission
("SEC") on March 31, 1999 and in the Company's Annual Report on Form 10-K/A
filed with the SEC on April 30, 1999.
2. Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions about the future that affect the
amounts reported in the financial statements and disclosures made in the
accompanying notes of the financial statements. The actual results could differ
from those estimates.
3. Lines of Credit
During June 1998, the Company secured two borrowing facilities, a $2.0 million
revolving line of credit and an $8.0 million line of credit under which no funds
are currently available for future borrowings. As of March 31, 1999, the Company
was not in compliance with one of the covenants and has been informed by the
bank that the Company cannot avail itself to the unused lines of credit.
Management is actively negotiating for a replacement line of credit, believes
that a replacement line will be obtained before expiration of the existing lines
of credit and that the Company has sufficient liquidity to fund operations until
this new line is in place.
In addition, the Company has an additional $700,000 line of credit, which
expires May 1, 1999. The $700,000 line of credit bears interest at prime plus
0.25% (8.00% at March 31, 1999) per annum. There are no compensating balance
requirements and borrowings under the line of credit are limited to 65% of
qualifying receivables. At March 31, 1999 no amounts were outstanding under the
line of credit.
4. Related Party Transactions
The Company has an agreement with an officer that guarantees a cash bonus
(approximately $650,000 at March 31, 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.
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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
March 31,
1999 1998
------------------------
<S> <C> <C>
Numerator:
Net income (loss) $ (1,668) $ 1,068
Denominator:
Denominator for basic net income (loss) per share -
weighted average common shares outstanding 17,689 17,596
Effect of dilutive securities:
Warrants -- 106
Common stock options -- 874
------------------------
-- 980
------------------------
Denominator for diluted net income (loss) per share -
adjusted weighted average common shares
outstanding and assumed conversion of preferred
stock 17,689 18,576
------------------------
------------------------
Basic net income (loss) per share $ (0.09) $ 0.06
------------------------
------------------------
Diluted net income (loss) per share $ (0.09) $ 0.06
------------------------
------------------------
</TABLE>
6. Comprehensive Income (loss)
Comprehensive income (loss) for the three months ended March 31, 1999 and 1998
totaled $(1,577,000) and $1,171,000, 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 months ended March 31, 1999 and 1998
was (41)% and 46%, respectively. The effective tax rate for the three months
ended March 31, 1998 differed from the expected consolidated federal statutory
rate of 35% 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.
At March 31, 1999, net deferred tax assets were approximately $3.1 million.
Because the Company incurred an operating loss for 1998 and through the first
quarter for 1999, management will continue to evaluate the realization of the
net deferred tax assets. If realization becomes doubtful a valuation allowance
will be provided.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. Forward-looking statements usually contain the words "estimate,"
"anticipate," "believe," "expect" or similar expressions. All forward-looking
statements are inherently uncertain as they are based on various expectations
and assumptions concerning future events and are subject to numerous known and
unknown risks and uncertainties. The forward-looking statements included herein
are based on current expectations and entail various risks and uncertainties as
those set forth herein and in the Company's other SEC filings, including those
more fully set forth in the "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other sections of
the Company's Form 10-K for the year ended December 31, 1998 on file with the
SEC. These risks and uncertainties could cause the Company's actual results to
differ materially from those projected in the forward-looking statements. The
Company disclaims any obligation to update or publicly announce revisions to any
such statements to reflect future events or developments.
Overview
The Company provides integrated information technology solutions and services to
the U.S. healthcare industry. DAOU's capabilities range from up-front strategic
consulting to information technology ("IT") system design, implementation and
long-term tactical support. DAOU's IT offerings include application
implementation, communications infrastructure, management consulting and
integration services. The Company's application implementation group supplies
staffing resources to hospitals and other healthcare organizations. DAOU's
vendor certified consultants are capable of installing nearly 90% of the most
common healthcare applications. The Company's communications infrastructure
group focuses on the information superstructure in healthcare enterprises,
including networking, Intranet and Internet, desktop, and voice, video and data
solutions. Management consulting develops business plans and solves problems for
healthcare IT managers, installs and integrates applications, engineers,
installs and integrates infrastructure, and manages IT systems. DAOU's
integration services group analyzes, implements and supports information systems
that meet a customer's business objectives and 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 Company's revenues were $27.3 million and $24.0 million for the three months
ended March 31, 1999 and 1998, respectively, representing an increase of 14%.
Revenues increased primarily due to the increased number of professional
services consulting contracts, which accounted for $3.5 million of the increase,
and professional services management contracts, which accounted for $3.4 million
of the increase. Growth in these two service areas was offset by a $3.5 million
decrease in revenues from implementation and cabling contracts for the three
months ended March 31, 1999 as compared to 1998. Services to DAOU's five largest
customers accounted for $7.6 million of total revenues in for the three months
ended March 31, 1999, representing 28% of total revenues.
Cost of revenues was $21.8 million and $14.5 million for the three months ended
March 31, 1999 and 1998, respectively, representing an increase of 51%. Gross
margin was 20% and 40% for the three months ended March 31, 1999 and 1998,
respectively. This decrease in gross margin during the three months ended March
31, 1999 was primarily due to the following: i) an increase in the product
content of the Company's large network implementation contracts, and ii)
decreases in networking labor utilization rates due to decreases in network
sales within the communications infrastructure group.
Sales and marketing expenses were $2.9 million and $2.7 million for the three
months ended March 31, 1999 and 1998, respectively, representing an increase of
6%. This increase was primarily due to an increase in sales personnel
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and related expenses to support the increased sales volume and activity. Sales
and marketing expenses were approximately 11% of total revenues for the three
months ended March 31, 1999 and 1998. Although the Company believes that it can
achieve a decrease in these expenses as a percentage of revenue, the Company
also expects that sales and marketing expenses will continue to increase in
absolute dollars to support the anticipated growth in the Company's business.
General and administrative expenses were $5.3 million and $3.1 million for the
three months ended March 31, 1999 and 1998, respectively, representing an
increase of 71%. The primary factors contributing to this increase were costs
associated with additional administrative staffing and other increased
infrastructure requirements to support growth and integration of acquired
companies, increased legal fees and increased recruiting costs. General and
administrative expenses were approximately 20% and 13% of total revenues for the
three months ended March 31, 1999 and 1998, respectively. The Company expects
that general and administrative expenses will increase in dollar terms to
support the anticipated growth in the Company's business and the continued
integration of acquired companies.
Other income (expense), net, was $(86,000) and $143,000 for the three months
ended March 31, 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 decrease in net other income (expense), net was primarily
due to overall lower average cash reserves available for investment during the
three months ended March 31, 1999 as compared to 1998.
The effective income tax rate for the three months ended March 31, 1999 and 1998
was (41)% and 46%, respectively. The effective tax rate for the three months
ended March 31, 1998 differed from the expected consolidated federal statutory
rate of 35% 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. At March 31, 1999, net
deferred tax assets were approximately $3.1 million. Because the Company
incurred an operating loss for 1998 and through the first quarter for 1999,
management will continue to evaluate the realization of the net deferred tax
assets. If realization becomes doubtful a valuation allowance will be provided.
Liquidity and Capital Resources
On March 31, 1999, the Company had working capital of $30.3 million, a decrease
of $1.4 million from $31.7 million on December 31, 1998. For the three months
ended March 31, 1999, cash used in operating activities was $552,000 compared to
cash used in operating activities of $9.0 million for the three months ended
March 31, 1998. This decrease resulted primarily from a decrease in contract
work in progress for the quarter ended March 31, 1999 as compared to 1998.
Net cash used in investing activities was $265,000 in the current period,
compared to net cash provided by investing activities of $2.2 million in the
comparable prior period. This change was primarily from $3.2 million in 1998 of
maturing marketable securities, which were not reinvested.
Net cash used in financing activities was $1.3 million for the three months
ended March 31,1999, compared to net cash provided by financing activities of
$386,000 in the comparable prior period. This change was primarily the result of
repayments of debt and lines of credit of acquired companies of $1.3 million
during the three months ended March 31, 1999.
During June 1998, the Company secured two borrowing facilities, a $2.0 million
revolving line of credit and an $8.0 million line of credit under which no funds
are currently available for future borrowings. As of March 31, 1999, the Company
was not in compliance with one of the covenants and has been informed by the
bank that the Company cannot avail itself to the unused lines of credit.
Management is actively negotiating for a replacement line of credit, believes
that a replacement line will be obtained before expiration of the existing lines
of credit and that the Company has sufficient liquidity to fund operations until
this new line is in place.
Although the Company has an accumulated deficit and has used cash in its
operating activities over the past three years, the Company believes that its
available funds together with anticipated cash from operating activities will be
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sufficient to meet its capital requirements for the foreseeable future. The
Company may sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity securities or issuance of
equity securities in future acquisitions would result in dilution to the
Company's stockholders and the incurrence of additional debt could result in
additional interest expense.
Business Risks
In addition to the factors addressed in the preceding sections, certain dynamics
of the Company's markets and operations create fluctuations in the Company's
quarterly results. Uncertainty and cost containment in healthcare and
competitive conditions present various other risks to operating results which
are more fully described in the Company's Form 10-K filed with the SEC and other
SEC filings.
YEAR 2000
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 upon its assessment and testing efforts to date, the Company believes
that its internal local area network systems are year 2000 compliant, but
that certain hardware and software relating to its Internal Use Systems will
require replacement or modification through, for example, ROM-BIOS upgrades
to certain hardware components and year 2000 compliant software upgrades. In
the ordinary course of replacing computer equipment and software, the Company
also attempts to obtain replacements that it believes are year 2000
compliant. As of March 31, 1999, the Company has assembled year 2000
compliance statements from approximately 70% of its critical 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.
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The Company estimates that, as of March 31, 1999, it had completed
approximately 85% of the initiatives that it believes will be necessary to
fully address potential year 2000 issues relating to its Internal Use
Systems. The Company currently anticipates that its year 2000 identification,
assessment, testing and remediation efforts with respect to its Internal Use
Systems will be completed by September 30, 1999. Notwithstanding the above
assessment, both IT and non-IT systems may contain embedded technology that
could delay the Company's year 2000 identification, assessment, testing and
remediation efforts with respect to its Internal Use Systems.
THIRD-PARTY PRODUCTS AND SALES, SERVICE AND MAINTENANCE AGREEMENTS.
Third-party products ("Third-Party Products") that are re-sold, installed
and/or maintained by the Company in connection with sales, service and
maintenance agreements with its customers may fail to operate properly or as
expected because of year 2000 issues. These system failures could disrupt
customer operations through a temporary inability to, among other things,
diagnose and treat patients, operate medical communications systems, access
medical information and databases, process transactions, send invoices or
engage in similar medical and business activities.
The Company is undertaking the following initiatives with key customers
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
assurance regarding the year 2000 issue;
- - identification of year 2000 issues; and
- - notification and, as appropriate, remediation of year 2000 issues.
If vendors, manufacturers and service providers of Third-Party Products do
not remediate successfully Third-Party Products by the year 2000 or
adequately indemnify or provide pass-through warranties for products
re-sold, installed and maintained by the Company, then the Company may face
claims and increased obligations under its sales, service and maintenance
agreements that could affect materially and adversely its business, results
of operations and financial condition.
The Company currently is assessing its Year 2000 related obligations under
its sales, service and maintenance agreements. To date, the Company has
identified one major sales, service and maintenance agreement under which it
has agreed to repair, modify and replace certain Third-Party Products that
are not year 2000 compliant. Accordingly, the Company's year 2000 liability
under this agreement depends on the year 2000 compliance of Third-Party
Products that are re-sold, installed and/or maintained under the agreement
and the Company's ability to seek adequate indemnification and/or warranty
coverage from the vendors, manufacturers and service providers of Third-Party
Products. The Company has verified that approximately 80% of the Third-Party
Products covered by this agreement are year 2000 compliant. The customer has
advised the Company that the remaining 20% of these Third-Party Products will
be replaced for year 2000 compliance prior to the end of this year. Because
this process is still incomplete, the Company presently cannot assure,
however, that it will not incur significant expenses under this agreement
that could impact materially and adversely
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the Company's business, results of operations and financial condition.
The Company estimates that, as of March 31, 1999, it had completed
approximately 30% of the initiatives that it believes will be necessary to
fully address potential year 2000 issues relating to Third-Party Products and
its contractual obligations under key sales, service and maintenance
agreements. The Company currently anticipates that its year 2000
identification, assessment, testing and remediation efforts with respect to
Third-Party Products and key sales, service and maintenance agreements will
be completed by September 30, 1999.
COMPANY SOFTWARE PRODUCTS. The Company also distributes certain software
products through its subsidiary, DAOU-Sentient, inc. The Company has
completed its assessment and testing of these products and believes that they
are year 2000 compliant.
COSTS
As of March 31, 1999, the Company had incurred costs of approximately
$107,000 related to its year 2000 identification, assessment, testing and
remediation, of which $37,000 was incurred for Internal Use Systems and
$70,000 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 $63,000
for year 2000 issues relating to Internal Use Systems and additional costs of
$30,000 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
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If certain Internal Use Systems and Third-Party Products are not year 2000
compliant, then the Company could experience a negative impact on its
business, results of operations and financial condition relating to factors
that include, among others:
- - diversion of resources by the Company to address and/or remediate year
2000 issues;
- - damage to the Company's reputation;
- - litigation;
- - service delays to the Company's customers arising from the failure of
vendors, manufacturers and service providers to adequately address year
2000 issues; and
- - 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.
The Company currently cannot accurately assess or estimate the possible
impact of the foregoing risks and liability because:
- - there is no uniform definition of "compliance with Year 2000;"
- - the legal standards for year 2000 liability presently are uncertain;
- - the Company's year 2000 obligations will depend on, among other things,
the varying contractual terms contained in its sales, service and
maintenance agreements with respect to the particular customer and the
nature of such customer's year 2000 issue; and
- - there can be no assurance that indemnification or pass-through
arrangements relating to the Company's sales, service and maintenance
agreements will cover all of the Company's liabilities and costs incurred
in year 2000 related claims.
Consequently, the Company cannot provide assurances that the aggregate cost
of defending and resolving the foregoing issues and claims will not affect
materially and adversely the Company's business, results of operations and
financial condition.
CONTINGENCY PLANS
The Company has not yet developed a comprehensive 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. However,
the Company currently expects to complete its contingency planning by
September 30, 1999. This contingency planning will encompass "worst case"
scenarios that assume the failure of significant communications and computing
infrastructures of the Company, its customers and suppliers, together with
failures of governmental infrastructures affecting transportation. The
Company subsequently may identify other factors that could affect materially
and adversely the Company's business, results of operations and financial
condition.
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. There can be no assurance that these assumptions will be
accurate and that estimates will be achieved. The Company's evaluation and
assessment is ongoing and it expects that new or different information may
become available as its assessment and evaluation continue.
13
<PAGE>
PART II OTHER INFORMATION
1. Legal Proceedings
On August 24, 1998, August 31, 1998, September 14, 1998 and September
23, 1998, separate complaints were filed against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of California. A group of shareholders has been appointed the lead
plaintiffs and they filed an amended consolidated complaint on February 24,
1999. The new complaint realleges the same 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 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Consulting Agreement, dated as of March 15, 1999, between Larry D. Grandia
and the Registrant.
27. Financial Data Schedule
(b) Current Reports on Form 8-K. The Registrant filed the following Current
Reports on Form 8-K with the Commission during the quarter ended March 31,
1999:
1) On January 15, 1999, the Company filed a Current Report on Form 8-K
announcing that it had entered into a five-year contract to provide
information technology services to Saint Mary's Health Network of Reno,
Nevada.
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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: May 17, 1999
DAOU SYSTEMS, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Larry D. Grandia President and Director May 17, 1999
Larry D. Grandia
/s/ Fred C. McGee Executive Vice President, Chief Financial May 17, 1999
Fred C. McGee Officer and Secretary
</TABLE>
15
<PAGE>
CONSULTING AGREEMENT
This Consulting Agreement (this "AGREEMENT") is made as of March 15,
1999 by and between DAOU Systems, Inc., a Delaware corporation (the
"COMPANY"), and Larry D. Grandia, an individual resident of the State of Utah
("CONSULTANT").
RECITALS
WHEREAS, the Company desires to retain the services of Consultant, and
Consultant desires to render his services to the Company; and
WHEREAS, the Company and Consultant desire to set forth in this
Agreement the terms and conditions under which Consultant is to be engaged by
the Company.
NOW, THEREFORE, the Company and Consultant, in consideration of the
mutual promises set forth herein, hereby agree as follows:.
AGREEMENT
1. DEFINITIONS.
For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this Section 1:
"AAA" as defined in Section 7.9.
"AGREEMENT" means this Consulting Agreement, including any exhibits
hereto, as amended in writing from time to time.
"BOARD OF DIRECTORS" means the board of directors of the Company.
"CHANGE IN CONTROL" means a transaction whereby (a) substantially all
of the outstanding shares of the Company's Common Stock are exchanged for
cash or the securities (or combination thereof) of another Person , or (b)
any Person becomes the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or indirectly, of more
than fifty percent (50%) of the outstanding shares of the Company's Common
Stock at such time.
"COMPANY" as defined in the Preamble.
"COMPENSATION" as defined in Section 3.
"CONSULTANT" as defined in the Preamble.
"CONSULTING PERIOD" means the term of Consultant's engagement set forth
in Section 2.2.
<PAGE>
"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.
"POST-CONSULTING PERIOD" as defined in Section 6.2.
"RULES" as defined in Section 7.9.
"SERVICES" as defined in Section 2.1.
2. CONSULTING PERIOD AND DUTIES.
2.1 ENGAGEMENT. The Company hereby retains Consultant to provide
certain management services as the Company's Interim President, and services
acting as a liaison with acquisition candidates, as determined by the Company
(collectively, the "SERVICES"), and Consultant hereby agrees to provide the
Services to the Company upon the terms and conditions set forth in this
Agreement.
2.2 TERM. The term of Consultant's engagement under this Agreement
will begin on the Effective Date and, unless earlier terminated by
Consultant, will terminate one (1) year after the Effective Date.
2.3 CONSULTANT'S SERVICES AND DUTIES. Consultant shall, in addition
to providing the Services to the Company: (a) observe and conform to the
policies and directions promulgated from time to time by the Board of
Directors; (b) serve the Company faithfully, diligently and competently and
to the best of his ability; and (c) devote the necessary business time,
energy, ability, attention and skill in rendering the Services to the Company.
2.4 CHANGE IN CONTROL. Subject to Section 2.5 below, in the event
of a Change in Control of the Company during the Consulting Period,
Consultant will be entitled to receive an aggregate cash payment equal to One
Million Five-Hundred Thousand Dollars ($1,500,000).
2.5 EMPLOYMENT AGREEMENT. Prior to the conclusion of the Consulting
Period, Consultant may elect to execute and deliver the Employment Agreement
in the form attached hereto as ATTACHMENT A (the "EMPLOYMENT AGREEMENT").
Upon such election by Consultant, the Company will be obligated to execute
and deliver the Employment Agreement. Notwithstanding the above, the Company
shall have no obligation to execute and deliver the Employment Agreement, if,
prior to the date of such election by Consultant (i) the Company has entered
into an agreement with respect to a merger involving exchange of shares or a
similar transaction that would contemplate a Change in Control, or (ii) the
Company is negotiating or engaging in discussions with respect to a merger
involving exchange of shares resulting in a Change in Control. Upon final
execution and delivery of the Employment Agreement, this Agreement shall
terminate and be of no further force and effect.
3. COMPENSATION.
2
<PAGE>
As compensation in full for the Services to be rendered by Consultant
hereunder, the Company will pay to Consultant monthly consulting fees in the
amount of Thirty Thousand Dollars ($30,000), or the pro-rata portion thereof
(the "COMPENSATION"). Consultant will be responsible for the payment of all
appropriate federal, state and local withholding taxes in connection with any
and all payments made hereunder. Consultant will not be entitled to
participate in any employee benefit plans of the Company; PROVIDED, HOWEVER,
that during the Consulting Period, Consultant will be reimbursed by the
Company for (i) insurance premiums paid by Consultant for the period of the
consultancy resulting from Consultant's election of COBRA coverage relating
to Consultant's previous employment and (ii) any taxes paid by Consultant
relating to the Company's reimbursement of such premiums.
4. FACILITIES AND EXPENSES.
4.1 OFFICE SPACE, EQUIPMENT, ETC. The Company will furnish to
Consultant office space, equipment, supplies and such other facilities and
personnel as the Company deems necessary or appropriate for the performance
of Consultant's duties under this Agreement, including the payment of
reasonable expenses to equip Consultant's home office (e.g., personal
computer and telephonic access) at Consultant's Utah residence. Subject to
the Company's prior written approval, the Company will reimburse Consultant
for out-of-pocket expenses (a) which are reasonable and necessary for
Consultant to perform, and were incurred by Consultant in the course of the
performance of, the Services, and (b) for which Consultant has submitted
vouchers and completed an expense report in form and substance required by
the Company.
4.2 OTHER EXPENSES. In addition, the Company will: (a) reimburse
Consultant for the reasonable travel expenses of Consultant's spouse or
Consultant's children for up to two (2) trips per month (in the aggregate)
from Salt Lake City, Utah to San Diego, California; (b) provide Consultant
with membership access to a golf club within reasonable proximity to Del Mar,
California; and (c) reimburse Consultant for the amount that Consultant pays
to acquire in his name the equity membership in the golf club to which
Consultant's previous employer provided him with access, which reimbursement
shall not exceed Twenty Thousand Dollars ($20,000). Consultant must file
expense reports with respect to such expenses and reimbursements in
accordance with the Company's policies.
4.3 AUTOMOBILE. During the Consulting Period, the Company will
provide to Consultant a leased automobile commensurate with Consultant's role
as the Interim President of the Company.
4.4 LODGING. During the Consulting Period, the Company shall
provide to Consultant appropriate lodging in a condominium (available to
Consultant on a full-time basis) reasonably satisfactory to Consultant.
4.5 COBRA COVERAGE. Consultant will be reimbursed by the Company
for (i) insurance premiums paid by Consultant for a period of 18 months
resulting from Consultant's election of COBRA coverage relating to
Consultant's previous employment and (ii) any taxes paid by Consultant
relating to the Company's reimbursement of such premiums.
5. CONFIDENTIALITY AND INVENTIONS AGREEMENT
3
<PAGE>
Consultant hereby agrees to comply with the terms and conditions of
Company's Employee Confidentiality and Inventions Agreement, attached hereto
as ATTACHMENT B.
6. NON-COMPETITION AND NON-INTERFERENCE.
6.1 ACKNOWLEDGMENTS BY CONSULTANT. Consultant acknowledges that:
(a) the Services to be performed by him under this Agreement are of a
special, unique, unusual, extraordinary and intellectual character; (b) the
Company's business is national in scope and its products and services are
marketed throughout the United States; (c) the Company competes with other
businesses that are or could be located in any part of the United States; and
(d) the provisions of this Section 6 are reasonable and necessary to protect
the Company's business.
6.2 COVENANTS OF CONSULTANT. In consideration of the
acknowledgments by Consultant, and the Compensation to be paid or provided to
Consultant by the Company, and in recognition of the confidential information
that Consultant will obtain related to the Company's business (including its
customers and employees), Consultant covenants that he will not, directly or
indirectly:
(a) during the Consulting Period, except in the course of his
engagement hereunder, engage or invest in, own, manage,
operate, finance, control, or participate in the ownership,
management, operation, financing, or control of, be employed
by, associated with, or in any manner connected with, lend
Consultant's name or any similar name to, lend Consultant's
credit to or render services or advice to, any business
whose products or activities compete in whole or in part
with the products or activities of the Company; PROVIDED,
HOWEVER, that Consultant may purchase or otherwise acquire
up to (but not more than) one percent (1%) of any class of
securities of any enterprise (but without otherwise
participating in the activities of such enterprise) if such
securities are listed on any national or regional securities
exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended;
(b) whether for Consultant's own account or for the account of
any other Person, at any time during the Consulting Period
and the Post-Consulting Period, solicit business of the same
or similar type being carried on by the Company, from any
Person known by Consultant to be a customer of the Company
and with whom Consultant had personal contact during and by
reason of Consultant's engagement with the Company;
(c) whether for Consultant's own account or the account of any
other Person, at any time during the Consulting Period and
the Post-Consulting Period: (i) solicit, employ, or
otherwise engage as an employee, independent contractor, or
otherwise, any Person who is or was an employee of the
Company at any time during the Consulting Period or in any
manner induce or attempt to induce any employee of the
Company to terminate his employment with the Company; or
(ii) interfere with the Company's relationship with any
Person, including any Person who at any
4
<PAGE>
time during the Consulting Period was an employee,
contractor, supplier or customer of the Company; or
(d) at any time during or after the Consulting Period, disparage
the Company or any of its stockholders, directors, officers,
employees or agents.
For purposes of this Section 6.2, the term "POST-CONSULTING PERIOD"
means the one (1) year period beginning on the date of termination of
Consultant's engagement with the Company.
If any covenant in this Section 6.2 is held to be unreasonable,
arbitrary or against public policy, such covenant will be considered to be
divisible with respect to scope, time and geographic area, and such lesser
scope, time or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary and not against
public policy, will be effective, binding and enforceable against Consultant.
The period of time applicable to any covenant in this Section 6.2 will
be extended by the duration of any violation by Consultant of such covenant.
Consultant will, while the covenant under this Section 6.2 is in
effect, give notice to the Company, within ten (10) days after accepting
employment or another consulting engagement, of the identity of the Person
employing or retaining Consultant. The Company may notify such Person that
Consultant is bound by this Agreement and, at the Company's election, furnish
such Person with a copy of this Agreement or relevant portions thereof.
7. GENERAL PROVISIONS.
7.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. Consultant
acknowledges that the injury that would be suffered by the Company as a
result of a breach of the provisions of this Agreement (including any
provision of Sections 5 and 6) would be irreparable and that an award of
monetary damages to the Company for such a breach would be an inadequate
remedy. Consequently, the Company will have the right, in addition to any
other rights it may have, to obtain injunctive relief to restrain any breach
or threatened breach or otherwise to specifically enforce any provision of
this Agreement, and the Company will not be obligated to post bond or other
security in seeking such relief. Without limiting the Company's rights under
this Section 7 or any other remedies of the Company, if Consultant breaches
any of the provisions of Section 5 or 6, the Company will have the right to
cease making any payments otherwise due to Consultant under this Agreement.
7.2 COVENANTS OF SECTIONS 5 AND 6 ARE ESSENTIAL AND INDEPENDENT
COVENANTS. The covenants by Consultant in Sections 5 and 6 are essential
elements of this Agreement, and without Consultant's agreement to comply with
such covenants, the Company would not have entered into this Agreement or
engaged or continued the engagement of Consultant. The Company and
Consultant have independently consulted their respective counsel and have
been advised in all respects concerning the reasonableness and propriety of
such covenants, with specific regard to the nature of the business conducted
by the Company.
5
<PAGE>
Consultant's covenants in Sections 5 and 6 are independent covenants
and the existence of any claim by Consultant against the Company under this
Agreement or otherwise will not excuse Consultant's breach of any covenant in
Section 5 or 6.
If Consultant's engagement hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or
appropriate to enforce the covenants and agreements of Consultant in Sections
5 and 6.
7.3 REPRESENTATIONS AND WARRANTIES BY CONSULTANT. Consultant
represents and warrants to the Company that the execution and delivery by
Consultant of this Agreement do not, and the performance by Consultant of his
obligations hereunder will not, with or without the giving of notice or the
passage of time, or both: (a) violate any judgment, writ, injunction, or
order of any court, arbitrator, or governmental agency applicable to
Consultant; 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
Consultant is a party or by which Consultant is or may be bound.
7.4 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.
7.5 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.
7.6 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 the Company: DAOU Systems, Inc.
5120 Shoreham Place
San Diego, California 92122
6
<PAGE>
ATTENTION: Chief Executive Officer and Chief
Financial Officer
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 Consultant: Larry D. Grandia
1934 S. 850 E.
Bountiful, Utah 84010
7.7 ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the
attachments hereto constitute 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.
7.8 GOVERNING LAW. This Agreement will be governed by the laws of
the State of California without regard to conflicts of laws principles.
7.9 BINDING ARBITRATION. Subject to the arbitration provisions set
forth below, the parties hereto agree that all disputes arising out of or
related to the terms and conditions of this Agreement or to the performance,
breach or termination thereof, shall be submitted to binding arbitration
pursuant to the Expedited Procedures of the Commercial Arbitration Rules (the
"RULES") of the American Arbitration Association (the "AAA"). The
arbitration will take place in San Diego, California at the offices of the
AAA. The dispute will be resolved by a single arbitrator appointed by the
AAA in accordance with the list procedure described in Paragraph 13 of the
Rules, except that the AAA will transmit the list within ten (10) Business
Days of the filing of the demand for arbitration, and the parties thereto
will have five (5) Business Days to return the list to the AAA with their
objections and preferences. Discovery will be limited to no more than seven
(7) depositions by each side and written document requests, requesting the
production of specific documents. The parties to the dispute will
voluntarily produce any and all documents that they intend to use at the
hearing before the close of discovery, subject to supplementation for
purposes of rebuttal or good cause shown. The period for taking discovery
will be sixty (60) Business Days, commencing upon the day that the answer is
due under the Rules. The arbitrator will hold a pre-hearing conference
within three (3) Business Days of the close of discovery and will schedule
the hearing within thirty (30) Business Days of the close of discovery.
After the arbitrator is selected, the arbitrator will have sole jurisdiction
to hear such applications, except that any measure ordered by the arbitrator
may be immediately and specifically enforced by a court otherwise having
jurisdiction over the parties. All fees and costs will be allocated to the
parties to the arbitration as determined by the arbitrator. Each party will
pay its own fees and costs associated with the arbitration and each party
will pay one-half the estimated arbitrator's fees up front and if either
party fails to do so a default will be entered against such party solely with
respect to such fees. Any determination of the arbitrator shall be
7
<PAGE>
final and binding on the parties hereto. Nothing in this Agreement will
prevent a party hereto from applying to a court that would otherwise have
jurisdiction for provisional or interim injunctive or other equitable
measures.
7.10 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.
7.11 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.
7.12 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
COMPANY: CONSULTANT:
DAOU SYSTEMS, INC.
By: /s/ Georges J. Daou By: /s/ Larry D. Grandia
--------------------------------- ---------------------------------
Georges J. Daou, Chief Executive Larry D. Grandia
Officer
9
<PAGE>
ATTACHMENT A
EMPLOYMENT AGREEMENT
10
<PAGE>
ATTACHMENT B
EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT
11
<PAGE>
ATTACHMENT A
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of [__________], 1999 by DAOU
Systems, Inc., a Delaware corporation ("EMPLOYER" or the "COMPANY"), and
Larry D. Grandia, an individual resident of the State of Utah ("EMPLOYEE").
RECITALS
WHEREAS, Employer desires to obtain the services of Employee, and
Employee desires to secure employment from Employer; and
WHEREAS, Employer and Employee desire to set forth in this Agreement
the terms and conditions under which Employee is to be employed by Employer.
NOW THEREFORE, Employer and Employee, in consideration of the mutual
promises set forth herein, hereby agree as follows:
AGREEMENT
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this SECTION 1:
"AAA" as defined in SECTION 10.10.
"AGREEMENT" means this Employment Agreement, including any attachments
hereto, as amended in writing from time to time.
"BENEFITS" as defined in SECTION 3.2.
"BOARD OF DIRECTORS" means the board of directors of Employer.
"CAUSE" means: (a) Employee's material breach of this Agreement; (b)
Employee's material failure to adhere to any written policy of Employer
generally applicable to officers of the Company if Employee has been given a
reasonable opportunity to comply with such policy or cure his failure to
comply (which reasonable opportunity must be granted during the ten-day
period preceding termination of this Agreement); (c) the appropriation (or
attempted appropriation) of a material business opportunity of Employer,
including attempting to secure or securing any personal profit in connection
with any transaction entered into on behalf of Employer; (d) the
misappropriation (or attempted misappropriation) of any of Employer's funds
or property; (e) the conviction of, or the entering of a guilty plea or plea
of no contest with respect to, a felony, the equivalent thereof, or any other
crime with respect to which imprisonment is a possible punishment; (f)
willful misconduct; (g) physical or mental disability
<PAGE>
or other inability to perform the essential functions of his position, with
or without reasonable accommodation; or (h) death.
"CHANGE IN CONTROL" means a transaction whereby (a) substantially all
of the outstanding shares of Employer's Common Stock are exchanged for cash
or the securities (or combination thereof) of another Person, or (b) any
Person becomes the beneficial owner (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934, as amended), directly or indirectly, of more
than fifty percent (50%) of the outstanding shares of Employer's Common Stock
at such time.
"CONSULTING AGREEMENT" means the Consulting Agreement, dated as of
March 1, 1999, by and between Employer and Employee.
"EFFECTIVE DATE" means the date stated in the preamble of this
Agreement.
"EMPLOYEE" as defined in the preamble of this Agreement.
"EMPLOYER" as defined in the preamble of this Agreement.
"EMPLOYER'S COMMON STOCK" means Employer's common stock, $0.001 par
value per share.
"EMPLOYMENT" as defined in SECTION 2.1.
"EMPLOYMENT PERIOD" means the term of the Employment under this
Agreement.
"FAIR MARKET VALUE" of one Stock Option means the amount equal to (i)
the closing selling price per share of Employer's Common Stock on the date in
question, as reported by the National Association of Securities Dealers on
the Nasdaq National Market or any successor system, LESS (ii) the exercise
price of such Stock Option.
"FISCAL YEAR" means Employer's fiscal year, as it exists on the
Effective Date or as changed from time to time.
"INCENTIVE COMPENSATION PLAN" means Employer's Incentive Compensation
Plan, attached hereto as ATTACHMENT A, as modified from time to time.
"OPTION PLAN" as defined in SECTION 3.4(a).
"PERFORMANCE BONUS" as defined in SECTION 3.3.
"PERSON" means any individual, corporation (including any nonprofit
corporation), general or limited partnership, limited liability company,
joint venture, estate, trust, association, organization or governmental body.
"POST-EMPLOYMENT PERIOD" as defined in SECTION 7.2.
"RULES" as defined in SECTION 10.10.
"SALARY" as defined in SECTION 3.1.
2
<PAGE>
"STOCK OPTIONS" as defined in SECTION 3.4(a).
2. EMPLOYMENT TERMS AND DUTIES
2.1 EMPLOYMENT. Employer hereby employs Employee, and Employee
hereby accepts employment by Employer (the "EMPLOYMENT"), upon the terms and
conditions set forth in this Agreement.
2.2 AT-WILL EMPLOYMENT. Employee's Employment relationship with
Employer is at-will, terminable at any time and for any reason, with or
without Cause, by either Employer or Employee. While certain paragraphs of
this Agreement describe events which could occur at a particular time in the
future, nothing in this Agreement may be construed as a guarantee of
Employment of any length.
2.3 DUTIES. Employee will serve as the [______________] of Employer
and have such other duties as are assigned or delegated to Employee by the
Board of Directors. Employee will (i) devote his entire business time,
attention, skill and energy exclusively to the business of Employer (except
for Employee's reasonable, outside board or professional activities), (ii)
use his best efforts to promote the success of Employer's business and (iii)
cooperate fully with the Board of Directors in the advancement of the best
interests of Employer. If Employee continues to serve or is elected as a
director of Employer or as a director or officer of any of its affiliates,
then Employee will fulfill his duties as such director or officer without
additional compensation, except as set forth in SECTION 3.4(a).
2.4 COMPLIANCE WITH EMPLOYER'S POLICIES. Employee acknowledges and
agrees that compliance with Employer's policies, practices and procedures is
a term and condition of the Employment under this Agreement.
3. COMPENSATION
3.1 SALARY. Employee will be paid an annual salary (the "SALARY")
of Two Hundred Thirty Thousand Dollars ($230,000), which will be payable in
equal periodic installments according to Employer's customary payroll
practices. The Board of Directors (or a committee thereof) will review the
Salary no less frequently than annually.
3.2 BENEFITS. Employee will, during the Employment Period, be
permitted to participate in such pension, profit sharing, bonus, life
insurance, hospitalization, major medical and other employee benefit plans of
Employer that may be in effect from time to time, to the extent Employee is
eligible under the terms of those plans (collectively, the "BENEFITS"). In
addition, during the Employment Period, Employer will provide Employee with a
life insurance policy, providing for payment of One Million Dollars
($1,000,000) to the named beneficiaries to be specified by Employee.
Employee hereby represents and warrants that he is in good physical health
and has not been denied medical or life insurance in the past.
3.3 ADDITIONAL COMPENSATION. As additional compensation for the
services to be rendered by Employee pursuant to this Agreement, Employer will
pay to Employee an annual performance bonus (the "PERFORMANCE BONUS") in an
amount up to One Hundred Fifty-Thousand Dollars ($150,000) in accordance with
the Incentive Compensation Plan. Upon commencement
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of employment, Employer will pay to Employee a signing bonus in the amount of
Fifty Thousand Dollars ($50,000), which signing bonus shall constitute a
non-refundable advance against the Performance Bonus for Fiscal Year 1999.
Subject to SECTION 8, in order to be eligible to receive the Performance
Bonus, Employee must be employed by Employer on the date that the Performance
Bonus is distributed by the Employer.
3.4 STOCK OPTIONS.
(a) GRANT OF OPTIONS. Effective on the Effective Date,
Employer will grant to Employee options representing the right to purchase up
to Four Hundred Thousand (400,000) shares of Employer's Common Stock
(collectively, the "STOCK OPTIONS"). Two Hundred Fifty Thousand (250,000) of
the Stock Options shall be outside of the Company's 1996 Stock Option Plan
(the "OPTION PLAN"). One Hundred and Fifty Thousand (150,000) of the Stock
Options shall be pursuant to the Option Plan. The Stock Options granted
pursuant to the Option Plan will consist of incentive stock options as
defined in Internal Revenue Code Section 422(b) to the extent permitted by
applicable law (generally limited to options with no more than One Hundred
Thousand Dollars ($100,000) in exercise price in a given year) and the
balance will be non-qualified options (non-statutory options). All of the
Stock Options granted outside of the Option Plan will be
non-qualified/non-statutory stock options. The exercise price for the Stock
Options will be the closing price per share of Employer's Common Stock on the
Effective Date. Employee will be entitled to retain and continue to vest his
existing director stock options as long as he remains a director (the
"DIRECTOR OPTIONS"). The Company agrees that, if permitted by law, the
exercise price of the Director Options will be adjusted in the event that the
exercise price of employee stock options granted under the Option Plan is
adjusted.
(b) VESTING SCHEDULE. The Stock Options will vest in
accordance with the following schedule: (i) 50,000 of the Stock Options on
the Effective Date, (ii)100,000 of the Stock Options on December 15, 1999,
(iii) 100,000 of the Stock Options on December 15, 2000, and (iv) 150,000 of
the Stock Options on December 15, 2001. However, in the event of a Change in
Control of the Company, 70% of the then unvested Stock Options will vest
immediately upon the consummation of such Change in Control, except if such
Change in Control is initiated within six (6) months of the Effective Date
and intended to be consummated as a merger through an exchange of equity
securities. Furthermore, in the event that Employee is terminated without
Cause: (i) prior to December 15, 1999, 100,000 of the Stock Options will vest
immediately upon such termination; (ii) on or after December 15, 1999 but
prior to December 15, 2000, an additional 100,000 of the Stock Options will
vest immediately upon such termination; or (iii) on or after December 15,
2000 but prior to December 15, 2001, all of the remaining unvested Stock
Options will vest immediately upon such termination.
(c) OTHER TERMS. The Stock Options granted outside of
the Option Plan shall contain and be subject to such other terms and
conditions as are generally included in the Option Plan and the related stock
option agreement except as set forth herein. In addition, Employer shall
register the shares of Employer's Common Stock underlying the Stock Options
by filing a Registration Statement on Form S-8 (or other available
registration statement) with the Securities and Exchange Commission.
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3.5 LOAN. Upon Employee's written request to Employer, Employer
will, within thirty (30) days after receipt of such written request, loan to
Employee, at the minimum interest rate permitted under applicable tax
regulations, Two Hundred Thousand Dollars ($200,000) (the "LOAN"). The Loan
shall be due and payable by Employee to Employer in the event and on the date
of a Change in Control which occurs on or before the second anniversary of
the effective date of the Loan, unless such Change in Control occurs within
the first six (6) months after the Effective Date. In the event that a
Change in Control occurs (i) within the first six (6) months after the
Effective Date or (ii) does not occur before the second anniversary of the
effective date of the Loan, the Loan will be forgiven by the Company. In the
event that Employee is entitled to receive any payment pursuant to SECTION
8.2 or SECTION 8.5, Employer shall have the right to deduct from any such
payment any outstanding balance with respect to the Loan made pursuant to
this SECTION 3.5. Employee hereby acknowledges that the Loan and any
forgiveness thereof will result in imputed income to Employee and Employee
shall be responsible for payment of all applicable federal and state taxes.
3.6 MERGER AND ACQUISITION SUCCESS FEE. In the event that there is
a Change in Control transaction, Employee will be afforded the opportunity to
assist in the negotiations related thereto if he is still employed by the
Company; and Employee will be entitled to a success fee of (i) $750,000 if
such Change in Control occurs within the first six (6) months after the
Effective Date or (ii) $500,000 if such Change in Control occurs after the
date that is six (6) months after the Effective Date.
4. FACILITIES AND EXPENSES
Employer will furnish to Employee office space, equipment, supplies and
such other facilities and personnel as Employer deems necessary or
appropriate for the performance of Employee's duties under this Agreement,
including the payment of reasonable expenses to equip Employee's home office
(e.g., personal computer and telephonic access) at Employee's Utah residence.
Employer will pay on behalf of Employee (or reimburse Employee for)
reasonable expenses incurred by Employee at the request of, or on behalf of,
Employer in the performance of Employee's duties pursuant to this Agreement,
and in accordance with Employer's employment policies, including reasonable
expenses incurred by Employee in attending conventions, seminars, and other
business meetings, in appropriate business entertainment activities, and for
promotional expenses. Employee must file expense reports with respect to
such expenses in accordance with Employer's policies.
In addition, Employer will: (a) reimburse Employee for the reasonable
travel expenses of Employee's spouse or Employee's children for up to two (2)
trips per month (in the aggregate) from Salt Lake City, Utah to San Diego,
California; (b) provide Employee with membership access to a golf club within
reasonable proximity to Del Mar, California; and (c) to the extent not
previously covered under the Consulting Agreement, reimburse Employee for the
amount that Employee pays to acquire in his name the equity membership in the
golf club to which Employee's previous employer provided him with access,
which reimbursement shall not exceed Twenty Thousand Dollars ($20,000).
Employee must file expense reports with respect to such expenses and
reimbursements in accordance with Employer's policies.
5. VACATIONS AND HOLIDAYS
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Employee will be entitled to four (4) weeks of paid vacation per year
and holidays in accordance with Employer's policies. Employee will accrue
vacation to a maximum of six (6) weeks. After Employee reaches this maximum
accrual amount, he will cease to accrue additional vacation until his accrued
vacation falls below this maximum accrual amount.
6. CONFIDENTIALITY; EMPLOYEE INVENTIONS
Employee hereby agrees to comply with the terms and conditions of
Employer's Employee Confidentiality and Inventions Agreement, attached hereto
as ATTACHMENT B.
7. NON-COMPETITION AND NON-INTERFERENCE
7.1 ACKNOWLEDGMENTS BY EMPLOYEE. Employee acknowledges that: (a)
the services to be performed by him under this Agreement are of a special,
unique, unusual, extraordinary and intellectual character; (b) Employer's
business is national in scope and its products and services are marketed
throughout the United States; (c) Employer competes with other businesses
that are or could be located in any part of the United States; and (d) the
provisions of this SECTION 7 are reasonable and necessary to protect
Employer's business.
7.2 COVENANTS OF EMPLOYEE. In consideration of the acknowledgments
by Employee and the Compensation and the Benefits to be paid or provided to
Employee by Employer, and in recognition of the confidential information that
Employee will obtain related to Employer's business (including its customers
and employees), Employee covenants that he will not, directly or indirectly:
(a) during the Employment Period, except in the course
of the Employment hereunder, engage or invest in, own, manage, operate,
finance, control, or participate in the ownership, management, operation,
financing, or control of, be employed by, associated with, or in any manner
connected with, lend Employee's name or any similar name to, lend Employee's
credit to or render services or advice to, any business whose products or
activities compete in whole or in part with the products or activities of
Employer; PROVIDED, HOWEVER, that Employee may purchase or otherwise acquire
up to (but not more than) one percent (1%) of any class of securities of any
enterprise (but without otherwise participating in the activities of such
enterprise) if such securities are listed on any national or regional
securities exchange or have been registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended;
(b) whether for Employee's own account or for the
account of any other Person, at any time during the Employment Period and the
Post-Employment Period, solicit business of the same or similar type being
carried on by Employer, from any Person known by Employee to be a customer of
Employer and with whom Employee had personal contact during and by reason of
the Employment with Employer;
(c) whether for Employee's own account or the account of
any other Person (i) at any time during the Employment Period and the
Post-Employment Period, solicit, employ, or otherwise engage as an employee,
independent contractor, or otherwise, any Person who is or was an employee of
Employer at any time during the Employment Period or in any manner induce or
attempt to induce any employee of Employer to terminate his employment
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with Employer; or (ii) at any time during the Employment Period and the
Post-Employment Period, interfere with Employer's relationship with any
Person, including any Person who at any time during the Employment Period was
an employee, contractor, supplier, or customer of Employer; or
(d) at any time during or after the Employment Period,
disparage Employer or any of its shareholders, directors, officers, employees
or agents.
For purposes of this SECTION 7.2, the term "POST-EMPLOYMENT PERIOD"
means the one (1) year period beginning on the date of termination of the
Employment with Employer.
If any covenant in this SECTION 7.2 is held to be unreasonable,
arbitrary or against public policy, such covenant will be considered to be
divisible with respect to scope, time and geographic area, and such lesser
scope, time or geographic area, or all of them, as a court of competent
jurisdiction may determine to be reasonable, not arbitrary and not against
public policy, will be effective, binding and enforceable against Employee.
The period of time applicable to any covenant in this SECTION 7.2 will
be extended by the duration of any violation by Employee of such covenant.
Employee will, while the covenant under this SECTION 7.2 is in effect,
give notice to Employer, within ten (10) days after accepting any other
employment, of the identity of Employee's employer. Employer may notify such
employer that Employee is bound by this Agreement and, at Employer's
election, furnish such employer with a copy of this Agreement or relevant
portions thereof.
8. TERMINATION PAY
Effective upon the termination of this Agreement, Employer will be
obligated to pay to Employee (or, in the event of his death, his designated
beneficiary as defined below) only such compensation as is provided in this
SECTION 8.
8.1 TERMINATION WITH CAUSE. In the event that Employer terminates
Employee with Cause, Employee only will be entitled to receive the portion of
the Salary and the Performance Bonus accrued and owing to Employee only
through the date that such termination is effective, but will not be entitled
to any compensation during any subsequent Fiscal Year.
8.2 TERMINATION WITHOUT CAUSE. In the event that Employer
terminates Employee without Cause, Employee will be entitled to receive a
severance payment of One Million Five Hundred Thousand Dollars ($1,500,000).
Payment of this severance amount will be conditional upon Employee signing a
standard form general release of claims against the Company and its
directors, officers, affiliates and agents. Upon payment of such amount,
Employee will not be entitled to receive any other payment under this SECTION
8.
8.3 [RESERVED.]
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8.4 RESIGNATION. In the event that Employee resigns from Employer,
Employee shall not be entitled to any termination pay, other than the portion
of the Salary and the Performance Bonus accrued and owing to Employee only
through the date that such resignation is effective.
8.5 NON-RENEWAL PAYMENT. In the event that, on or before August 15,
2001, the Company does not offer an employment agreement to Employee which is
acceptable to Employee (after reasonable negotiations between Employer and
Employee lasting for at least thirty (30) days), then Employee will be
entitled to payment of One Million Five Hundred Thousand Dollars
($1,500,000); PROVIDED, HOWEVER, that payment of such amount will be
conditional upon Employee signing a standard form general release of claims
against the Company and its directors, officers, affiliates and agents. Upon
payment of such amount, Employee will not be entitled to receive any other
payment under this SECTION 8.
8.6 BENEFITS. Employee's accrual of, or participation in plans
providing for, the Benefits will cease at the effective date of Employee's
termination, and Employee will be entitled to accrued Benefits pursuant to
such plans only as provided in such plans.
8.7 DESIGNATED BENEFICIARY. For purposes of this SECTION 8,
Employee's designated beneficiary will be such individual beneficiary or
trust, located at such address, as Employee may designate by notice to
Employer from time to time or, if Employee fails to give notice to Employer
of such a beneficiary, Employee's estate. Notwithstanding the preceding
sentence, Employer will have no duty, in any circumstances, to attempt to
open an estate on behalf of Employee, to determine whether any beneficiary
designated by Employee is alive or to ascertain the address of any such
beneficiary, to determine the existence of any trust, to determine whether
any person or entity purporting to act as Employee's personal representative
(or the trustee of a trust established by Employee) is duly authorized to act
in that capacity, or to locate or attempt to locate any beneficiary, personal
representative or trustee.
8.8 CHANGE IN CONTROL. In the event that (i) there is a Change in
Control of the Company and (ii) the acquiring party in such Change in Control
does not offer to Employee a position acceptable to Employee, such acquiring
party will pay to Employee an amount equal to one and one-half (1 1/2) times
the aggregate of the Salary and the Performance Bonus. The acquiring party
will pay to Employee such amount upon the consummation of such Change in
Control.
9. RELOCATION AND OTHER BENEFITS
9.1 AUTOMOBILE. During the Employment Period, Employer will provide
to Employee a leased automobile commensurate with Employee's role as the
[____________] of Employer.
9.2 LODGING. During the Employment Period, Employer shall provide
to Employee appropriate lodging in a condominium (available to Employee on a
full-time basis) reasonably satisfactory to Employee, until June 30, 2000, or
longer if Employee is requested by Employer to spend a substantial portion of
his time in San Diego, California.
9.3 HOUSING RELOCATION BENEFITS. Employee will be entitled to the
housing relocation benefits, including reasonable moving expenses and realtor
fees and the current house sales price guarantee described in ATTACHMENT C to
this Agreement.
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9.4 COBRA COVERAGE. Employee will be reimbursed by the Company for
(i) insurance premiums paid by Employee for a period of 18 months resulting
from Employee's election of COBRA coverage relating to Employee's previous
employment and (ii) any taxes paid by Employee relating to the Company's
reimbursement of such premiums.
9.5 CERTAIN ADDITIONAL PAYMENTS.
(a) Anything in this Agreement to the contrary
notwithstanding and except as set forth below, in the event it shall be
determined that any payment or distribution by Employer or for the benefit of
Employee (whether paid or payable or distributed or distributable pursuant to
the terms of this Agreement or otherwise, but determined without regard to
any additional payments required under this Section 9.5) (a "PAYMENT") would
be subject to the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "CODE"), or any interest or penalties are
incurred by Employee with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "EXCISE TAX"), then Employee shall be entitled to receive
an additional payment (a "GROSS-UP PAYMENT") in an amount such that, after
payment by Employee of all taxes (including any interest or penalties imposed
with respect to such taxes), including, without limitation, any income taxes
(and any interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, Employee retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 9.5(c), all
determinations required to be made under this Section 9.5, including whether
and when a Gross-Up Payment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in arriving at such determination,
shall be made by Ernst & Young LLP (the "ACCOUNTING FIRM"), which shall
provide detailed supporting calculations to Employer and Employee within
fifteen (15) business days of the receipt of notice from Employee that there
has been a Payment, or such earlier time as is requested by Employer. In the
event that the Accounting Firm is serving as accountant or auditor for the
individual, entity or group effecting Change in Control, Employee shall
appoint another nationally recognized accounting firm to make the
determinations required hereunder (which accounting firm shall then be
referred to as the Accounting Firm hereunder). All fees and expenses of the
Accounting Firm shall be borne solely by Employer. Any Gross-Up Payment, as
determined pursuant to this Section 9.5, shall be paid by Employer to
Employee within five (5) days of the receipt of the Accounting Firm's
determination. If the Accounting Firm determines that no Excise Tax is
payable by Employee, it shall furnish Employee with a written opinion that
failure to report the Excise Tax on the Executive's applicable federal income
tax return should not result in the imposition of a negligence or similar
penalty. Any determination by the Accounting Firm shall be binding upon
Employer and Employee. As a result of the uncertainty in the application of
Section 4999 of the Code at the time of the initial determination by the
Accounting Firm hereunder, it is possible that Gross-Up Payments which will
not have been made by Employer should have been made ("UNDERPAYMENT"),
consistent with the calculations required to be made hereunder. In the event
that Employer exhausts its remedies pursuant to Section 9.5(c) and Employee
thereafter is required to make a payment of any Excise Tax, the Accounting
Firm shall determine the amount of the Underpayment that has occurred and any
such Underpayment shall be promptly paid by Employer to or for the benefit of
Employee.
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(c) Employee shall notify Employer in writing of any claim by
the Internal Revenue Service that, if successful, would require the payment
of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than ten (10) business days after Employee is
informed in writing of such claim and shall apprise Employer of the nature of
such claim and the date on which such claim is requested to be paid.
Employee shall not pay such claim prior to the expiration of the 30-day
period following the date on which it gives such notice to Employer (or such
shorter period ending on the date that any payment of taxes with respect to
such claim is due). If Employer notifies Employee in writing prior to the
expiration of such period that it desires to contest such claim, Employee
shall:
(i) give Employer any information reasonably requested
by Employer relating to such claim;
(ii) take such action in connection with contesting
such claim as Employer shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with respect to
such claim by an attorney reasonably selected by Employer;
(iii) cooperate with Employer in good faith in order
effectively to contest such claim; and
(iv) permit Employer to participate in any proceedings
relating to such claim; PROVIDED, HOWEVER, that Employer shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold
Employee harmless, on an after-tax basis, for any Excise Tax or income tax
(including interest and penalties with respect thereto) imposed as a result
of such representation and payment of costs and expenses. Without limitation
on the foregoing provisions of this Section 9.5(c), Employer shall control
all proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim
and may, at its sole option, either direct Employee to pay the tax claimed
and sue for a refund or contest the claim in any permissible manner, and
Employee agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or
more appellate courts, as Employer shall determine; PROVIDED, HOWEVER, that
if Employer directs Employee to pay such claim and sue for a refund, Employer
shall advance the amount of such payment to Employee, on an interest-free
basis and shall indemnify and hold Employee harmless, on an after-tax basis,
from any Excise Tax or income tax (including interest or penalties with
respect thereto) imposed with respect to such advance or with respect to any
imputed income with respect to such advance; and FURTHER, PROVIDED, that any
extension of the statute of limitations relating to payment of taxes for the
taxable year of Employee with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, Employer's control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder
and Employee shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
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(d) If, after the receipt by Employee of an amount advanced
by Employer pursuant to Section 9.5(c), Employee becomes entitled to receive
any refund with respect to such claim, Employee shall promptly pay to
Employer the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Employee of an amount advanced by Employer pursuant to Section 9.5(c), a
determination is made that Employee shall not be entitled to any refund with
respect to such claim and Employer does not notify Employee in writing of its
intent to contest such denial of refund prior to the expiration of thirty
(30) days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be
paid.
10. GENERAL PROVISIONS
10.1 INJUNCTIVE RELIEF AND ADDITIONAL REMEDY. Employee acknowledges
that the injury that would be suffered by Employer as a result of a breach of
the provisions of this Agreement (including any provision of SECTIONS 6 and
7) would be irreparable and that an award of monetary damages to Employer for
such a breach would be an inadequate remedy. Consequently, Employer will have
the right, in addition to any other rights it may have, to obtain injunctive
relief to restrain any breach or threatened breach or otherwise to
specifically enforce any provision of this Agreement, and Employer will not
be obligated to post bond or other security in seeking such relief. Without
limiting Employer's rights under this SECTION 10 or any other remedies of
Employer, if Employee breaches any of the provisions of SECTION 6 or 7,
Employer will have the right to cease making any payments otherwise due to
Employee under this Agreement.
10.2 COVENANTS OF SECTIONS 6 AND 7 ARE ESSENTIAL AND INDEPENDENT
COVENANTS; ADVICE OF COUNSEL. The covenants by Employee in SECTIONS 6 and 7
are essential elements of this Agreement, and without Employee's agreement to
comply with such covenants, Employer would not have entered into this
Agreement or employed or continued the Employment of Employee. Employer and
Employee have independently consulted their respective counsel and have been
advised in all respects concerning the terms of this Agreement, including the
reasonableness and propriety of the above referenced covenants, with specific
regard to the nature of the business conducted by Employer. Employee further
confirms that he has been advised by counsel and/or tax professionals with
respect to the income tax effects of the terms of his employment, including,
but not limited to, potential "golden parachute" tax lability. Subject to
the final execution and delivery of this Agreement, Employer will reimburse
Employee for all reasonable legal and tax consulting fees (not to exceed Five
Thousand Dollars ($5,000)) associated with Employee's review and negotiation
of this Agreement.
Employee's covenants in SECTIONS 6 and 7 are independent covenants and
the existence of any claim by Employee against Employer under this Agreement
or otherwise will not excuse Employee's breach of any covenant in SECTION 6
or 7.
If Employee's Employment hereunder expires or is terminated, this
Agreement will continue in full force and effect as is necessary or
appropriate to enforce the covenants and agreements of Employee in SECTIONS 6
and 7.
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10.3 REPRESENTATIONS AND WARRANTIES BY EMPLOYEE. Employee represents
and warrants to Employer that the execution and delivery by Employee of this
Agreement do not, and the performance by Employee of his obligations
hereunder will not, with or without the giving of notice or the passage of
time, or both: (a) violate any judgment, writ, injunction, or order of any
court, arbitrator, or governmental agency applicable to Employee; or (b)
conflict with, result in the breach of any provisions of or the termination
of, or constitute a default under, any agreement to which Employee is a party
or by which Employee is or may be bound.
10.4 OBLIGATIONS CONTINGENT ON PERFORMANCE. The obligations of
Employer hereunder, including its obligation to pay the compensation provided
for herein, are contingent upon Employee's performance of Employee's
obligations hereunder.
10.5 WAIVER. The rights and remedies of the parties to this
Agreement are cumulative and not alternative. Neither the failure nor any
delay by either party in exercising any right, power, or privilege under this
Agreement will operate as a waiver of such right, power, or privilege, and no
single or partial exercise of any such right, power, or privilege will
preclude any other or further exercise of such right, power, or privilege or
the exercise of any other right, power, or privilege. To the maximum extent
permitted by applicable law, (a) no claim or right arising out of this
Agreement can be discharged by one party, in whole or in part, by a waiver or
renunciation of the claim or right unless in writing signed by the other
party; (b) no waiver that may be given by a party will be applicable except
in the specific instance for which it is given; and (c) no notice to or
demand on one party will be deemed to be a waiver of any obligation of such
party or of the right of the party giving such notice or demand to take
further action without notice or demand as provided in this Agreement.
10.6 BINDING EFFECT; DELEGATION OF DUTIES PROHIBITED. This Agreement
shall inure to the benefit of, and shall be binding upon, the parties hereto
and their respective successors, assigns, heirs, and legal representatives,
including any entity with which Employer may merge or consolidate or to which
all or substantially all of its assets may be transferred. The duties and
covenants of Employee under this Agreement, being personal, may not be
delegated.
10.7 NOTICES. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by facsimile (with written confirmation of receipt),
provided that a copy is mailed by registered mail, return receipt requested
or (c) when received by the addressee, if sent by a nationally recognized
overnight delivery service (receipt requested), in each case to the
appropriate addresses and facsimile numbers set forth below (or to such other
addresses and facsimile numbers as a party may designate by notice to the
other parties):
If to Employer: DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92122
Attention: Chairman of the Board and Chief
Financial Officer
Facsimile No.: (619) 452-2789
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With a copy to: Baker & McKenzie
101 West Broadway, Twelfth Floor
San Diego, California 92101-3890
ATTENTION: John J. Hentrich, Esq.
Facsimile No.: (619) 236-0429
If to Employee: Larry D. Grandia
1934 S. 850 E.
Bountiful, UT 84010
10.8 ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the
entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior agreements and understandings, oral or
written, between the parties hereto with respect to the subject matter
hereof, including the Consulting Agreement. This Agreement may not be
amended orally, but only by an agreement in writing signed by the parties
hereto.
10.9 GOVERNING LAW. This Agreement will be governed by the laws of
the State of California without regard to conflicts of laws principles.
10.10 BINDING ARBITRATION. Subject to the arbitration provisions set
forth below, the parties hereto agree that all disputes arising out of or
related to the terms and conditions of this Agreement or to the performance,
breach or termination thereof, shall be submitted to binding arbitration
pursuant to the Expedited Procedures of the Commercial Arbitration Rules (the
"RULES") of the American Arbitration Association (the "AAA"). The
arbitration will take place in San Diego, California, at the offices of the
AAA. The dispute will be resolved by a single arbitrator appointed by the
AAA in accordance with the list procedure described in Paragraph 13 of the
Rules, except that the AAA will transmit the list within ten (10) Business
Days of the filing of the demand for arbitration, and the parties thereto
will have five (5) Business Days to return the list to the AAA with their
objections and preferences. Discovery will be limited to no more than seven
(7) depositions by each side and written document requests, requesting the
production of specific documents. The parties to the dispute will
voluntarily produce any and all documents that they intend to use at the
hearing before the close of discovery, subject to supplementation for
purposes of rebuttal or good cause shown. The period for taking discovery
will be sixty (60) Business Days, commencing upon the day that the answer is
due under the Rules. The arbitrator will hold a pre-hearing conference
within three (3) Business Days of the close of discovery and will schedule
the hearing within thirty (30) Business Days of the close of discovery.
After the arbitrator is selected, the arbitrator will have sole jurisdiction
to hear such applications, except that any measure ordered by the arbitrator
may be immediately and specifically enforced by a court otherwise having
jurisdiction over the parties. All fees and costs will be allocated to the
parties to the arbitration as determined by the arbitrator. Each party will
pay its own fees and costs associated with the arbitration and each party
will pay one-half the estimated arbitrator's fees up front and if either
party fails to do so a default will be entered against such party solely with
respect to such fees. Any determination of the arbitrator shall be final and
binding on the parties hereto. Nothing in this Agreement will prevent a
party hereto from applying to a court that would otherwise have jurisdiction
for provisional or interim injunctive or other equitable measures.
13
<PAGE>
10.11 SECTION HEADINGS, CONSTRUCTION. The section headings in this
Agreement are provided for convenience only and will not affect its
construction or interpretation. All references to "section" or "sections"
refer to the corresponding section or sections of this Agreement unless
otherwise specified. All words used in this Agreement will be construed to be
of such gender or number as the circumstances require. Unless otherwise
expressly provided, the word "including" does not limit the preceding words
or terms.
10.12 SEVERABILITY. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any
provision of this Agreement held invalid or unenforceable only in part or
degree will remain in full force and effect to the extent not held invalid or
unenforceable.
10.13 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
DAOU SYSTEMS, INC. EMPLOYEE:
By: By:
------------------------------- ------------------------------
Georges J. Daou, Larry D. Grandia
Chief Executive Officer
15
<PAGE>
ATTACHMENT A
INCENTIVE COMPENSATION PLAN
16
<PAGE>
ATTACHMENT B
EMPLOYEE CONFIDENTIALITY AND INVENTIONS AGREEMENT
17
<PAGE>
ATTACHMENT C
HOUSING AND RELOCATION BENEFITS
Employee will be entitled to the following housing and relocation benefits:
1. In the event that, during the Employment Period, Employee elects to
relocate his personal residence in Salt Lake City, Utah (the "UTAH
RESIDENCE") to San Diego, California, Employee shall provide written notice
of such election to Employer. Within 15 days of the date of such written
notice, Employee shall obtain from three (3) licensed real estate appraisers
in the Salt lake City area three (3) separate appraisals of the fair market
value of the Utah Residence (collectively, the "APPRAISALS"). To the extent
that (i) Employee is unable to sell the Utah Residence within 90 days after
the conclusion of such 15-day period and (ii) Employee subsequently sells the
Utah Residence during the Employment Period and relocates to San Diego,
California to continue his employment with Employer, Employer agrees to pay
to Employee the amount, if any, by which the average value of the Appraisals
exceeds the actual sales price of the Utah Residence.
2. Employer will reimburse Employee for standard closing costs relating to
Employee's sale of the Utah Residence as set forth above in item 1.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,617
<SECURITIES> 1,113
<RECEIVABLES> 26,152
<ALLOWANCES> 1,054
<INVENTORY> 8,059
<CURRENT-ASSETS> 44,883
<PP&E> 9,418
<DEPRECIATION> 4,722
<TOTAL-ASSETS> 49,989
<CURRENT-LIABILITIES> 14,586
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 33,115
<TOTAL-LIABILITY-AND-EQUITY> 49,989
<SALES> 27,323
<TOTAL-REVENUES> 27,323
<CGS> 21,820
<TOTAL-COSTS> 21,820
<OTHER-EXPENSES> 8,240
<LOSS-PROVISION> 98
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> (2,824)
<INCOME-TAX> (1,156)
<INCOME-CONTINUING> (1,668)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,668)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
