<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________,
Commission File No.: 000-22073
DAOU SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0284454
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5120 Shoreham Place
San Diego, California 92122
(Address of principal executive offices) (Zip Code)
(858) 452-2221
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
The number of shares of Registrant's Common Stock, par value $.001 per share,
outstanding as of May 12, 2000: 17,712,368
1
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DAOU SYSTEMS, INC.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----------
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 (unaudited) and
December 31, 1999 3
Condensed Consolidated Statements of Operations (unaudited) for the Three
Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
2
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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,
2000 1999
(UNAUDITED)
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,642 $ 15,480
Short-term investments, available-for-sale 59 68
Accounts receivable, net of allowance for doubtful accounts of
$1,849 and $1,868 at March 31, 2000 and December 31, 1999,
respectively 16,857 21,912
Contract work in progress 3,743 2,816
Income tax receivable - 378
Other current assets 1,660 670
------------------------------------
Total current assets 34,961 41,324
Due from officers/stockholders 95 98
Equipment, furniture and fixtures, net 4,126 4,319
Other assets 246 319
------------------------------------
TOTAL ASSETS $ 39,428 $ 46,060
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities $ 3,019 $ 4,698
Accrued salaries and benefits 3,706 4,248
Current portion of severance payable 210 210
------------------------------------
Total current liabilities 6,935 9,156
Long-term liabilities 567 548
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value. Authorized 3,520
shares; issued and outstanding 2,182 shares at March 31, 2000
and December 31, 1999 11,566 11,382
Stockholders' equity:
Common stock, $.001 par value. Authorized shares 50,000 shares;
issued and outstanding 17,712 shares at March 31, 2000 and
December 31, 1999 18 18
Additional paid-in capital 37,395 37,395
Deferred compensation (155) (192)
Accumulated other comprehensive income (44) (43)
Retained deficit (16,854) (12,204)
------------------------------------
Total stockholders' equity 20,360 24,974
------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,428 $ 46,060
====================================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
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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,
2000 1999
------------------ ------------------
<S> <C> <C>
Revenues $ 17,575 $ 27,323
Cost of revenues 15,956 21,820
------------------ ------------------
Gross profit 1,619 5,503
Operating expenses:
Sales and marketing 1,790 2,905
General and administrative 4,464 5,336
------------------ ------------------
6,254 8,241
------------------ ------------------
Loss from operations (4,635) (2,738)
Interest income (expense), net 169 (86)
------------------ ------------------
Loss before income taxes (4,466) (2,824)
Provision (benefit) for income taxes - (1,156)
------------------ ------------------
Net loss (4,466) (1,668)
Accrued dividends on preferred stock (184) -
------------------ ------------------
Net loss available to common stockholders $ (4,650) $ (1,668)
================== ==================
Basic and diluted net loss per common share $ (0.26) $ (0.09)
================== ==================
Shares used in computing basic and diluted net loss per
common share: 17,712 17,689
================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL statements.
4
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DAOU Systems, Inc.
Condensed Consolidated Statements of Cash Flows
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------------- ------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,466) $ (1,668)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 637 458
Provision for uncollectible accounts 75 98
Deferred income taxes - (1,158)
Changes in operating assets and liabilities:
Accounts receivable 4,980 (615)
Contract work in process (927) 4,212
Other current assets (612) (170)
Accounts payable and accrued liabilities (1,679) (1,686)
Accrued salaries and benefits (542) 185
Other accounts 19 44
----------------- ------------------
Net cash used in operating activities (2,515) (552)
INVESTING ACTIVITIES:
Purchases of equipment, furniture and fixtures (407) (337)
Changes in other assets and maturities of
short-term investments 84 74
----------------- ------------------
Net cash used in investing activities (323) (265)
FINANCING ACTIVITIES:
Repayments of long-term debt and line of credit - (1,322)
----------------- ------------------
Net cash used in financing activities - (1,322)
----------------- ------------------
Decrease in cash and cash equivalents (2,838) (2,139)
Cash and cash equivalents at beginning of period 15,480 6,756
----------------- ------------------
Cash and cash equivalents at end of period $ 12,642 $ 4,617
================= ==================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
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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, 2000 and for the three-month periods
ended March 31, 2000 and 1999 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, 2000 and the results of operations for the three month
periods ended March 31, 2000 and 1999. The results of operations for the three
months ended March 31, 2000 are not necessarily indicative of the results to be
expected for the year ending December 31, 2000. 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 30, 2000 and in the Company's Proxy Statement Schedule 14A
Information filed with the SEC on May 1, 2000.
2. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
about the future that affect the amounts reported in the financial statements
and disclosures made in the accompanying notes of the financial statements. The
actual results could differ from those estimates.
3. Lines of Credit
On June 29, 1999, the Company secured a replacement $8.0 million revolving line
of credit, which expires June 29, 2001. The line of credit bears interest at
prime plus 1% per annum and is secured by substantially all of the assets of the
Company and contains customary covenants and restrictions. There are no
compensating balance requirements and borrowings under the line of credit are
limited to 80% of qualifying receivables. No amounts were outstanding under this
revolving line of credit as of March 31, 2000.
4. Related Party Transactions
In 1999, the Company provided implementation services to a company in which
the Chairman of the Board is an investor. The Company has $514,000 in
accounts receivable outstanding at March 31, 2000 related to the
implementation services provided during 1999.
5. Net Loss Per Share
Net loss per share is computed in accordance with FASB Statement No. 128,
EARNINGS PER SHARE. Basic net loss per share is computed using the weighted
average number of common shares outstanding during each period.
6
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Diluted net loss per share includes the dilutive effect of common shares
potentially issuable upon the exercise of stock options and warrants. In 1999,
diluted loss per share is unchanged from basic loss per share because the
effects of the assumed conversion of stock options and warrants would be
antidilutive.
The following table details the computation of basic and diluted net loss per
share:
(In thousands, except per share information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------------- ---------------
<S> <C> <C>
Numerator:
Net loss available to common stockholders $ (4,650) $ (1,668)
Denominator:
Denominator for basic net loss per share - weighted
average common shares outstanding 17,712 17,689
Effect of dilutive securities:
Warrants - -
Common stock options - -
Preferred stock - -
---------------- ---------------
- -
---------------- ---------------
Denominator for diluted net loss per share -adjusted
weighted average common shares outstanding 17,712 17,689
================ ===============
Basic net loss per share $ (0.26) $ (0.09)
================ ===============
Diluted net loss per share $ (0.26) $ (0.09)
================ ===============
</TABLE>
6. Comprehensive Loss
Comprehensive loss for the three months ended March 31, 2000 and 1999 totaled
$(4,651,000) and $(1,577,000), respectively. The difference from reported net
loss arises from the unrealized gains and losses on short-term investments.
7. Series A Preferred Stock
Holders of the Series A Preferred Stock are entitled to receive cumulative
dividends at the rate of six percent per annum, payable in the form of shares of
Series A Preferred Stock. Such dividend rate shall increase an additional
one-percent per annum for each successive year after the second anniversary of
the purchase date. As of March 31, 2000, the Company has accrued but undeclared
preferred stock dividends of $492,000, payable in shares of Series A Preferred
Stock.
7
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8. Disclosure of Segment Information
For the three months ended March 31, 2000 and 1999, the Company has the
following five reportable segments: information technology (IT) consulting
and managed care implementation, communications infrastructure, applications
implementation, integration services, and outsourcing. Beginning in early
2000, the Company formed a new segment, Enosus. The IT consulting and managed
care implementation group focuses on providing senior consultants to assist
healthcare management to plan and meet their business and IT objectives. The
communications infrastructure group installs, implements and maintains IT
infrastructure for healthcare organizations. The applications implementation
group provides IT consulting resources to hospitals and other healthcare
organizations. The integration services group concentrates on integration of
existing healthcare systems (financial, clinical and management) to reduce
overall costs and improve the quality of care. The outsourcing group performs
a full range of IT outsourcing services including co-source or outsource of
call centers, help desks, desktop support, server management, network
management, voice management and complete IT department outsourcing. Enosus
provides Internet professional services and solutions to healthcare and other
organizations executing an eBusiness strategy.
The Company manages segment reporting at a gross margin level. Sales and
marketing, general and administrative expenses, and capital assets are
managed at the corporate level separately from the segments and therefore are
not separately allocated to the segments. The Company's segments are managed
on an integrated basis in order to serve clients by assembling
multi-disciplinary teams, which provide comprehensive services across its
principal services.
<TABLE>
<CAPTION>
IT
Consulting
and
Managed Care Communications Application Integration
Implementation Infrastructure Implementation Services Outsourcing Enosus Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
MARCH 31, 2000
- -------------------------
Total revenues $ 1,400 $ 3,948 $ 4,397 $ 2,512 $ 5,271 $ 47 $ 17,575
Cost of services 1,323 3,453 4,354 2,175 4,489 160 15,956
--------------------------------------------------------------------------------------------
Gross profit 77 495 43 337 782 (113) 1,619
Gross profit percent 6% 13% 1% 13% 15% (240)% 9%
Sales and marketing 1,790
General and
administrative 4,464
--------
Loss from operations $ (4,635)
========
THREE MONTHS ENDED
MARCH 31, 1999
- -------------------------
Total revenues $ 2,342 $ 8,450 $ 7,351 $ 3,421 $ 5,759 $ - $ 27,323
Cost of services 1,496 9,695 4,054 2,178 4,397 - 21,820
--------------------------------------------------------------------------------------------
Gross profit 846 (1,245) 3,297 1,243 1,362 5,503
-
Gross profit percent 36% (15)% 45% 36% 24% 20%
Sales and marketing 2,905
General and
administrative 5,336
--------
Loss from operations $ (2,738)
========
</TABLE>
9. Contingencies
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
8
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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 that
was filed on April 12, 2000 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.
9
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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, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. 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, 1999 on file with the
SEC, and in the Company's Proxy Statement Schedule 14A Information filed with
the SEC on May 1, 2000. 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
DAOU provides integrated information technology (IT) solutions and services to
the U.S. healthcare and Internet professional services industries. The Company's
capabilities range from strategic planning (using IT to support key business
goals), to the design and integration of IT components (voice, video and data
networks, application implementation, Internet infrastructure, data warehouses),
to the management and delivery of operational services (IT department, desktop
management, ASP services, network management), and to Internet solutions and
professional services supporting organizations executing an eBusiness strategy.
The Company's service offerings are segmented into the following business units:
- - IT CONSULTING AND MANAGED CARE IMPLEMENTATION (IT Consulting) - develops
business and IT strategic plans and solves execution challenges for managed
care and healthcare delivery organizations, installs and integrates managed
care applications, and manages IT systems.
- - COMMUNICATIONS INFRASTRUCTURE - focuses on the IT infrastructure in
healthcare enterprises, primarily IDNs, hospitals, academic medical centers
and medical groups, provides networking, desktop, and voice, video and data
solutions.
- - APPLICATION IMPLEMENTATION - supplies hospitals and other healthcare
organizations with temporary, certified consultants who are capable of
installing and servicing approximately 90% of the most common healthcare
software applications.
- - INTEGRATION SERVICES - focuses on integration of the customers information
systems with existing or new infrastructure that allow healthcare
organizations to share and access data housed across multiple platforms and
environments.
- - OUTSOURCING - performs a full range of IT outsourcing services including
co-source or outsource of call centers, help desks, desktop support, server
management, network management, voice management and complete IT department
outsourcing.
- - ENOSUS - provides Internet professional services and solutions to
organizations executing an eBusiness strategy.
The Company's service offerings represent aggregated end-to-end healthcare IT
solutions. Depending on the specific needs of its customers, the Company's
relationships may begin anywhere along the IT solution process,
10
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growing within one of the groups or developing cohesively across the complete
end-to-end IT solution process from conceptualization to operation.
The Company's gross margin with respect to fixed-fee based service contracts
varies significantly depending on the percentage of third-party products versus
professional services provided by the Company. Payments received in advance of
services performed are recorded as deferred revenues. Certain contract payment
terms may result in customer billing occurring at a pace slower than revenue
recognition. The resulting revenues recognized in excess of amounts billed and
project costs are included in contract work in progress on the Company's balance
sheet. In 1999, the Company began to focus on providing its professional
services on a "time and expense" basis, under which revenues are recognized as
the services are performed. Billings for these services occur on a semi-monthly
or monthly basis. The Company also provides support and management service
revenues, which are recognized ratably over the period that these services are
provided.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statement of
operations data as a percentage of net revenues.
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
----------------- -------------
<S> <C> <C>
Revenues 100% 100%
Cost of revenues 91 80
----------------- -------------
Gross profit 9 20
Operating expenses 35 30
----------------- -------------
Loss from operations (26) (10)
Interest income (expense), net 1 0
----------------- -------------
Income (loss) before income taxes (25) (10)
Provision (benefit) for income taxes - (4)
----------------- -------------
Net income (loss) (25) (6)
================= =============
</TABLE>
The Company's revenues decreased 36% or $9.7 million to $17.6 million for the
three months ended March 31, 2000 from $27.3 million for the three months
ended March 31, 1999, primarily due to a continued lag in the Company's core
health care information technology business, attributable largely to weak
post Year 2000 market demand, and due to the closure of the Company's cabling
division, DAOU On-line, Inc. Services to DAOU's five largest customers
accounted for 33% or $5.8 million of total revenues for the three months
ended March 31, 2000.
Cost of revenues decreased 27% or $5.8 million to $16.0 million for the three
months ended March 31, 2000 from $21.8 million for the three months ended March
31, 1999, primarily as a result of a decrease in revenue. Gross margin
percentage decreased to 9% for the three months ended March 31, 2000 from 20%
for the three months ended March 31, 1999, as a result of the reduced demand for
professional services.
Sales and marketing expenses decreased 38% or $1.1 million to $1.8 million for
the three months ended March 31, 2000 from $2.9 million for the three months
ended March 31, 1999, primarily due to the continued consolidation of sales and
marketing efforts into the corporate office and a reduction of sales
expenditures. Sales and marketing expenses represented approximately 10% and 11%
of total revenues for the three months ended March 31, 2000 and 1999,
respectively.
General and administrative expenses decreased 15% or $800,000 to $4.5 million
for the three months ended March 31, 2000 from $5.3 million for the three months
ended March 31, 1999, primarily as a result of lower expenses caused by the
integration of acquired companies and decreases in legal, travel and recruiting
costs. General and administrative expenses represented approximately 25% and 20%
of total revenues for the three months ended
11
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March 31, 2000 and 1999, respectively.
Other income (expense), net, was $169,000 and $(86,000) for the three months
ended March 31, 2000 and 1999, respectively. Other income is primarily interest
income on cash and cash equivalents, and short-term investments. Other expense
consists primarily of interest associated with the Company's business lines of
credit. The increase in net other income (expense), net, was primarily due to
higher average cash reserves available for investment and reduced interest
expense after the payoff of outstanding debt in 1999.
Income taxes provided in 2000 are based on the Company's estimated effective
tax rate. During 1999, the Company was estimating that it would receive tax
benefit for its losses. In the fourth quarter, the tax benefit previously
recorded was reversed due to the total loss in 1999.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 2000, the Company had working capital of $28.0 million, a
decrease of $4.2 million from $32.2 million on December 31, 1999. For the
three months ended March 31, 2000, cash used in operating activities was $2.5
million compared to cash used in operating activities of $552,000 for the
three months ended March 31, 1999. This change resulted primarily from the
loss from operations.
Net cash used in investing activities was $323,000 in the current period,
compared to net cash used in investing activities of $265,000 in the
comparable prior period. This change resulted primarily from slightly
increased equipment purchases for the three months ended March 31, 2000.
Net cash used in financing activities was $0 for the three months ended March
31, 2000, compared to net cash used in financing activities of $1.3 million in
the comparable prior period. This change resulted primarily from repayments of
debt and lines of credit of acquired companies of $1.3 million during the three
months ended March 31, 1999.
On June 29, 1999, the Company secured an $8.0 million revolving line of credit
that expires on June 29, 2001. The line of credit bears interest at prime plus
1% per annum, is secured by substantially all of the assets of the Company and
contains customary covenants and restrictions. There are no compensating balance
requirements and borrowings under the line of credit are limited to 80% of
qualifying receivables. No amount remained outstanding under this revolving line
of credit as of March 31, 2000.
Although the Company has an accumulated deficit as of March 31, 2000, the
Company believes that its available funds together with anticipated cash from
operating activities will be sufficient to meet its capital requirements,
including the start-up costs for Enosus, 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.
In July 1999, the Company issued 2,181,818 shares of Series A Preferred Stock.
The Series A Preferred Stock accrues dividends at a six percent annual rate.
Such rate will increase one percent each year after the second anniversary of
the issue date of the Series A Preferred Stock. The dividend is payable in
shares of Series A Preferred Stock except in the case of redemption or
liquidation. The holders of the Series A Preferred Stock have the right to cause
the Company to redeem their stock for an aggregate amount equal to $12 million,
plus accrued dividends, which were $492,000 as of March 31, 2000, upon the
occurrence of certain events that are outside the Company's control. If the
Company is forced to redeem the Series A Preferred Stock, then the Company may
be forced to sell additional equity or debt securities, or draw down its credit
facility. The Company may not be able to raise additional capital on terms
favorable to the Company, if at all.
12
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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
The Company has experienced no significant disruptions in its critical
information technology and non-information technology systems and believes these
systems responded successfully to the year 2000 date change. The Company is not
aware of any material problems resulting from year 2000 compliance issues,
either with its internal systems, or with the products and services of third
parties. The Company will continue to monitor its critical computer
applications, as well as those of its suppliers and vendors throughout the year
2000 to ensure that any latent year 2000 compliance matters that may arise are
addressed promptly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates, primarily from its
variable-rate long-term debt arrangements and, to a lessor extent, its
investments in certain available-for-sale marketable securities. Under its
current policies, the Company does not use interest rate derivatives instruments
to manage this exposure to interest rate changes. The Company does not have the
option to convert its variable-rate long-term debt arrangement to fixed-rate
debt arrangements for a nominal transaction fee. At March 31, 2000, the Company
had no outstanding balance on its variable-rate debt. A hypothetical 1% adverse
move in the interest rates along the entire interest rate yield curve would not
materially effect the fair value of the Company's financial instruments that are
exposed to changes in interest rates.
13
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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, 2000. 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, 2000 in the
federal litigation. That motion has been fully briefed and awaits the Court's
ruling which will occur at the June 12, 2000 hearing on the matter. 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
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1 Retention and Severance Agreement, dated as of March 1,
2000, by and between DAOU Systems, Inc. and Eric Ringwall
10.2 Retention and Severance Agreement, dated as of March 1,
2000, by and between DAOU Systems, Inc. and Stephen M. Casey
10.3 Retention and Severance Agreement, dated as of March 1,
2000, by and between DAOU Systems, Inc. and Donald R. Myll
27.1 Financial Data Schedule
</TABLE>
(b) Current Reports on Form 8-K. The Registrant did not file any Current
Reports on Form 8-K with the Commission during the quarter ended March 31,
2000.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: May 12, 2000
DAOU SYSTEMS, INC.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Larry D. Grandia President and Chief Executive Officer May 12, 2000
- ------------------------ (Principal Executive Officer)
Larry D. Grandia
/s/ Donald R. Myll Executive Vice President, Chief Financial Officer and Secretary May 12, 2000
- ------------------------ (Principal Financial and Accounting Officer)
Donald R. Myll
</TABLE>
15
<PAGE>
Exhibit Index
10.1 Retention and Severance Agreement, dated as of March 1, 2000, by
and between DAOU Systems, Inc. and Eric Ringwall
10.2 Retention and Severance Agreement, dated as of March 1, 2000, by
and between DAOU Systems, Inc. and Stephen M. Casey
10.3 Retention and Severance Agreement, dated as of March 1, 2000, by
and between DAOU Systems, Inc. and Donald R. Myll
27.1 Financial Data Schedule
16
<PAGE>
Exhibit 10.1
RETENTION AND SEVERANCE AGREEMENT
THIS RETENTION AND SEVERANCE AGREEMENT (this "AGREEMENT"),
dated as of March 1, 2000, is made by and between DAOU Systems, Inc., a Delaware
corporation ("DAOU"), and Eric Ringwall ("EMPLOYEE").
RECITALS
WHEREAS, DAOU and each of its wholly-owned subsidiaries (collectively,
the COMPANY") recognize that the possibility of a Change in Control (as defined
below) of DAOU exists and that such possibility, including the uncertainty that
such possibility may raise among the Company's key employees, may result in the
departure or distraction of such employees to the detriment of the Company and
DAOU's stockholders;
WHEREAS, DAOU's Board of Directors has determined that appropriate
steps should be taken to reinforce and encourage the continued employment of the
Company's key employees without distraction from the possibility of a Change in
Control of DAOU or any related events and circumstances;
WHEREAS, Employee is a key employee of the Company;
WHEREAS, the Company considers that providing Employee with certain
retention and severance benefits will operate as an incentive for Employee to
remain employed by the Company in the event of a Change in Control of DAOU.
NOW THEREFORE, to induce Employee to remain employed by the Company,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, DAOU and Employee agree as follows:
AGREEMENT
1. DEFINITIONS.
1.1 "BASE SALARY" shall mean the Employee's gross annual salary as of
the Termination Date.
1.2 "CAUSE" shall mean:
(a) [Reserved.]
(b) Employee's material failure to adhere to any written policy of
the Company generally applicable to officers of the Company if Employee has been
given a reasonable opportunity (but in no event later than thirty (30) days) to
comply with such policy or cure his failure to comply;
(c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company;
<PAGE>
(d) the misappropriation (or attempted misappropriation) of any of
the Company's funds or property;
(e) the conviction of, or the entering of a guilty plea or plea of
no contest with respect to, a felony, the equivalent thereof, or any other crime
with respect to which imprisonment is a possible punishment;
(f) willful misconduct;
(g) physical or mental disability or other inability to perform the
essential functions of his position, with or without reasonable accommodation;
or
(h) death.
1.3 "CHANGE OF CONTROL" is defined to have occurred if, and only if,
during Employee's employment:
(a) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or person, or any syndicate
or group deemed to be a person under Section 14(d)(2) of the Exchange Act is or
becomes the "Beneficial Owner" (as defined in Rule 13d-3 of the General Rules
and Regulations under the Exchange Act), directly or indirectly, of securities
of DAOU representing fifty percent (50%) or more of the combined voting power of
DAOU's then outstanding securities entitled to vote in the election of directors
of DAOU;
(b) there occurs a reorganization, merger, consolidation or other
corporate transaction involving DAOU (a "TRANSACTION"), in each case, with
respect to which the stockholders of DAOU immediately prior to such Transaction
do not, immediately after the Transaction, own more than fifty percent (50%) of
the combined voting power of DAOU or other corporation resulting from such
Transaction; or
(c) all or substantially all of the assets of DAOU are sold,
liquidated or distributed.
1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
1.5 "CONTINGENT COMPENSATION PAYMENT" shall mean any payment (or
benefit) in the nature of compensation that is made or supplied (under this
Agreement or otherwise) to a "disqualified individual" (as defined in Section
280G(c) of the Code) and that is contingent (within the meaning of Section
280G(b)(2)(A)(i) of the Code) on a Change in Control of the Company.
1.6 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
1.7 "EXCISE TAX" shall mean the amount, if any, of the excise tax
payable pursuant to Section 4999 of the Code by Employee with respect to a
Contingent Compensation Payment.
2
<PAGE>
1.8 "GROSS-UP PAYMENT" shall mean an amount equal to the sum of (i) the
amount of the Excise Tax payable with respect to a Contingent Compensation
Payment, and (ii) the amount necessary to pay all additional taxes imposed on
(or economically borne by) Employee (including the Excise Tax, state and federal
income taxes and all applicable withholding taxes) attributable to the receipt
of such Gross-Up Payment. For purposes of the preceding sentence, all taxes
attributable to the receipt of the Gross-Up Payment shall be computed assuming
the application of the maximum tax rates provided by law.
1.9 "RETENTION BONUS" shall mean the payment made pursuant to SECTION 4
of this Agreement.
1.10 "RESIGNATION FOR GOOD REASON" shall mean the voluntary resignation
by Employee of his employment with the Company within two (2) years following a
Change in Control and within three (3) months of the following "GOOD REASONS":
(a) any reduction in Employee's Base Salary or Target Bonus;
(b) any significant reduction in Employee's responsibilities and
authority; or
(c) a relocation by the Company of Employee's place of Employment
outside a thirty-five (35) mile radius of Employee's current place of
employment.
An event described in Section 1.10(a) through (c) will not
constitute Good Reason unless Employee provides written notice to the Company
(or its successor) of his intention to resign for Good Reason and unless the
Company (or its successor) does not cure the Good Reason within ten (10) days of
the Company's (or its successor's) receipt of the written notice.
1.11 "TARGET BONUS" shall mean the variable annual cash compensation
that Employee is eligible to receive, prior to a Change in Control, in the event
targeted goals are achieved for the year.
1.12 "TERMINATION DATE" shall mean the date of termination of
Employee's employment relationship with the Company.
1.13 "TERMINATION PAYMENTS" shall mean any payment or distribution of
compensation or benefits made pursuant to SECTIONS 5.1 (a)-(d) of this
Agreement.
2. TITLE AND DUTIES. Employee currently holds the positions of Chief Technology
Officer of DAOU and Executive Vice President and Chief Operating Officer of
Enosus, Inc. Employee will: (i) devote his entire business time, attention,
skill, and energy exclusively to the business of the Company; (ii) use his best
efforts to promote the success of the Company's business; and (iii) cooperate
fully with the President and the Board of Directors of the Company in the
advancement of the best interests of the Company.
3. AT-WILL EMPLOYMENT. Employee reaffirms that Employee's employment
relationship with the Company is at-will, terminable at any time and for any
reason by either the Company or Employee. While certain paragraphs of this
Agreement describe events that could occur at a
3
<PAGE>
particular time in the future, nothing in this Agreement may be construed as a
guarantee of employment of any length.
4. RETENTION BONUS. If the Employee is continuously employed by the Company from
the date of this Agreement through the consummation of a Change in Control,
then, within fifteen (15) days after the consummation of such Change in Control,
DAOU (or its successor) shall pay to Employee a lump sum amount equal to Two
Hundred Seventy-Five Thousand Dollars ($275,000), less applicable state and
federal taxes and/or other payroll deductions (the "RETENTION BONUS").
5. TERMINATION PAYMENTS.
5.1 If, within two (2) years immediately following a Change in Control,
Employee's employment with the Company (or its successor or subsidiary)
terminates as the result of (i) termination by the Company (or its successor or
subsidiary) of Employee's employment for a reason other than Cause or (ii)
Employee's Resignation for Good Reason:
(a) Employee will receive a pro-rata share of the Base Salary and
Target Bonus accrued and owing to Employee through the Termination Date, less
applicable state and federal taxes and/or other payroll deductions, and accrued
but unused vacation, sick days and floating holidays through the Termination
Date in accordance with the Company's (or its successor's) regular policies,
less applicable state and federal taxes and/or other payroll deductions;
(b) Within fifteen (15) days after the Termination Date, DAOU (or
its successor) will pay to Employee a severance payment in a lump-sum amount
equal to Five Hundred Fifty Thousand Dollars ($550,000), less applicable state
and federal taxes and/or other payroll deductions;
(c) GROSS-UP PAYMENT. In the event that (i) DAOU undergoes a Change
in Control, and (ii) any payment to Employee under this Agreement triggers an
obligation to pay an Excise Tax, then DAOU shall, within fifteen (15) days after
the date on which such payment to Employee is made, pay to Employee the relevant
Gross-Up Payment.
(d) If Employee elects to continue insurance coverage as afforded
to Employee according to the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA"), DAOU (or its successor) will reimburse Employee the amount of
the premiums incurred by Employee during the period beginning on the Termination
Date and extend for twelve (12) months following the Termination Date. Nothing
in this Agreement will extend Employee's COBRA period beyond the period allowed
under COBRA, nor is the Company assuming any responsibility which Employee has
for formally electing to continue coverage;
5.2 The payments set forth in SECTIONS 5.1(b), (c) AND (d) above are in
exchange for, and contingent upon Employee's execution of a release of all
claims as of the Termination Date, in substantially the form attached to this
Agreement as EXHIBIT 1.
5.3 If Employee's employment terminates (i) for any reason after the
two (2) year period immediately following a Change in Control or (ii) during
that two (2) year period (A) for
4
<PAGE>
Cause or (B) due to Employee's resignation without Good Reason, then DAOU (or
its successor) will pay to Employee a pro-rata share of the Base Salary and
Target Bonus accrued and owing to Employee through the Termination Date, less
applicable state and federal taxes and/or other payroll deductions, and accrued
but unused vacation, sick days and floating holidays through the Termination
Date in accordance with the Company's (or its successor's) regular policies,
less applicable state and federal taxes and/or other payroll deductions.
5.4 If Employee resigns his employment for Good Reasons described in
Section 1.10 (b) above, payment of the above Termination Payments is further
contingent upon Employee's willingness, at the Company's (or its successor's)
request, to continue performing his duties on behalf of the Company (or its
successor) in good faith for up to sixty (60) days following the occurrence of
the events described in Section 1.10 (b); PROVIDED, HOWEVER, that Employee shall
not be required to travel to perform his duties in good faith. DAOU (or its
successor) will pay to Employee a pro-rata share of the Base Salary and Target
Bonus and accrued but unused vacation, sick days and floating holidays according
to the Company's (or its successor's) regular policies, less applicable state
and federal taxes and/or other payroll deductions, during the up-to sixty (60)
day period and will receive the Termination Payments upon completion of that
period.
6. RETIREMENT AND PROFIT-SHARING PLANS. Notwithstanding anything in this
Agreement to the contrary, Employee's rights in any retirement, pension or
profit-sharing plans offered by the Company shall be governed by the rules of
such plans as well as by applicable law.
7. TAX CONSEQUENCES. The Company makes no representations regarding the tax
consequence of any provision of this Agreement. Employee is advised to consult
with his own tax advisor with respect to the tax treatment of any payment
contained in this Agreement.
8. [Reserved.]
9. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this
Agreement shall be subject to final and binding arbitration. The arbitration
will be conducted by one arbitrator who is a member of the American Arbitration
Association ("AAA") or of the Judicial Arbitration and Mediation Services
("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. The parties will be
entitled to conduct discovery (i.e., investigation of facts through depositions
and other means), which shall be governed by Section 1283.05 of the California
Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and
authority to enter orders relating to such discovery as are allowed under the
CCP. The arbitrator shall apply California substantive law in all respects. The
party prevailing in the resolution of any such claim will be entitled, in
addition to such other relief as may be granted, to an award of all reasonable
attorneys' fees and costs incurred in pursuit of the claim, without regard to
any statute, schedule, or rule of court purported to restrict such award.
10. GENERAL PROVISIONS.
5
<PAGE>
10.1 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of California.
10.2 ASSIGNMENT. Employee may not assign, pledge or encumber his interest in
this Agreement or any part thereof.
10.3 AMENDMENTS; WAIVERS. No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by both of the parties.
No waiver of any provision or consent to any exception to the terms of this
Agreement or any agreement contemplated hereby will be effective unless in
writing and signed by the party to be bound and then only to the specific
purpose, extent, and instance so provided.
10.4 SEVERABILITY. The provisions of this Agreement are severable; and, if any
provision will be held to be invalid or otherwise unenforceable, in whole or in
part, then the remainder of the provisions, or enforceable parts of this
Agreement, will not be affected.
10.5 NOTICES. All notices, consents, waivers, and other communications under
this Agreement must be in writing and will be deemed to have been duly given
when (a) delivered by hand (with written confirmation of receipt), (b) sent by
facsimile (with written confirmation of receipt), provided that a copy is mailed
by registered mail, return receipt requested or (c) when received by the
addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and facsimile
numbers set forth below (or to such other addresses and facsimile numbers as a
party may designate by notice to the other parties):
If to the Company: DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92122
ATTENTION: Chief Executive Officer
Facsimile No.: (619) 452-2789
With a copy to: Baker & McKenzie
101 West Broadway, Twelfth Floor
San Diego, California 92101-3890
ATTENTION: Carlos D. Heredia, Esq.
Facsimile No.: (619) 236-0429
If to Employee: Eric Ringwall
13628 Sunset View Road
Poway, CA 92064
Facsimile No.: (858) 486-3465
10.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the
parties with respect to the subject matter of this Agreement, and supersedes all
prior and
6
<PAGE>
contemporaneous negotiations, agreements and understandings between the parties,
oral or written.
10.7 MODIFICATION; WAIVERS. No modification, termination or attempted waiver of
this Agreement will be valid unless in writing, signed by the party against whom
such modification, termination or waiver is sought to be enforced.
10.8 FEES AND EXPENSES. If any proceeding is brought for the enforcement or
interpretation of this Agreement, or because of any alleged dispute, breach,
default or misrepresentation in connection with any provisions of this
Agreement, then the successful or prevailing party will be entitled to recover
from the other party reasonable attorneys' fees and other costs incurred in that
proceeding (including, in the case of an arbitration, arbitration fees and
expenses), in addition to any other relief to which such party may be entitled.
10.9 AMENDMENT. This Agreement may be amended or supplemented only by a writing
signed by both of the parties hereto.
10.10 DUPLICATE COUNTERPARTS. This Agreement may be executed in duplicate
counterparts, each of which shall be deemed an original; PROVIDED, HOWEVER, that
such counterparts shall together constitute only one instrument.
10.11 INTERPRETATION. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
10.12 DRAFTING AMBIGUITIES. Each party to this Agreement and its counsel have
reviewed and revised this Agreement. The rule of construction that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of this Agreement or any of the amendments to this
Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
DAOU SYSTEMS, INC.
By: /s/ Larry Grandia
--------------------------------------------------
Larry Grandia, President and Chief Executive
Officer
EMPLOYEE:
/s/ Eric Ringwall
--------------------------------------------------
Eric Ringwall
8
<PAGE>
EXHIBIT 1
GENERAL RELEASE
THIS GENERAL RELEASE (this "RELEASE") is entered into effective as of
______________, ____, (the "EFFECTIVE DATE") by and between DAOU Systems, Inc.,
a Delaware corporation, having its principal offices at 5120 Shoreham Place, San
Diego, California 92122 (the "COMPANY"), and Eric Ringwall ("EMPLOYEE"), with
reference to the following facts:
RECITALS
A. The parties entered into a Retention and Severance Agreement, dated
as of March 1, 2000 (the "AGREEMENT"), pursuant to which the parties agreed that
upon the occurrence of certain conditions, Employee would become eligible for
certain Termination Payments (as defined in the Agreement) in exchange for
Employee's release of the Company from all claims which Employee may have
against the Company as of the Termination Date (as defined in the Agreement).
Capitalized terms not otherwise defined herein shall have the respective
meanings ascribed to them in the Agreement.
B. The parties desire to dispose of, fully and completely, all claims,
which Employee may have against the Company in, the manner set forth in this
Release.
AGREEMENT
1. RELEASE. Employee, for himself and his heirs, successors and
assigns, each fully releases, and discharges the Company, its officers,
directors, employees, shareholders, attorneys, accountants, other professionals,
insurers and agents of the other (collectively "AGENTS"), and all entities
related to each party, including, but not limited to, their respective heirs,
executors, administrators, personal representatives, assigns, parent, subsidiary
and sister corporations, affiliates, partners and co-venturers (collectively
"RELATED ENTITIES"), from all rights, claims, demands, actions, causes of
action, liabilities and obligations of every kind, nature and description
whatsoever, Employee now has, owns or holds or has at anytime had, owned or held
or may have against the Company, Agents or Related Entities from any source
whatsoever, whether or not arising from or related to the facts recited in this
Release. Employee specifically releases and waives any and all claims arising
under any express or implied contract, rule, regulation or ordinance, including,
without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights
Act of 1991, the Americans with Disabilities Act, the California Fair Employment
and Housing Act, and the Age Discrimination in Employment Act, as amended
("ADEA").
2. SECTION 1542 WAIVER. This Release is intended as a full and complete
release and discharge of any and all claims that Employee may have against the
Company, its Agents or Related Entities. In making this release, Employee
intends to release the Company, its Agents and Related Entities from liability
of any nature whatsoever for any claim of damages or injury or for equitable or
declaratory relief of any kind, whether the claim, or any facts on which such
claim might be based, is known or unknown to him. Employee expressly waives all
rights under Section 1542 of the California Civil Code, which Employee
understands provides as follows:
1
<PAGE>
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR.
Employee acknowledges that he may discover facts different from or in addition
to those that he now believes to be true with respect to this Release. Employee
agrees that this Release shall remain effective notwithstanding the discovery of
any different or additional facts.
3. WAIVER OF CERTAIN CLAIMS. Employee acknowledges that he has been
advised in writing of his right to consult with an attorney prior to executing
the waivers set out in this Release, and that he has been given a 21-day period
in which to consider entering into the release of ADEA claims, if any. In
addition, Employee acknowledges that he has been informed that he may revoke a
signed waiver of the ADEA claims for up to seven (7) days after executing this
Release.
4. NO UNDUE INFLUENCE. This Release is executed voluntarily and without
any duress or undue influence. Employee acknowledges he has read this Release
and executed it with his full and free consent. No provision of this Release
shall be construed against any party by virtue of the fact that such party or
its counsel drafted such provision or the entirety of this Release.
5. GOVERNING LAW. This Release is made and entered into in the State of
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California, without regard to conflicts of law principles.
6. SEVERABILITY. If any provision of this Release is held to be
invalid, void or unenforceable, the balance of the provisions of this Release
shall, nevertheless, remain in full force and effect and shall in no way be
affected, impaired or invalidated.
7. CONSULTATION WITH COUNSEL. Employee acknowledges and agrees that he
has had the opportunity to consult and review this Release with counsel.
8. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of
this Release shall be subject to final and binding arbitration. The arbitration
will be conducted by one arbitrator who is a member of the American Arbitration
Association ("AAA") or of the Judicial Arbitration and Mediation Services
("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. The parties will be
entitled to conduct discovery (i.e., investigation of facts through depositions
and other means), which shall be governed by Section 1283.05 of the California
Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and
authority to enter
2
<PAGE>
orders relating to such discovery as are allowed under the CCP. The arbitrator
shall apply California substantive law in all respects. The party prevailing in
the resolution of any such claim will be entitled, in addition to such other
relief as may be granted, to an award of all reasonable attorneys' fees and
costs incurred in pursuit of the claim, without regard to any statute, schedule,
or rule of court purported to restrict such award.
Dated:
-------------------------- ----------------------------
Eric Ringwall
3
<PAGE>
Exhibit 10.2
RETENTION AND SEVERANCE AGREEMENT
THIS RETENTION AND SEVERANCE AGREEMENT (this "AGREEMENT"),
dated as of March 1, 2000, is made by and between DAOU Systems, Inc., a Delaware
corporation ("DAOU"), DAOU-Sentient, Inc., a Delaware corporation and a
wholly-owned subsidiary of DAOU ("DAOU-SENTIENT"), and Stephen M. Casey
("EMPLOYEE").
RECITALS
WHEREAS, DAOU and each of its wholly-owned subsidiaries (collectively,
the COMPANY") recognize that the possibility of a Change in Control (as defined
below) of DAOU exists and that such possibility, including the uncertainty that
such possibility may raise among the Company's key employees, may result in the
departure or distraction of such employees to the detriment of the Company and
DAOU's stockholders;
WHEREAS, DAOU's Board of Directors has determined that appropriate
steps should be taken to reinforce and encourage the continued employment of the
Company's key employees without distraction from the possibility of a Change in
Control of DAOU or any related events and circumstances;
WHEREAS, Employee is a key employee of the Company;
WHEREAS, Employee has entered into an Employment Agreement with
DAOU-Sentient dated as of March 30, 1998 (the "EMPLOYMENT AGREEMENT");
WHEREAS, the Company considers that providing Employee with certain
retention and severance benefits will operate as an incentive for Employee to
remain employed by the Company in the event of a Change in Control of DAOU.
NOW THEREFORE, to induce Employee to remain employed by the Company,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, DAOU, DAOU-Sentient and Employee agree as
follows:
AGREEMENT
1. DEFINITIONS.
1.1 "BASE SALARY" shall mean the Employee's gross annual salary as of
the Termination Date.
1.2 "CAUSE" shall mean:
(a) Employee's material breach of the Employment Agreement;
(b) Employee's material failure to adhere to any written policy of
the Company generally applicable to officers of the Company if Employee has been
given a reasonable opportunity (but in no event later than thirty (30) days) to
comply with such policy or cure his failure to comply after receiving notice of
such failure;
<PAGE>
(c) Employee's appropriation (or attempted appropriation) of a
material business opportunity of the Company, including attempting to secure or
securing any personal profit in connection with any transaction entered into on
behalf of the Company;
(d) Employee's misappropriation (or attempted misappropriation) of
any of the Company's funds or property;
(e) the conviction of Employee, or the entering of a guilty plea or
plea of no contest by Employee 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) Employee's physical or mental disability or other inability to
perform the essential functions of his position, with or without reasonable
accommodation; or
(h) Employee's death.
1.3 "CHANGE OF CONTROL" is defined to have occurred if, and only if,
during Employee's employment:
(a) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or person, or any syndicate
or group deemed to be a person under Section 14(d)(2) of the Exchange Act is or
becomes the "Beneficial Owner" (as defined in Rule 13d-3 of the General Rules
and Regulations under the Exchange Act), directly or indirectly, of securities
of DAOU representing fifty percent (50%) or more of the combined voting power of
DAOU's then outstanding securities entitled to vote in the election of directors
of DAOU;
(b) there occurs a reorganization, merger, consolidation or other
corporate transaction involving DAOU (a "TRANSACTION"), in each case, with
respect to which the stockholders of DAOU immediately prior to such Transaction
do not, immediately after the Transaction, own more than fifty percent (50%) of
the combined voting power of DAOU or other corporation resulting from such
Transaction; or
(c) all or substantially all of the assets of DAOU are sold,
liquidated or distributed.
1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
1.5 [Reserved.]
1.6 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
1.7 [Reserved.]
1.8 [Reserved.]
2
<PAGE>
1.9 "RETENTION BONUS" shall mean the payment made pursuant to SECTION 4
of this Agreement.
1.10 "RESIGNATION FOR GOOD REASON" shall mean the voluntary resignation
by Employee of his employment with the Company within two (2) years following a
Change in Control and within three (3) months of any of the following "GOOD
REASONS":
(a) any reduction in Employee's Base Salary or Target Bonus;
(b) any significant reduction in Employee's responsibilities and/or
authority; or
(c) a relocation by the Company of Employee's place of Employment
outside a twenty-five (25) mile radius of Employee's current place of
employment.
An event described in Section 1.10(a) through (c) will not constitute Good
Reason unless Employee provides written notice to the Company (or its successor)
of his intention to resign for Good Reason and unless the Company (or its
successor) does not cure the Good Reason within ten (10) days of the Company's
(or its successor's) receipt of the written notice.
1.11 "TARGET BONUS" shall mean the variable annual cash compensation
that Employee is eligible to receive, prior to a Change in Control, as
additional compensation or as an incentive bonus in the event targeted goals are
achieved for the year.
1.12 "TERMINATION DATE" shall mean the date of termination of
Employee's employment relationship with the Company.
1.13 "TERMINATION PAYMENTS" shall mean any payment or distribution of
compensation or benefits made pursuant to SECTIONS 5.1 (a)-(d) of this
Agreement.
2. TITLE AND DUTIES. Employee currently holds the positions of Director and
President and Chief Executive Officer of DAOU-Sentient and Director and
President and Chief Executive Officer of Enosus, Inc, a wholly-owned subsidiary
of DAOU. Employee will: (i) devote his entire business time, attention, skill,
and energy exclusively to the business of the Company; (ii) use his best efforts
to promote the success of the Company's business; and (iii) cooperate fully with
the President and the Board of Directors of the Company in the advancement of
the best interests of the Company.
3. AT-WILL EMPLOYMENT. Employee reaffirms that Employee's employment
relationship with the Company is at-will, terminable at any time and for any
reason by either the Company or Employee. While certain paragraphs of this
Agreement describe events that could occur at a particular time in the future,
nothing in this Agreement may be construed as a guarantee of employment of any
length.
4. RETENTION BONUS. If the Employee is continuously employed by the Company from
the date of this Agreement through the consummation of a Change in Control,
then, within fifteen (15) days after the consummation of such Change in Control,
DAOU (or its successor) shall pay to Employee a lump sum amount equal to Two
Hundred Seventy-Five Thousand Dollars
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($275,000), less applicable state and federal taxes and/or other payroll
deductions (the "RETENTION BONUS"). Such payment of the Retention Bonus shall be
in addition to any compensation paid to Employee hereunder or under the
Employment Agreement.
5. TERMINATION PAYMENTS. The provisions of this Section 5 of this Agreement
shall replace the provisions of Section 8 of the Employment Agreement, and the
Employment Agreement shall be deemed to be amended accordingly.
5.1 If, within two (2) years immediately following a Change in Control,
Employee's employment with the Company (or its successor) terminates as the
result of (i) termination by the Company (or its successor) of Employee's
employment for a reason other than Cause or (ii) Employee's Resignation for Good
Reason:
(a) Employee will receive a pro-rata share of the Base Salary and
Target Bonus accrued and owing to Employee through the Termination Date, less
applicable state and federal taxes and/or other payroll deductions, and accrued
but unused vacation, sick days and floating holidays through the Termination
Date in accordance with the Company's (or its successor's) regular policies,
less applicable state and federal taxes and/or other payroll deductions;
(b) Within fifteen (15) days after the Termination Date, DAOU (or
its successor) shall pay to Employee a severance payment in a lump-sum amount
equal to Five Hundred Fifty Thousand Dollars ($550,000), less applicable state
and federal taxes and/or other payroll deductions;
(c) [Reserved.]
(d) If Employee elects to continue insurance coverage as afforded
to Employee according to the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA"), DAOU (or its successor) will reimburse Employee the amount of
the premiums incurred by Employee during the period beginning on the Termination
Date and extend for twelve (12) months following the Termination Date. Nothing
in this Agreement will extend Employee's COBRA period beyond the period allowed
under COBRA, nor is the Company assuming any responsibility which Employee has
for formally electing to continue coverage;
5.2 The Termination Payments set forth in SECTIONS 5.1(b), (c) AND (d)
above are in exchange for, and contingent upon Employee's execution of a release
of all claims as of the Termination Date, in substantially the form attached to
this Agreement as EXHIBIT 1.
5.3 If Employee's employment terminates at any time prior to a Change
of Control or after the two (2) year period immediately following a Change in
Control as the result of (i) termination by the Company (or its successor) of
Employee's employment for a reason other than Cause, or (ii) Employee's
Resignation for Good Reason, Employee will be entitled to receive (A) payments
in an aggregate amount equal to the Base Salary, payable over a twelve (12)
month period following the Termination Date, (B) that part of the Target Bonus,
if any, for the fiscal year in which such termination occurs, prorated through
the end of the calendar month during which such termination occurs and (C)
accrued but unused vacation, sick days and floating holidays through the
Termination Date in accordance with the Company's (or its
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successor's) regular policies, each less applicable state and federal taxes
and/or other payroll deductions.
5.4 If Employee's employment with the Company terminates (i) for Cause
or (ii) due to Employee's resignation without Good Reason, then DAOU (or its
successor) will pay to Employee a pro-rata share of the Base Salary and Target
Bonus accrued and owing to Employee through the Termination Date, less
applicable state and federal taxes and/or other payroll deductions, and accrued
but unused vacation, sick days and floating holidays through the Termination
Date in accordance with the Company's (or its successor's) regular policies,
less applicable state and federal taxes and/or other payroll deductions.
5.5 If Employee resigns his employment for Good Reasons described in
Section 1.10 (b) above, payment of the above Termination Payments is further
contingent upon Employee's willingness, at the Company's (or its successor's)
request, to continue performing his duties on behalf of the Company (or its
successor) in good faith for up to sixty (60) days following the occurrence of
the events described in Section 1.10 (b); PROVIDED, HOWEVER, that Employee shall
not be required to travel to perform his duties in good faith. DAOU (or its
successor) will pay to Employee a pro-rata share of the Base Salary and Target
Bonus and accrued but unused vacation, sick days and floating holidays according
to the Company's (or its successor's) regular policies, less applicable state
and federal taxes and/or other payroll deductions, during the up-to sixty (60)
day period and will receive the Termination Payments upon completion of that
period.
5.6 Upon the Termination Date, Employee shall be entitled to take
possession of the office furnishings which are located in his office at
DAOU-Sentient, including a desk, a credenza, a bookshelf and chairs.
6. RETIREMENT AND PROFIT-SHARING PLANS. Notwithstanding anything in this
Agreement to the contrary, Employee's rights in any retirement, pension or
profit-sharing plans offered by the Company shall be governed by the rules of
such plans as well as by applicable law.
7. TAX CONSEQUENCES. The Company makes no representations regarding the tax
consequence of any provision of this Agreement. Employee is advised to consult
with his own tax advisor with respect to the tax treatment of any payment
contained in this Agreement.
8. TAX ADJUSTMENT. Notwithstanding the foregoing or any other provision of this
Agreement to the contrary, if tax counsel selected by the Company and acceptable
to Employee determines that any portion of any payment under this Agreement
would constitute an "excess parachute payment" within the meaning of Section
280G of the Code, the payments to be made to Employee under this Agreement shall
be reduced (but not below zero) such that the value of the aggregate payments
that Employee is entitled to receive under this Agreement, and any other
agreement or plan or program of the Company, shall be one dollar ($1) less than
the maximum amount of payments which Employee may receive without becoming
subject to the tax imposed by Section 4999 of the Code.
9. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this
Agreement shall be subject to final and binding arbitration. The arbitration
will be conducted by one arbitrator who is a member of the American Arbitration
Association ("AAA") or of the Judicial Arbitration
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and Mediation Services ("JAMS"), and will be conducted under the Expedited
Procedures for Commercial Arbitration Rules of the AAA, or such similar
procedures as may be in effect (the "Rules"). The arbitration shall be held in
Montgomery County, Maryland. The parties will select the arbitrator from a list
maintained by the AAA or JAMS and the parties agree that they will have five (5)
Business Days in which to return the list to AAA or JAMS 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 of good cause
shown. The period for taking discovery shall 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 shall
have all authority to determine the arbitrability of any claim and enter a final
and binding judgment at the conclusion of any proceedings in respect of the
arbitration. Any final judgment only may be appealed on the grounds of improper
bias or improper conduct of the arbitrator. All fees and costs will be allocated
to the parties to the arbitration as determined by the arbitrator. Each party
will initially pay its own fees and costs associated with the arbitration and
each party will pay one-half of the arbitrator's fees up front, subject to the
arbitrator's final determination on fees and costs.
10. GENERAL PROVISIONS.
10.1 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of California.
10.2 ASSIGNMENT. Employee may not assign, pledge or encumber his
interest in this Agreement or any part thereof.
10.3 AMENDMENTS; WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by both
of the parties. No waiver of any provision or consent to any exception to the
terms of this Agreement or any agreement contemplated hereby will be effective
unless in writing and signed by the party to be bound and then only to the
specific purpose, extent, and instance so provided.
10.4 SEVERABILITY. The provisions of this Agreement are severable; and,
if any provision will be held to be invalid or otherwise unenforceable, in whole
or in part, then the remainder of the provisions, or enforceable parts of this
Agreement, will not be affected.
10.5 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by facsimile (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and facsimile
numbers set forth below (or to such other addresses and facsimile numbers as a
party may designate by notice to the other parties):
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If to the Company: DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92122
ATTENTION: Chief Executive Officer
Facsimile No.: (619) 452-2789
With a copy to: Baker & McKenzie
101 West Broadway, Twelfth Floor
San Diego, California 92101-3890
ATTENTION: Carlos D. Heredia, Esq.
Facsimile No.: (619) 236-0429
If to Employee: Stephen M. Casey
21608 Goshen Oaks Road
Laytonsville, Maryland 20882
Facsimile No.: 301-929-7677
With a copy to: Linowes and Blocher LLP
1010 Wayne Avenue, Suite 1000
Silver Spring, Maryland 20910
ATTENTION: John R. Orrick, Jr.
Facsimile No. 301-495-9044.
10.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter of this Agreement, and
supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written. To the extent that the
provisions of the Employment Agreement do not conflict with this Agreement, such
provisions of the Employment Agreement shall remain in full force and effect.
10.7 MODIFICATION; WAIVERS. No modification, termination or attempted
waiver of this Agreement will be valid unless in writing, signed by the party
against whom such modification, termination or waiver is sought to be enforced.
10.8 AMENDMENT. This Agreement may be amended or supplemented only by a
writing signed by both of the parties hereto.
10.9 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original; PROVIDED, HOWEVER, that such counterparts
shall together constitute only one instrument.
10.10 INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.11 DRAFTING AMBIGUITIES. Each party to this Agreement and its
counsel have reviewed and revised this Agreement. The rule of construction that
any ambiguities are to be
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resolved against the drafting party shall not be employed in the interpretation
of this Agreement or any of the amendments to this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
DAOU SYSTEMS, INC.
By: /s/ Larry Grandia
-------------------------------
Larry Grandia, President and
Chief Executive Officer
DAOU-SENTIENT, INC.
By: /s/ Donald R. Myll
-------------------------------
Donald R. Myll
Vice President
EMPLOYEE:
/s/ Stephen M. Casey
-----------------------------------
Stephen M. Casey
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EXHIBIT 1
GENERAL RELEASE
THIS GENERAL RELEASE (this "RELEASE") is entered into effective as of
______________, ____, (the "EFFECTIVE DATE") by and between DAOU Systems, Inc.,
a Delaware corporation, having its principal offices at 5120 Shoreham Place, San
Diego, California 92122 (the "COMPANY"), and Stephen M. Casey ("EMPLOYEE"), with
reference to the following facts:
RECITALS
A. The parties entered into a Retention and Severance Agreement, dated
as of March 1, 2000 (the "AGREEMENT"), pursuant to which the parties agreed that
upon the occurrence of certain conditions, Employee would become eligible for
certain Termination Payments (as defined in the Agreement) in exchange for
Employee's release of the Company from all claims which Employee may have
against the Company as of the Termination Date (as defined in the Agreement).
Capitalized terms not otherwise defined herein shall have the respective
meanings ascribed to them in the Agreement.
B. The parties desire to dispose of, fully and completely, all claims,
which Employee may have against the Company in, the manner set forth in this
Release.
AGREEMENT
1. RELEASE. Employee, for himself and his heirs, successors and
assigns, each fully releases, and discharges the Company, its officers,
directors, employees, shareholders, attorneys, accountants, other professionals,
insurers and agents of the other (collectively "AGENTS"), and all entities
related to each party, including, but not limited to, their respective heirs,
executors, administrators, personal representatives, assigns, parent, subsidiary
and sister corporations, affiliates, partners and co-venturers (collectively
"RELATED ENTITIES"), from all rights (except for those rights that Employee may
have as a stockholder of the Company), claims, demands, actions, causes of
action, liabilities and obligations of every kind, nature and description
whatsoever, Employee now has, owns or holds or has at anytime had, owned or held
or may have against the Company, Agents or Related Entities from any source
whatsoever, whether or not arising from or related to the facts recited in this
Release. Employee specifically releases and waives any and all claims arising
under any express or implied contract, rule, regulation or ordinance, including,
without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights
Act of 1991, the Americans with Disabilities Act, the California Fair Employment
and Housing Act, and the Age Discrimination in Employment Act, as amended
("ADEA").
2. SECTION 1542 WAIVER. This Release is intended as a full and complete
release and discharge of any and all claims that Employee may have against the
Company, its Agents or Related Entities. In making this release, Employee
intends to release the Company, its Agents and Related Entities from liability
of any nature whatsoever for any claim of damages or injury or for equitable or
declaratory relief of any kind, whether the claim, or any facts on which such
claim might be based, is known or unknown to him. Employee expressly waives all
rights under Section 1542 of the California Civil Code, which Employee
understands provides as follows:
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A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Employee acknowledges that he may discover facts different from or in addition
to those that he now believes to be true with respect to this Release. Employee
agrees that this Release shall remain effective notwithstanding the discovery of
any different or additional facts.
3. WAIVER OF CERTAIN CLAIMS. Employee acknowledges that he has been
advised in writing of his right to consult with an attorney prior to executing
the waivers set out in this Release, and that he has been given a 21-day period
in which to consider entering into the release of ADEA claims, if any. In
addition, Employee acknowledges that he has been informed that he may revoke a
signed waiver of the ADEA claims for up to seven (7) days after executing this
Release.
4. NO UNDUE INFLUENCE. This Release is executed voluntarily and without
any duress or undue influence. Employee acknowledges he has read this Release
and executed it with his full and free consent. No provision of this Release
shall be construed against any party by virtue of the fact that such party or
its counsel drafted such provision or the entirety of this Release.
5. GOVERNING LAW. This Release is made and entered into in the State of
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California, without regard to conflicts of law principles.
6. SEVERABILITY. If any provision of this Release is held to be
invalid, void or unenforceable, the balance of the provisions of this Release
shall, nevertheless, remain in full force and effect and shall in no way be
affected, impaired or invalidated.
7. CONSULTATION WITH COUNSEL. Employee acknowledges and agrees that he
has had the opportunity to consult and review this Release with counsel.
8. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of
this Release shall be subject to final and binding arbitration. The arbitration
will be conducted by one arbitrator who is a member of the American Arbitration
Association ("AAA") or of the Judicial Arbitration and Mediation Services
("JAMS"), and will be conducted under the Expedited Procedures for Commercial
Arbitration Rules of the AAA, or such similar procedures as may be in effect
(the "Rules"). The arbitration shall be held in Montgomery County, Maryland. The
parties will select the arbitrator from a list maintained by the AAA or JAMS and
the parties agree that they will have five (5) Business Days in which to return
the list to AAA or JAMS 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
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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 of good cause shown. The period for
taking discovery shall 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 shall have all authority to
determine the arbitrability of any claim and enter a final and binding judgment
at the conclusion of any proceedings in respect of the arbitration. Any final
judgment only may be appealed on the grounds of improper bias or improper
conduct of the arbitrator. All fees and costs will be allocated to the parties
to the arbitration as determined by the arbitrator. Each party will initially
pay its own fees and costs associated with the arbitration and each party will
pay one-half of the arbitrator's fees up front, subject to the arbitrator's
final determination on fees and costs.
Dated:
------------------------------- ---------------------------------
Stephen M. Casey
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Exhibit 10.3
RETENTION AND SEVERANCE AGREEMENT
THIS RETENTION AND SEVERANCE AGREEMENT (this "AGREEMENT"),
dated as of March 1, 2000, is made by and between DAOU Systems, Inc., a Delaware
corporation ("DAOU"), and Donald R. Myll ("EMPLOYEE").
RECITALS
WHEREAS, DAOU and each of its wholly-owned subsidiaries (collectively,
the COMPANY") recognize that the possibility of a Change in Control (as defined
below) of DAOU exists and that such possibility, including the uncertainty that
such possibility may raise among the Company's key employees, may result in the
departure or distraction of such employees to the detriment of the Company and
DAOU's stockholders;
WHEREAS, DAOU's Board of Directors has determined that appropriate
steps should be taken to reinforce and encourage the continued employment of the
Company's key employees without distraction from the possibility of a Change in
Control of DAOU or any related events and circumstances;
WHEREAS, Employee is a key employee of the Company;
WHEREAS, the Company considers that providing Employee with certain
retention and severance benefits will operate as an incentive for Employee to
remain employed by the Company in the event of a Change in Control of DAOU.
NOW THEREFORE, to induce Employee to remain employed by the Company,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, DAOU and Employee agree as follows:
AGREEMENT
1. DEFINITIONS.
1.1 "BASE SALARY" shall mean the Employee's gross annual salary as of
the Termination Date.
1.2 "CAUSE" shall mean:
(a) Employee's material breach of the Employment Agreement, dated
as of September 8, 1999 (the "EMPLOYMENT AGREEMENT"), by and between Employee
and DAOU;
(b) Employee's material failure to adhere to any written policy of
the Company generally applicable to officers of the Company if Employee has been
given a reasonable opportunity (but in no event later than thirty (30) days) to
comply with such policy or cure his failure to comply;
<PAGE>
(c) the appropriation (or attempted appropriation) of a material
business opportunity of the Company, including attempting to secure or securing
any personal profit in connection with any transaction entered into on behalf of
the Company;
(d) the misappropriation (or attempted misappropriation) of any of
the Company's funds or property;
(e) the conviction of, or the entering of a guilty plea or plea of
no contest with respect to, a felony, the equivalent thereof, or any other crime
with respect to which imprisonment is a possible punishment;
(f) willful misconduct;
(g) physical or mental disability or other inability to perform the
essential functions of his position, with or without reasonable accommodation;
or
(h) death.
1.3 "CHANGE OF CONTROL" is defined to have occurred if, and only if,
during Employee's employment:
(a) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or person, or any syndicate
or group deemed to be a person under Section 14(d)(2) of the Exchange Act is or
becomes the "Beneficial Owner" (as defined in Rule 13d-3 of the General Rules
and Regulations under the Exchange Act), directly or indirectly, of securities
of DAOU representing fifty percent (50%) or more of the combined voting power of
DAOU's then outstanding securities entitled to vote in the election of directors
of DAOU;
(b) there occurs a reorganization, merger, consolidation or other
corporate transaction involving DAOU (a "TRANSACTION"), in each case, with
respect to which the stockholders of DAOU immediately prior to such Transaction
do not, immediately after the Transaction, own more than fifty percent (50%) of
the combined voting power of DAOU or other corporation resulting from such
Transaction; or
(c) all or substantially all of the assets of DAOU are sold,
liquidated or distributed.
1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended.
1.5 "CONTINGENT COMPENSATION PAYMENT" shall mean any payment (or
benefit) in the nature of compensation that is made or supplied (under this
Agreement or otherwise) to a "disqualified individual" (as defined in Section
280G(c) of the Code) and that is contingent (within the meaning of Section
280G(b)(2)(A)(i) of the Code) on a Change in Control of the Company.
1.6 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
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1.7 "EXCISE TAX" shall mean the amount, if any, of the excise tax
payable pursuant to Section 4999 of the Code by Employee with respect to a
Contingent Compensation Payment.
1.8 "GROSS-UP PAYMENT" shall mean an amount equal to the sum of (i) the
amount of the Excise Tax payable with respect to a Contingent Compensation
Payment, and (ii) the amount necessary to pay all additional taxes imposed on
(or economically borne by) Employee (including the Excise Tax, state and federal
income taxes and all applicable withholding taxes) attributable to the receipt
of such Gross-Up Payment. For purposes of the preceding sentence, all taxes
attributable to the receipt of the Gross-Up Payment shall be computed assuming
the application of the maximum tax rates provided by law.
1.9 "RETENTION BONUS" shall mean the payment made pursuant to SECTION 4
of this Agreement.
1.10 "RESIGNATION FOR GOOD REASON" shall mean the voluntary resignation
by Employee of his employment with the Company within two (2) years following a
Change in Control and within three (3) months of the following "GOOD REASONS":
(a) any reduction in Employee's Base Salary or Target Bonus;
(b) any significant reduction in Employee's responsibilities and
authority relative to Employee's current position as Executive Vice President
and Chief Financial Officer of DAOU, including, but not limited to, requiring
Employee to report to anyone other than the Chief Executive Officer of the
acquiring entity of DAOU following a Change in Control; or
(c) a relocation by the Company of Employee's place of Employment
outside a forty (40) mile radius of Employee's current place of employment.
An event described in Section 1.10(a) through (c) will not
constitute Good Reason unless Employee provides written notice to the Company
(or its successor) of his intention to resign for Good Reason and unless the
Company (or its successor) does not cure the Good Reason within ten (10) days of
the Company's (or its successor's) receipt of the written notice.
1.11 "TARGET BONUS" shall mean the variable annual cash compensation
that Employee is eligible to receive, prior to a Change in Control, in the event
targeted goals are achieved for the year.
1.12 "TERMINATION DATE" shall mean the date of termination of
Employee's employment relationship with the Company.
1.13 "TERMINATION PAYMENTS" shall mean any payment or distribution of
compensation or benefits made pursuant to SECTIONS 5.1 (a)-(d) of this
Agreement.
2. TITLE AND DUTIES. Employee currently holds the positions of Executive Vice
President and Chief Financial Officer of DAOU and Treasurer of Enosus, Inc., a
Delaware corporation and wholly-owned subsidiary of DAOU. Employee will: (i)
devote his entire business time, attention, skill, and energy exclusively to the
business of the Company; (ii) use his best efforts to
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promote the success of the Company's business; and (iii) cooperate fully with
the President and the Board of Directors of the Company in the advancement of
the best interests of the Company.
3. AT-WILL EMPLOYMENT. Employee reaffirms that Employee's employment
relationship with the Company is at-will, terminable at any time and for any
reason by either the Company or Employee. While certain paragraphs of this
Agreement describe events that could occur at a particular time in the future,
nothing in this Agreement may be construed as a guarantee of employment of any
length.
4. RETENTION BONUS. If the Employee is continuously employed by the Company from
the date of this Agreement through the consummation of a Change in Control,
then, within fifteen (15) days after the consummation of such Change in Control,
DAOU (or its successor) shall pay to Employee a lump sum amount equal to Two
Hundred Seventy Thousand Dollars ($270,000), less applicable state and federal
taxes and/or other payroll deductions (the "RETENTION BONUS"). Such payment of
the Retention Bonus shall be in addition to any compensation paid to Employee
hereunder or under the Employment Agreement.
5. TERMINATION PAYMENTS.
5.1 If, within two (2) years immediately following a Change in Control,
Employee's employment with the Company (or its successor or subsidiary)
terminates as the result of (i) termination by the Company (or its successor or
subsidiary) of Employee's employment for a reason other than Cause or (ii)
Employee's Resignation for Good Reason:
(a) Employee will receive a pro-rata share of the Base Salary and
Target Bonus accrued and owing to Employee through the Termination Date, less
applicable state and federal taxes and/or other payroll deductions, and accrued
but unused vacation, sick days and floating holidays through the Termination
Date in accordance with the Company's (or its successor's) regular policies,
less applicable state and federal taxes and/or other payroll deductions;
(b) Within fifteen (15) days after the Termination Date, DAOU (or
its successor) will pay to Employee a severance payment in a lump-sum amount
equal to Five Hundred Forty Thousand Dollars ($540,000), less applicable state
and federal taxes and/or other payroll deductions;
(c) GROSS-UP PAYMENT. In the event that (i) DAOU undergoes a Change
in Control, and (ii) any payment to Employee under this Agreement triggers an
obligation to pay an Excise Tax, then DAOU shall, within fifteen (15) days after
the date on which such payment to Employee is made, pay to Employee the relevant
Gross-Up Payment.
(d) If Employee elects to continue insurance coverage as afforded
to Employee according to the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA"), DAOU (or its successor) will reimburse Employee the amount of
the premiums incurred by Employee during the period beginning on the Termination
Date and extend for twelve (12) months following the Termination Date. Nothing
in this Agreement will extend Employee's COBRA period beyond the period allowed
under COBRA, nor is the Company assuming any responsibility which Employee has
for formally electing to continue coverage;
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5.2 The payments set forth in SECTIONS 5.1(b), (c) AND (d) above are in
exchange for, and contingent upon Employee's execution of a release of all
claims as of the Termination Date, in substantially the form attached to this
Agreement as EXHIBIT 1.
5.3 If Employee's employment terminates (i) for any reason after the
two (2) year period immediately following a Change in Control or (ii) during
that two (2) year period (A) for Cause or (B) due to Employee's resignation
without Good Reason, then DAOU (or its successor) will pay to Employee a
pro-rata share of the Base Salary and Target Bonus accrued and owing to Employee
through the Termination Date, less applicable state and federal taxes and/or
other payroll deductions, and accrued but unused vacation, sick days and
floating holidays through the Termination Date in accordance with the Company's
(or its successor's) regular policies, less applicable state and federal taxes
and/or other payroll deductions.
5.4 If Employee resigns his employment for Good Reasons described in
Section 1.10 (b) above, payment of the above Termination Payments is further
contingent upon Employee's willingness, at the Company's (or its successor's)
request, to continue performing his duties on behalf of the Company (or its
successor) in good faith for up to sixty (60) days following the occurrence of
the events described in Section 1.10 (b); PROVIDED, HOWEVER, that Employee shall
not be required to travel to perform his duties in good faith. DAOU (or its
successor) will pay to Employee a pro-rata share of the Base Salary and Target
Bonus and accrued but unused vacation, sick days and floating holidays according
to the Company's (or its successor's) regular policies, less applicable state
and federal taxes and/or other payroll deductions, during the up-to sixty (60)
day period and will receive the Termination Payments upon completion of that
period.
6. RETIREMENT AND PROFIT-SHARING PLANS. Notwithstanding anything in this
Agreement to the contrary, Employee's rights in any retirement, pension or
profit-sharing plans offered by the Company shall be governed by the rules of
such plans as well as by applicable law.
7. TAX CONSEQUENCES. The Company makes no representations regarding the tax
consequence of any provision of this Agreement. Employee is advised to consult
with his own tax advisor with respect to the tax treatment of any payment
contained in this Agreement.
8. [Reserved.]
9. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this
Agreement shall be subject to final and binding arbitration. The arbitration
will be conducted by one arbitrator who is a member of the American Arbitration
Association ("AAA") or of the Judicial Arbitration and Mediation Services
("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. The parties will be
entitled to conduct discovery (i.e., investigation of facts through depositions
and other means), which shall be governed by Section 1283.05 of the California
Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and
authority to enter orders relating to such discovery as are allowed under the
CCP. The arbitrator shall apply California substantive law in all respects. The
party prevailing in the resolution of any such claim will be entitled, in
addition to such other relief as may be granted, to an award of all
5
<PAGE>
reasonable attorneys' fees and costs incurred in pursuit of the claim, without
regard to any statute, schedule, or rule of court purported to restrict such
award.
10. GENERAL PROVISIONS.
10.1 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the laws of California.
10.2 ASSIGNMENT. Employee may not assign, pledge or encumber his
interest in this Agreement or any part thereof.
10.3 AMENDMENTS; WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by both
of the parties. No waiver of any provision or consent to any exception to the
terms of this Agreement or any agreement contemplated hereby will be effective
unless in writing and signed by the party to be bound and then only to the
specific purpose, extent, and instance so provided.
10.4 SEVERABILITY. The provisions of this Agreement are severable; and,
if any provision will be held to be invalid or otherwise unenforceable, in whole
or in part, then the remainder of the provisions, or enforceable parts of this
Agreement, will not be affected.
10.5 NOTICES. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by facsimile (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and facsimile
numbers set forth below (or to such other addresses and facsimile numbers as a
party may designate by notice to the other parties):
If to the Company: DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92122
ATTENTION: Chief Executive Officer
Facsimile No.: (619) 452-2789
With a copy to: Baker & McKenzie
101 West Broadway, Twelfth Floor
San Diego, California 92101-3890
ATTENTION: Carlos D. Heredia, Esq.
Facsimile No.: (619) 236-0429
If to Employee: Donald R. Myll
5120 Shoreham Place
San Diego, CA 92122
Facsimile No.: (619) 452-2789
6
<PAGE>
10.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter of this Agreement, and
supersedes all prior and contemporaneous negotiations, agreements and
understandings between the parties, oral or written. In particular, this
Agreement specifically amends and supersedes Section 7.1 of the Employment
Agreement, but does not amend or supersede any other provisions of the
Employment Agreement, which provisions shall remain in full force and effect.
Notwithstanding the foregoing, in the event that Employee receives any payment
pursuant to Section 5 hereof, Employee shall not be entitled to, and shall not
receive, any payment pursuant to Section 7 or Section 8 of the Employment
Agreement; and, in the event that (i) there is no Change in Control of DAOU, and
(ii) Employee receives any payment under Section 7 or Section 8 of the
Employment Agreement, then Employee shall not be entitled to, and shall not
receive, any payment pursuant to Section 5 hereof.
10.7 MODIFICATION; WAIVERS. No modification, termination or attempted
waiver of this Agreement will be valid unless in writing, signed by the party
against whom such modification, termination or waiver is sought to be enforced.
10.8 FEES AND EXPENSES. If any proceeding is brought for the
enforcement or interpretation of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with any provisions
of this Agreement, then the successful or prevailing party will be entitled to
recover from the other party reasonable attorneys' fees and other costs incurred
in that proceeding (including, in the case of an arbitration, arbitration fees
and expenses), in addition to any other relief to which such party may be
entitled.
10.9 AMENDMENT. This Agreement may be amended or supplemented only by a
writing signed by both of the parties hereto.
10.10 DUPLICATE COUNTERPARTS. This Agreement may be executed in
duplicate counterparts, each of which shall be deemed an original; PROVIDED,
HOWEVER, that such counterparts shall together constitute only one instrument.
10.11 INTERPRETATION. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.12 DRAFTING AMBIGUITIES. Each party to this Agreement and its
counsel have reviewed and revised this Agreement. The rule of construction that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any of the amendments to
this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
DAOU SYSTEMS, INC.
By: /s/ Larry Grandia
-----------------------------------
Larry Grandia, President and
Chief Executive Officer
EMPLOYEE:
/s/ Donald R. Myll
-----------------------------------
Donald R. Myll
8
<PAGE>
EXHIBIT 1
GENERAL RELEASE
THIS GENERAL RELEASE (this "RELEASE") is entered into effective as of
______________, ____, (the "EFFECTIVE DATE") by and between DAOU Systems, Inc.,
a Delaware corporation, having its principal offices at 5120 Shoreham Place, San
Diego, California 92122 (the "COMPANY"), and Donald R. Myll ("EMPLOYEE"), with
reference to the following facts:
RECITALS
A. The parties entered into a Retention and Severance Agreement, dated
as of March 1, 2000 (the "AGREEMENT"), pursuant to which the parties agreed that
upon the occurrence of certain conditions, Employee would become eligible for
certain Termination Payments (as defined in the Agreement) in exchange for
Employee's release of the Company from all claims which Employee may have
against the Company as of the Termination Date (as defined in the Agreement).
Capitalized terms not otherwise defined herein shall have the respective
meanings ascribed to them in the Agreement.
B. The parties desire to dispose of, fully and completely, all claims,
which Employee may have against the Company in, the manner set forth in this
Release.
AGREEMENT
1. RELEASE. Employee, for himself and his heirs, successors and
assigns, each fully releases, and discharges the Company, its officers,
directors, employees, shareholders, attorneys, accountants, other professionals,
insurers and agents of the other (collectively "AGENTS"), and all entities
related to each party, including, but not limited to, their respective heirs,
executors, administrators, personal representatives, assigns, parent, subsidiary
and sister corporations, affiliates, partners and co-venturers (collectively
"RELATED ENTITIES"), from all rights, claims, demands, actions, causes of
action, liabilities and obligations of every kind, nature and description
whatsoever, Employee now has, owns or holds or has at anytime had, owned or held
or may have against the Company, Agents or Related Entities from any source
whatsoever, whether or not arising from or related to the facts recited in this
Release. Employee specifically releases and waives any and all claims arising
under any express or implied contract, rule, regulation or ordinance, including,
without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights
Act of 1991, the Americans with Disabilities Act, the California Fair Employment
and Housing Act, and the Age Discrimination in Employment Act, as amended
("ADEA").
2. SECTION 1542 WAIVER. This Release is intended as a full and complete
release and discharge of any and all claims that Employee may have against the
Company, its Agents or Related Entities. In making this release, Employee
intends to release the Company, its Agents and Related Entities from liability
of any nature whatsoever for any claim of damages or injury or for equitable or
declaratory relief of any kind, whether the claim, or any facts on which such
claim might be based, is known or unknown to him. Employee expressly waives all
rights under Section 1542 of the California Civil Code, which Employee
understands provides as follows:
1
<PAGE>
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Employee acknowledges that he may discover facts different from or in addition
to those that he now believes to be true with respect to this Release. Employee
agrees that this Release shall remain effective notwithstanding the discovery of
any different or additional facts.
3. WAIVER OF CERTAIN CLAIMS. Employee acknowledges that he has been
advised in writing of his right to consult with an attorney prior to executing
the waivers set out in this Release, and that he has been given a 21-day period
in which to consider entering into the release of ADEA claims, if any. In
addition, Employee acknowledges that he has been informed that he may revoke a
signed waiver of the ADEA claims for up to seven (7) days after executing this
Release.
4. NO UNDUE INFLUENCE. This Release is executed voluntarily and without
any duress or undue influence. Employee acknowledges he has read this Release
and executed it with his full and free consent. No provision of this Release
shall be construed against any party by virtue of the fact that such party or
its counsel drafted such provision or the entirety of this Release.
5. GOVERNING LAW. This Release is made and entered into in the State of
California and accordingly the rights and obligations of the parties hereunder
shall in all respects be construed, interpreted, enforced and governed in
accordance with the laws of the State of California as applied to contracts
entered into by and between residents of California to be wholly performed
within California, without regard to conflicts of law principles.
6. SEVERABILITY. If any provision of this Release is held to be
invalid, void or unenforceable, the balance of the provisions of this Release
shall, nevertheless, remain in full force and effect and shall in no way be
affected, impaired or invalidated.
7. CONSULTATION WITH COUNSEL. Employee acknowledges and agrees that he
has had the opportunity to consult and review this Release with counsel.
8. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of
this Release shall be subject to final and binding arbitration. The arbitration
will be conducted by one arbitrator who is a member of the American Arbitration
Association ("AAA") or of the Judicial Arbitration and Mediation Services
("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator
shall have all authority to determine the arbitrability of any claim and enter a
final and binding judgment at the conclusion of any proceedings in respect of
the arbitration. Any final judgment only may be appealed on the grounds of
improper bias or improper conduct of the arbitrator. The parties will be
entitled to conduct discovery (i.e., investigation of facts through depositions
and other means), which shall be governed by Section 1283.05 of the California
Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and
authority to enter
2
<PAGE>
orders relating to such discovery as are allowed under the CCP. The arbitrator
shall apply California substantive law in all respects. The party prevailing in
the resolution of any such claim will be entitled, in addition to such other
relief as may be granted, to an award of all reasonable attorneys' fees and
costs incurred in pursuit of the claim, without regard to any statute, schedule,
or rule of court purported to restrict such award.
Dated:
--------------------- ----------------------------------------
Donald R. Myll
3
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<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,642,000
<SECURITIES> 59,000
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11,566,000
0
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