<PAGE>
Form 10-QSB
UNITED STATES SECURITIES AND EXCHANGE COMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-9129
DESIGN AUTOMATION SYSTEMS, INC.
Exact name of Registrant as specified in is charter
TEXAS 75-1657943
State of Incorporation IRS Employer Identification Number
SUITE 370
3200 WILCREST
HOUSTON, TEXAS 77042-3366
713-783-2374
Address and telephone number of principal executive offices
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 filing
requirements for the past 90 days.
Yes X No
The number of shares of common stock of the Registrant outstanding at March 31,
1999 was 20,759,986.
<PAGE>
DESIGN AUTOMATION SYSTEMS, INC.
AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 1-3
Item 2 Management's Discussion and Analysis or Plan of Operation 5
PART II OTHER INFORMATION
Item 2 Changes in Securities 7
Item 4 Submission of Matters to a Vote of Security Holders 8
Item 6 Exhibits and Reports on Form 8-K 8
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1999 1998
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,245,829 $ 850,925
Account receivable - trade, no allowance for doubtful accounts 5,204,895 4,020,385
Net assets - discontinued operations 220,089 --
Other assets 34,755 144,579
----------- -----------
Total current assets 6,705,568 5,015,889
PROPERTY AND EQUIPMENT, net 132,923 71,480
Goodwill 2,898,147 --
----------- -----------
Total assets $ 9,736,638 $ 5,087,369
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Note payable $ 2,530,821 $ 1,031,483
Accounts payable 3,298,062 3,649,398
Accounts payable to affiliate 39,944 50,419
Accrued expenses and other current liabilities 1,001,213 386,488
----------- -----------
Total current liabilities 6,870,040 5,117,788
SHAREHOLDERS' EQUITY (DEFICIT) :
Common stock, par value .001; 50,000,000 shares authorized;
20,759,986 and 16,560,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998 , respectively 20,760 16,560
Additional paid in capital 2,905,697 37,832
Retained earnings (accumulated deficit) (59,859) (84,811)
----------- -----------
Total shareholders' equity (deficit) 2,866,598 (30,419)
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 9,736,638 $ 5,087,369
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
------------------------------
1999 1998
------------ -----------
<S> <C> <C>
REVENUES $ 7,675,309 $ 3,157,340
OPERATING EXPENSES:
Cost of revenues 6,894,075 2,820,340
Selling, general and administrative 744,248 272,703
------------ -----------
7,638,323 3,093,043
------------ -----------
INCOME FROM OPERATIONS 36,986 64,297
OTHER INCOME (EXPENSE):
Interest expense -- (13,108)
Interest income 17,316 7,741
Other income 23,926 50,362
------------ -----------
41,242 44,995
------------ -----------
Income before income taxes and discontinued
Operations 78,228 109,292
Income taxes (26,300) --
------------ -----------
Income from continuing operations 51,928 109,292
Discontinued Operations (26,976) --
------------ -----------
Net income $ 24,952 $ 109,292
============ ===========
BASIC EARNINGS PER COMMON SHARE:
Continuing operations $ -- $ .01
Discontinued operations $ -- --
Net income $ -- $ .01
WEIGHTED AVERAGE SHARES OUTSTANDING 20,006,654 14,400,000
------------ -----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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DESIGN AUTOMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Quarter Ended
March 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,952 $ 109,292
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Discontinued operations 26,976 --
Depreciation and amortization 5,160 5,160
Accounts receivable (856,938) 1,050,344
Accounts payable (412,170) 848,659
Accrued expenses and other current liabilities 227,619 (103,389)
Other, net 119,654 (37,961)
----------- -----------
Net cash provided by (used in) operating activities (864,747) 1,872,105
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (14,054) (9,527)
Advances to Related Party -- (194,131)
Net cash used in acquisition of business (125,633)
----------- -----------
Net cash used in investing activities (139,687) (203,658)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment on) notes payable, net 1,399,338 (1,784,526)
Advances from shareholder, net -- 137,808
----------- -----------
Net cash provided by financing activities 1,399,338 (1,646,718)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, at beginning of period 853,925 354,551
----------- -----------
CASH AND CASH EQUIVALENTS, at end of period $ 1,245,829 $ 376,280
=========== ===========
SUPPLEMENTAL DISCLOSURES - interest paid $ -- $ 13,108
=========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Stock in business combination $ 2,625,000 $ --
Net assets acquired 147,514 --
Goodwill (2,898,147) --
----------- -----------
Net cash in business combination (125,633) --
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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DESIGN AUTOMATION SYSTEMS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1998 AND 1999
PART 1
FINANCIAL INFORMATION
(1) PRESENTATION OF INTERIM INFORMATION
The unaudited consolidated financial statements and related notes are
presented as permitted by form 10-QSB, and do not contain certain
information included in the Company's audited consolidated financial
statements and notes for the fiscal year ended December 31, 1998. The
information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented. The
results of operations for interim periods are not necessarily indicative
of the results to be expected for the entire fiscal year ending December
31, 1999. The accompanying unaudited consolidated condensed financial
statements and related notes should be read in conjunction with the
audited consolidated financial statements and the Form 10-K of Design
Automation Systems, Inc. (the "Company") and notes thereto, for its
fiscal year ended December 31, 1998.
(2) BUSINESS COMBINATION
Effective January 1, 1999, Loch Exploration, Inc. (Loch), a Texas
corporation, acquired all of the stock of the Company in a "reverse
merger," whereby the Company is the acquiror for accounting purposes.
In connection with the acquisition, Loch (effectively a shell
corporation) issued the Company's shareholders 16,560,000 shares of
authorized but unissued common stock, $.001 par value, valued at
approximately $ 4.3 million. The transaction was funded January 4, 1999.
The amount of consideration was negotiated through an arm's length
transaction. The transaction was accounted for in a manner similar to a
pooling of interests, whereby no goodwill resulted from this
transaction. The Company became the parent company and Loch became the
subsidiary for accounting purposes. As a result of the transaction, the
Company will be taxed as a C Corporation; however, at the date of the
transaction, no significant basis differences existed between tax and
financial reporting purposes that would result in deferred tax balances.
Net assets and operations of Loch are presented herein as discontinued
operations.
Effective January 1999, the Board of Directors of the Company approved
five-year employment agreements with three key employees for an
aggregate minimum base salary and bonus compensation of $ 925,000. On
January 4, 1999, the Company's shareholders approved a 10,000-for-one
split of the Company's common stock. Shares issued and outstanding have
been retroactively restated to reflect this split.
(3) ACQUISITION OF COAD SOLUTIONS, INC.
The consideration for the acquisition was (1) 600,000 shares of Company
common stock, (2) $ 200,000 cash, payable $ 100,000 at closing, and $
100,000 payable in quarterly installments of $ 25,000 beginning 90 days
from the closing date, and ( 3) for a period of 24 months each COAD
stockholder will receive a 20% royalty on gross revenues of SQLACE
products. The two stockholders of COAD entered into employment
agreements, which terminate in December 2001 and include a non-compete
provision for the term of the agreement and one year thereafter.
However, the Company can provide no assurance the non-compete will be
enforceable. The transaction has been accounted for as a purchase. The
following unaudited pro forma condensed consolidated operating results
are presented as if the transaction had occurred at the beginning of the
periods being reported upon herein:
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<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
<S> <C> <C>
Revenues 8,253,953 3,691,986
Income from continuing operations 65,880 138,299
Net Income 38,904 138,299
Income Per Share .00 .01
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, OF THE COMPANY CONTAINED
ELSEWHERE IN THIS FORM 10-QSB.
OVERVIEW
Design Automation Systems, Inc. (The Company) engages in the business of
providing computer system integration specializing in UNIX client server
architecture and its components, and offering system management services with a
complete software selection. The Company's integration services assist customers
in dealing with issues during the entire life cycle of their systems; including
system architecture and design, product acquisition, configuration and
implementation, ongoing operational support, and evolutions in technology. The
Company provides solutions to complex information technology problems including
system availability and performance, UNIX/ Microsoft Windows NT integration,
client server database implementation, network security, and internet/intranet
electronic commerce/electronic business World Wide Web application deployment.
In March 1999, the Company acquired all of the issued and outstanding stock of
COAD Solutions, Inc. COAD Solutions provides systems integrator Design
Automation Systems with a highly experienced team of consultants specializing in
PeopleSoft HRMS implementations, custom development and upgrades. COAD also
provides design and implementation of knowledge management systems,
internet/intranet development and project management services, and markets "SQL
Ace" software, a proprietary program for easy data manipulation of multiple,
complex databases.
5
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
For the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998, revenues Increased to $ 7,675,309 from $ 3,157,340, an
increase of $ 4,517,969 or 143% primarily due to increased growth of
individual sales.
For the three months ended March 31, 1999 as compared to the three months
ended March 31, 1998 costs of revenues increased to $ 6,894,075 from
$ 2,820,340 an increase of $4,073,735 or 144%, primarily due to increased
revenues. Selling, general, and administrative expenses increased to
$ 744,248 for the three months ended March 31, 1999 from $ 272,703 for the
three months ended March 31, 1998, a increase of $ 471,545 or 173%, primarily
due to an increase in personnel to service increased revenues, increased
compensation associated thereto, and increase professional fees. This
resulted in income from operations of $ 36,986 for the three months ended
March 31, 1999, as compared to $ 64,297 from operations of for the three
months ended March 31, 1998
For the three months ended March 31, 1999, net income was $ 24,952 as
compared to a net income $ 109,292 for the three months March 31, 1998,
primarily as a result of an increase of operating expenses, discontinued
operations, and non-recognition of income tax as previous year tax filing
status was an S Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity and capital resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations is intended to
present the reader with information regarding the Company's ability to
generate cash to meet its ongoing requirements. Accordingly, the information
below speaks as to the parent company's ability to generate cash to meet its
ongoing cash requirements as its business will be the ongoing business of the
Company.
As of March 31, 1999, the Company's primary sources of liquidity were
$1,245,829 in cash and cash equivalents, $5,204,895 of accounts receivable,
and $4,534,536 of available and unused funds in the Company's line of credit.
The Company had a working capital deficit of $164,472 as of March 31, 1999.
Net cash used in operating activities was $864,747 for the quarter ended
March 31, 1999, as compared to net cash provided in operating activities of
$1,872,105 for the quarter ended March 31, 1998, the difference was primarily
the result of increased accounts receivable and decreased accounts payable.
Net cash used in investing activities was $139,687 for the quarter ended
March 31, 1999, as compared to $203,658 for the quarter ended March 31, 1998,
primarily due to advances to related party. Net cash provided by financing
activities was $1,399,338 for the quarter ended March 31, 1999, as compared
to net cash used in financing activities of $1,646,718, the result of a
significant increase in the Company's line of credit.
As of April 30, 1999, the Company had $2,692,905. Management believes that
the Company's line of credit, current assets and cash generated from
operations will be sufficient to accommodate the Company's current operations
through fiscal year 1999.
DISCONTINUED SEGMENT RESULTS OF OPERATIONS
Total revenue for the first quarter of 1999 amounted to $ 11,092, and lease
operating expenses amounted to $ 5,215. The first quarter net loss of $26,976
is mainly due to the continual market decline in oil and gas prices.
YEAR 2000 COMPLIANCE ISSUES
The year 2000 poses certain issues for business and consumer computing,
particularly the functionality of software for two-digit storage of dates and
special meanings for certain dates such as 9/9/99. The year 2000 is also a leap
year, which may also lead to incorrect calculations, functions, or system
failure. The problem exists for many kinds of software, including software for
mainframes, PCs, and embedded systems.
In assessing the effect of the year 2000 problem on the company,
management has identified, and is currently evaluating, the following three
general areas:
- Internal infrastructure;
6
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- Supplier/third-party relationships;
- Contingency plans.
A discussion of the three general areas as well as management's ongoing
and planned actions with regard to each is set forth below:
INTERNAL INFRASTRUCTURE. The company is in the process of verifying that
all of its personal computers, servers, and software are Year 2000 compliant.
The company intends to replace or upgrade all items that are found not to be
year 2000 compliant. The company intends to determine if the software vendors of
all of its critical applications have represented that their products are year
2000 compliant. The company will obtain certification from its vendors that
these systems are year 2000 compliant. The costs related to these efforts have
not been nor are they expected to be material to the company's business,
financial condition, or results of operations.
SUPPLIERS/THIRD-PARTY RELATIONSHIPS. The company has been gathering
information from vendor Web sites and available compliance statements to
identify and, to the extent possible, resolve issues involving the year 2000
problem. The company relies on outside vendors for water, electrical, and
telecommunications services as well as climate control, building access, and
other infrastructure services. The company does not intend to independently
evaluate the year 2000 compliance of the systems utilized to supply these
services. The company has received no assurance of compliance from the providers
of these services. There can be no assurance that these suppliers will resolve
any or all year 2000 problems with these systems before the occurrence of a
material disruption to the company's business. Any failure of these third
parties to resolve year 2000 problems with their systems in a timely manner
could have a material adverse effect on the company's business, financial
condition, or results of operation.
CONTINGENCY PLANS. The company has not currently developed a formal
contingency plan to be implemented as part of its efforts to identify and
correct year 2000 problems affecting its internal systems. However, if the
company deems it necessary, it may take the following actions:
- Accelerated replacement of affected equipment or software;
- Short to medium-term use of backup equipment and software;
- Wholesale backup of existing computerized data prior to January 1,
2000;
- Increased work hours for company personnel; and/or
- Other similar approaches.
If the company is required to implement any of these contingency plans,
such plans could have a material adverse effect on the company's business,
financial condition, or results of operations.
Based on the actions taken to date as discussed above, the Company is
reasonably certain that it has or will identify and resolve all year 2000
problems that could materially adversely affect its business and operations.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 1999, the Company issued 600,000 shares of company common stock
to the two stockholders of COAD Solutions, Inc. in connection with the
acquisition of 100% of the outstanding capital stock of COAD. The company
believes the transaction was exempt from registration pursuant to Section 4(2)
and/or Regulation D promulgated under the Act as a transaction by an issuer not
involving any public offering. No underwriter was utilized in such issuances and
no commissions were paid.
7
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 12, 1999, the company delivered an information statement to its
stockholders of record informing them that the majority shareholder had voted
his 14,400,000 shares of company common stock to take the following action:
o Change the name of the company from Loch Exploration, Inc. to Design
Automation Systems, Inc. and
o Adopt an Employee Stock option plan reserving 3,000,000 shares of
company common stock for issuance thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NUMBER DESCRIPTION
2.1(1) Exchange Agreement by and between Loch Exploration, Inc. and
Design Automation Systems Incorporated
2.2(2) Exchange Agreement by and between Loch Exploration, Inc. and
COAD Solutions, Inc.
2.3(2) Acquisition Agreement of Cherokee Methane Corporation
2.4(2) Plan of Merger between the Company and Design Automation Systems
Incorporated
3.1(3) Articles of Incorporation
3.2(4) Amended Articles of Incorporation
3.3(3) By-laws
4.1(3) Common Stock Specimen
10.1(4) 1999 Employee Stock Option Plan
10.2(2) Employment Agreement with Carl Rose
10.3(2) Employment Agreement with Charles Leaver
10.4(5) Employment Agreement with Kelly Knake
10.5(2) Lease Agreement
10.6(2) Indirect Reseller Agreement between the Company, Hewlett-Packard
Company and Hall-Mark Computer Products
10.7(2) Indirect Reseller Agreement between the Company, Hewlett-Packard
Company and Client Systems, Inc.
10.8(2) Indirect Value Added Reseller Agreement between the Company and
Sun Microsystems Computer Corporation
10.9(2) IBM Business Partner Agreement for Solution Providers
10.10(2) Line of Credit with Finova Corporation
21.1(2) List of Subsidiaries of the Registrant
27.(5) Financial Data Schedule
- ----------
(1) Filed as an exhibit to the company's Current Report on Form 8-K dated
January 15, 1999 and incorporated herein by reference.
8
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(2) Filed as an exhibit to the company's 10-K for the year ended December
31, 1998 and incorporated herein by reference.
(3) Filed as an exhibit to the company's Registration Statement on Form S-1
dated September 7, 1979 and incorporated herein by reference.
(4) Filed as an exhibit to the company's Definitive Information Statement
filed March 9, 1999 and incorporated herein by reference.
(5) Filed herewith.
(b) REPORTS ON FORM 8-K
Form 8-K/A filed March 16, 1999
Form 8-K/A filed January 27, 1999
Form 8-K filed March 16, 1999
9
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Design Automation Systems, Inc.
Date: May 15, 1999
By /s/ Robert E. Nelson
------------------------------
Robert E. Nelson
Chief Financial Officer and
Director
10
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EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between, DESIGN
AUTOMATION SYSTEMS, INC. (the "Company"), and KELLY KNAKE, ("Employee") is
hereby entered into and effective as of the close of business on December 31,
1998. This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the parties.
RECITALS
The following statements are true and correct:
As of the date of this Agreement, the Company is engaged primarily in
the business of providing computer system integration, specializing in UNIX
client server architecture and its components, and offering system management
services with a complete software selection.
Employee is employed hereunder by the Company in a confidential
relationship wherein Employee, in the course of Employee's employment with
the Company, will be instrumental in the development of the Company's
business and has and will continue to become familiar with and aware of
information as to the Company's customers, specific manner of doing business,
including the processes, techniques and trade secrets utilized by the
Company, and future plans with respect thereto, all of which has been and
will be established and maintained at great expense to the Company; this
information is a trade secret and constitutes the valuable good will of the
Company.
Therefore, in consideration of the mutual promises, terms, covenants
and conditions set forth herein and the performance of each, it is hereby
agreed as follows:
AGREEMENTS
1. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Employee as Commission Salesman. As such,
Employee shall have the responsibilities, duties and authority reasonably
accorded to and expected of such position and such other executive duties as
are assigned to him and will report directly to the President. Employee
hereby accepts this employment upon the terms and conditions herein contained
and, subject to Section 1(c), agrees to devote such time, attention and
efforts as are reasonably necessary to promote and further the business of
the Company.
(b) Employee shall adhere to, execute and fulfill all reasonable and
uniformly applied policies established by the Company.
(c) Employee shall not, during the term of Employee's employment
hereunder, be engaged in any other business activity pursued for gain,
profit or other pecuniary advantage if such activity interferes with
Employee's duties and responsibilities hereunder. The foregoing limitations
shall not be construed as prohibiting Employee from making personal
investments in such form or
<PAGE>
manner as will neither require Employee's services in the operation or
affairs of the companies or enterprises in which such investments are made
nor violate the terms of Section 3 hereof.
2. COMPENSATION. For all services rendered by Employee, the Company shall
compensate Employee as follows:
(a) COMMISSION BASIS equal to 30% of the gross profit, as defined by
generally accepted accounting principles, and specifically defined as total
sales price, less any related taxes; cost of internal technical time spent on
the project; cost of any products; interest on sales price at 1.5% per month
if not paid within thirty (30) days. The exact amount of the commission due
Employee on each project will be solely determined by the Chief Executive
Officer on a timely basis.
(b) Employee shall receive a $2,800.00 non-recoverable draw against
future commissions.
(c) Employee's medical insurance premiums paid by the Company shall be
considered the same as (b) above.
(d) All payments due Employee are payable twice monthly on the 5th and
20th day of each month.
(e) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Employee
shall be entitled to receive additional benefits and compensation from the
Company in such form and to such extent as specified below:
(i) Admittance for participation for Employee under health,
hospitalization, disability, dental, life and other insurance
plans that the Company may have in effect from time to time.
(ii) Reimbursement for all business travel and other out-of-pocket
expenses reasonably incurred by Employee in the performance of
Employee's services pursuant to this Agreement. All reimbursable
expenses shall be appropriately documented in reasonable detail by
Employee upon submission of any request for reimbursement, and in a
format and manner consistent with expense reporting policy of the
Company. Specifically, Employee to receive $100.00 per month for
use of his mobile phone.
(iii) The Company shall provide Employee with other perquisites as may be
available to or deemed appropriate for Employee by the Board of
Directors and participation in all other the Company-wide employee
benefits as available from time to time.
3. NON-COMPETITION AGREEMENT.
(a) Employee will not, during the period of Employee's employment by or
with the Company, and for a period of one (1) year immediately following the
termination of Employee's employment under this Agreement for any reason
other than the expiration of its term or termination
- 2 -
<PAGE>
by the Company without cause, directly or indirectly, for Employee or on
behalf of or in conjunction with any other person, persons, company,
partnership, corporation or business of whatever nature:
(i) call upon any person who is, at that time, an employee of the
Company (including the respective subsidiaries thereof) in any
capacity for the purpose or with the intent of enticing such
employee away from or out of the employ of the Company (including
the respective subsidiaries thereof); or
(ii) call upon any person or entity which is, at that time, or which has
been, within one (1) year prior to that time, a customer of the
Company (including the respective subsidiaries thereof) for the
purpose of soliciting or selling products or services in direct
competition with the Company.
The foregoing covenant shall not be deemed to prohibit Employee from
acquiring as an investment not more than three percent (3%) of the capital
stock of a competing business, whose stock is traded on a national securities
exchange or over-the-counter.
(b) Because of the difficulty of measuring economic losses to the
Company as a result of a breach of the foregoing covenant, and because of the
immediate and irreparable damage that could be caused to the Company for
which they would have no other adequate remedy, Employee agrees that the
foregoing covenant may be enforced by the Company in the event of breach by
Employee, by injunctions and restraining orders.
(c) It is agreed by the parties that the foregoing covenants in this
Section 3 impose a reasonable restraint on Employee in light of the
activities and business of the Company (including their respective
subsidiaries) on the date of the execution of this Agreement; but it is also
the intent of the Company and Employee that such covenants be construed and
enforced in accordance with the changing activities, business and locations
of the Company (including their respective subsidiaries) throughout the term
of this covenant, whether before or after the date of termination of the
employment of Employee. For example, if, during the term of this Agreement,
the Company (including their respective subsidiaries) engage in new and
different activities, enter a new business or establish new locations for its
current activities or business in addition to or other than the activities or
business enumerated under the Recitals above or the locations currently
established therefor, then Employee will be precluded from soliciting the
customers or employees of such new activities or business, except as
specifically provided for herein.
(d) The covenants in this Section 3 are severable and separate, and the
unenforceability of any specific covenant shall not affect the provisions of
any other covenant. Moreover, in the event any court of competent
jurisdiction shall determine that the scope, time or territorial restrictions
set forth are unreasonable, then it is the intention of the parties that such
restrictions be enforced to the fullest extent which the court deems
reasonable, and the Agreement shall thereby be reformed.
4. PLACE OF PERFORMANCE.
- 3 -
<PAGE>
(a) Employee's duties shall be carried out in Houston, Texas, except
for occasional traveling which may be involved in the ordinary course of
Employee's duties.
(b) Notwithstanding the above, if Employee is requested by the Board to
relocate and Employee refuses, such refusal shall not constitute "cause" for
termination of this Agreement under the terms of Section 5(c).
5. TERM; TERMINATION RIGHTS ON TERMINATION. The term of this Agreement
shall begin January 1, 1999 and continue until December 31, 2004 (the "Term"),
and, unless terminated sooner as herein provided or at the end of the Term by
either party, shall continue thereafter on a year-to-year basis on the same
terms and conditions contained herein in effect as of the time of renewal.
This Agreement and Employee's employment may be terminated in any one of the
following ways:
(a) DEATH. The death of Employee shall immediately terminate this
Agreement with no severance compensation due to Employee's estate. In the
event of Employee's death, Employee's estate shall be entitled to all Base
Salary earned through the date of death.
(b) DISABILITY. If, as a result of incapacity due to physical or mental
illness or injury, Employee shall have been absent from full-time duties
hereunder for two (2) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of
such two (2) month period, but which shall not be effective earlier than the
last day of such two (2) month period), the Company may terminate Employee's
employment hereunder provided Employee is unable to resume full-time duties
at the conclusion of such notice period. Also, Employee may terminate
Employee's employment hereunder if Employee's health should become impaired
to an extent that makes the continued performance of Employee's duties
hereunder hazardous to Employee's physical or mental health or life, provided
that Employee shall have furnished the Company with a written statement from
a qualified doctor to such effect and provided, further, that, at the
Company's request made within thirty (30) days of the date of such written
statement, Employee shall submit to an examination by a doctor selected by
the Company who is reasonably acceptable to Employee or Employee's doctor and
such doctor shall have concurred in the conclusion of Employee's doctor. In
the event this Agreement is terminated as a result of Employee's disability,
Employee shall receive from the Company sixty percent (60%) of the Base
Salary at the rate then in effect for whatever time period is remaining under
the Term of this Agreement or for one (1) year, whichever amount is less,
payable at regular pay intervals. The Company may satisfy this obligation
through provision of a disability policy covering Employee that meets the
terms of this Section, with the premiums for such policy being paid by the
Company.
(c) GOOD CAUSE. The Company may terminate the Agreement ten (10) days
after written notice to Employee for good cause, which shall be: (1)
Employee's gross negligence in the performance or intentional nonperformance
(either of which continuing for ten days after receipt of written notice of
need to cure) of any of Employee's material duties and responsibilities
hereunder; (2) Employee's willful, material and irreparable breach of this
Agreement; (3) Employee's willful dishonesty, fraud or misconduct with
respect to the business or affairs of the Company which materially and
adversely affects the operations or reputation of the Company; (4) Employee's
conviction of a felony crime; or (5) chronic alcohol abuse or illegal drug
abuse by Employee. In the
- 4 -
<PAGE>
event of a termination for good cause, as enumerated above, Employee shall
have no right to any severance compensation.
(d) WITHOUT CAUSE. At any time after the commencement of employment,
the Company or Employee may, without cause, terminate this Agreement and
Employee's employment, effective thirty (30) days after written notice is
provided to the Company. Should Employee be terminated by the Company without
cause during the Term, Employee shall receive from the Company, at his
option, either six (6) months Base Salary (at the rate then in effect)
payable in a lump-sum payment due on the effective date of termination or one
year's Base Salary payable from time to time at regular intervals. Further,
any termination without cause by the Company shall operate to invalidate the
terms of Section 3. If Employee resigns or otherwise terminates Employee's
employment without cause pursuant to this Section 5(d), Employee shall
receive no severance compensation and the terms of Section 3 shall be fully
enforceable.
If termination of Employee's employment arises out of the Company's
failure to pay Employee on a timely basis the amounts to which Employee is
entitled under this Agreement or as a result of any other breach of this
Agreement by the Company, pursuant to the provisions of Section 17 below, the
Company shall pay all amounts and damages to which Employee may be entitled
as a result of such breach, including interest thereon and all reasonable
legal fees and expenses and other costs incurred by Employee to enforce
Employee's rights hereunder. Further, none of the provisions of Section 3
shall apply in the event this Agreement is terminated as a result of a breach
by the Company.
6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business
plans, financial statements, manuals, memoranda, lists and other property
delivered to or compiled by Employee by or on behalf of the Company or their
representatives, vendors or customers which pertain to the business of the
Company shall be and remain the property of the Company, as the case may be,
and be subject at all times to their discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company which is collected by Employee shall be delivered promptly to the
Company without request by it upon termination of Employee's employment.
7. INVENTIONS. Employee shall disclose promptly to the Company any and all
significant conceptions and ideas for inventions, improvements and valuable
discoveries, whether patentable or not, which are conceived or made by
Employee, solely or jointly with another, during the period of employment,
and which are directly related to the business or activities of the Company
and which Employee conceives as a result of Employee's employment by the
Company. Employee hereby assigns and agrees to assign all Employee's
interests therein to the Company or its nominee. Whenever requested to do so
by the Company, Employee shall execute any and all applications, assignments
or other instruments that the Company shall deem necessary to apply for and
obtain Letters Patent of the United States or any foreign country or to
otherwise protect the Company's interest therein.
8. TRADE SECRETS. Employee agrees that Employee will not, during or after
the Term of this Agreement with the Company, disclose the specific terms of
the Company's relationships or
- 5 -
<PAGE>
agreements with significant vendors or customers or any other significant and
material trade secret of the Company, to any person, firm, partnership,
corporation or business for any reason or purpose whatsoever.
9. INDEMNIFICATION. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil or
administrative (other than an action by the Company against Employee), by
reason of the fact that Employee is or was performing services under this
Agreement, then the Company shall indemnify Employee against all expenses
(including attorneys' fees), judgments and amounts paid in settlement, as
actually and reasonably incurred by Employee in connection therewith. In the
event that both Employee and the Company are made a party to the same
third-party action, complaint, suit or proceeding, the Company agrees to
engage competent legal representation, and Employee agrees to use the same
representation, provided that if counsel selected by Company shall have a
conflict of interest that prevents such counsel from representing Employee,
Employee may engage separate counsel and the Company shall pay all reasonable
attorneys' fees of such separate counsel. Employee will not be held liable to
the Company for errors or omissions where Employee has not exhibited gross,
willful and wanton negligence and misconduct or performed criminal and
fraudulent acts which materially damage the business of the Company. The
indemnity provisions contained herein shall be deemed to extend to protect
Employee to the maximum extent permitted by law.
10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the
Company that the execution of this Agreement by Employee and Employee's
employment by the Company and the performance of Employee's duties hereunder
will not violate or be a breach of any written agreement with a former
employer, client or any other person or entity. Employee agrees to indemnify
the Company for any claim, including, but not limited to, attorneys' fees and
expenses of investigation, by any such third party that such third party may
now have or may hereafter come to have against the Company based upon or
arising out of any written non-competition agreement, invention or secrecy
agreement between Employee and such third party which was in existence as of
or prior to the date of this Agreement. Company agrees to indemnify Employee
for any claim, including, but not limited to, attorneys' fees and expenses of
investigation, by any third party that such third party may now have or may
hereafter come to have against Employee where there was not a written
non-competition agreement, invention or secrecy agreement between Employee
and such third party which was in existence as of or prior to the date of
this Agreement and where Employee committed no illegal or fraudulent act.
11. ASSIGNMENTS; BINDING EFFECT. Employee understands that Employee has
been selected for employment by the Company on the basis of Employee's
personal qualifications, experience and skills. Employee agrees, therefore,
that Employee cannot assign all or any portion of Employee's performance
under this Agreement. Subject to the preceding two (2) sentences, this
Agreement shall be binding upon, inure to the benefit of and be enforceable
by the parties hereto and their respective heirs, legal representatives,
successors and assigns.
12. COMPLETE AGREEMENT. This Agreement is not a promise of future
employment. Employee has no oral representations, understandings or
agreements with the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This
written
- 6 -
<PAGE>
Agreement is the final, complete and exclusive statement and expression of
the agreement between the Company and Employee and of all the terms of this
Agreement, and it cannot be varied, contradicted or supplemented by evidence
of any prior or contemporaneous oral or written agreements. This written
Agreement may not be later modified except by a further writing signed by a
duly authorized officer of the Company and Employee, and no term of this
Agreement may be waived except by writing signed by the party waiving the
benefit of such term.
13. NOTICE. Whenever any notice is required hereunder, it shall be given in
writing addressed as follows:
TO THE COMPANY: Design Automation Systems, Inc.
3200 Wilcrest, Suite 370
Houston, Texas 77042
WITH A COPY TO: Ronald B. Pruitt
2950 North Loop West, Suite 270
Houston, Texas 77092
TO EMPLOYEE: Kelly Knake
522 Mill Place
Sugar Land, Texas 77478
Notice shall be deemed given and effective three (3) days after the
deposit in the U.S. mail of a writing addressed as above and sent first class
mail, certified, return receipt requested, or when actually received. Either
party may change the address for notice by notifying the other party of such
change in accordance with this Section 13.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall
be given to the intent manifested by the portion held invalid or inoperative.
The Section headings herein are for reference purposes only and are not
intended in any way to describe, interpret, define or limit the extent or
intent of the Agreement or of any part hereof.
15. ARBITRATION. Any unresolved dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by first
mediation and then, if necessary, by arbitration, conducted before a panel of
three (3) arbitrators in Houston, Texas, in accordance with the rules of the
American Arbitration Association then in effect. The arbitrators shall not
have the authority to add to, detract from, or modify any provision hereof
nor to award punitive damages to any injured party. The arbitrators shall
have the authority to order back-pay, severance compensation, vesting of
options (or cash compensation in lieu of vesting of options), reimbursement
of costs, including those incurred to enforce this Agreement, and interest
thereon in the event the arbitrators determine that Employee was terminated
without disability or good cause, as defined in Sections 5(b) and 5(c),
respectively, or that the Company has otherwise materially breached this
Agreement. A decision by a majority of the arbitration panel shall be final
and binding. Judgment may be entered on the
- 7 -
<PAGE>
arbitrators' award in any court having jurisdiction. The direct expense of
any arbitration proceeding shall be borne by the Company.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas with giving effect to Texas
conflicts laws provisions.
17. COUNTERPARTS. This Agreement may be executed simultaneously in two (2)
or more counterparts, each of which shall be deemed an original and all of
which together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
COMPANY:
DESIGN AUTOMATION SYSTEMS, INC.
By: /s/ Carl R. Rose
--------------------------------
Name: Carl R. Rose
EMPLOYEE:
/s/ Kelly Knake
--------------------------------
Kelly Knake
- 8 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET MARCH 15, 1999 CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,245,829
<SECURITIES> 0
<RECEIVABLES> 5,204,895
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,705,568
<PP&E> 260,093
<DEPRECIATION> 127,170
<TOTAL-ASSETS> 9,736,638
<CURRENT-LIABILITIES> 6,870,040
<BONDS> 0
0
0
<COMMON> 20,760
<OTHER-SE> 2,845,838
<TOTAL-LIABILITY-AND-EQUITY> 9,736,638
<SALES> 7,675,309
<TOTAL-REVENUES> 7,675,309
<CGS> 6,894,075
<TOTAL-COSTS> 7,638,323
<OTHER-EXPENSES> 23,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 78,228
<INCOME-TAX> (26,300)
<INCOME-CONTINUING> 51,928
<DISCONTINUED> (26,976)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,952
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
