-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RCLXxAO5YOxxfgoPS4/KDmGxvlaxTCY0Pjf9qp2DkHC+KjCLB7FYkvA517iAu3X/ NjV47egDEzX8InPo2IzWOg== 0000898430-01-500575.txt : 20010516 0000898430-01-500575.hdr.sgml : 20010516 ACCESSION NUMBER: 0000898430-01-500575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAOU SYSTEMS INC CENTRAL INDEX KEY: 0001003989 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 330284454 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22073 FILM NUMBER: 1634833 BUSINESS ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 BUSINESS PHONE: 8584522221 MAIL ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 10-Q 1 d10q.txt FORM 10-Q 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, 2001 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 5, 2001: 16,838,523 DAOU SYSTEMS, INC. Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page ------ Item 1. Condensed Financial Statements 2 Condensed Balance Sheets at March 31, 2001 (unaudited) and December 31, 2000 2 Condensed Statements of Operations (unaudited) for the three months ended March 31, 2001 and 2000 3 Condensed Statements of Cash Flows (unaudited) for the three months ended March 31, 2001 and 2000 4 Notes to Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure about Market Risk 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14
1 PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements DAOU Systems, Inc. Condensed Balance Sheets (In thousands, except for per share data)
March 31, December 31, 2001 2000 ------------------------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 10,857 $ 10,504 Short-term investments, available-for-sale 49 82 Accounts receivable, net of allowance for doubtful accounts of $1,091 and $1,138 at March 31, 2001 and December 31, 2000, respectively 11,189 11,900 Contract work in progress 932 665 Other current assets 375 558 ----------------------------- Total current assets 23,402 23,709 Equipment, furniture and fixtures, net 1,962 2,565 Other assets 116 163 ----------------------------- Total Assets $ 25,480 $ 26,437 ============================= Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable and other accrued liabilities $ 2,884 $ 3,288 Accrued salaries and benefits 2,230 2,273 Current portion of severance payable 210 210 ----------------------------- Total current liabilities 5,324 5,771 Long-term liabilities 256 306 Commitments and contingencies Stockholders' equity: Convertible preferred stock, $.001 par value. Authorized 3,520 shares; issued and outstanding 2,182 shares at March 31, 2001 and December 31, 2000 2 2 Common stock, $.001 par value. Authorized shares 50,000 shares; issued and outstanding 17,831 shares at March 31, 2001 and December 31, 2000 18 18 Additional paid-in capital 51,809 51,614 Accumulated other comprehensive loss (82) (49) Accumulated deficit (31,847) (31,225) ----------------------------- Total stockholders' equity 19,900 20,360 ----------------------------- Total Liabilities and Stockholders' Equity $ 25,480 $ 26,437 =============================
See accompanying notes to the condensed financial statements. 2 DAOU Systems, Inc. Condensed Statements of Operations (In thousands, except for per share data) (unaudited)
Three Months Ended March 31, 2001 2000 ------- ------- Revenues $12,760 $17,575 Cost of revenues 9,424 15,956 ------- ------- Gross profit 3,336 1,619 Operating expenses: Sales and marketing 926 1,790 General and administrative 2,915 4,464 ------- ------- 3,841 6,254 ------- ------- Loss from operations (505) (4,635) Interest income, net 139 169 ------- ------- Loss before income taxes (366) (4,466) Provision for income taxes (61) - ------- ------- Net loss (427) (4,466) Accrued dividends on preferred stock (195) (184) ------- ------- Net loss available to common stockholders $ (622) $(4,650) ======= ======= Basic and diluted net loss available to common stockholders per common share $(0.03) $ (0.26) ======= ======= Shares used in computing basic and diluted net loss available to common stockholders per share 17,831 17,712 ======= =======
See accompanying notes to the condensed financial statements. 3 DAOU Systems, Inc. Condensed Statements of Cash Flows (In thousands) (unaudited)
Three Months Ended March 31, 2001 2000 ------- ------- Operating activities Net loss $ (427) $(4,466) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 364 637 Provision for uncollectible accounts 367 75 Loss on retirement of fixed assets 315 - Changes in operating assets and liabilities: Accounts receivable 344 4,980 Contract work in process (267) (927) Other current assets 183 (612) Accounts payable and accrued liabilities (404) (1,679) Accrued salaries and benefits (43) (542) Other accounts (50) 19 ------- ------- Net cash provided by (used in) operating activities 382 (2,515) Investing Activities: Purchases of equipment, furniture and fixtures, net (76) (407) Changes in other assets 47 84 ------- ------- Net cash used in investing activities (29) (323) Increase (decrease) in cash and cash equivalents 353 (2,838) Cash and cash equivalents at beginning of period 10,504 15,480 ------- ------- Cash and cash equivalents at end of period $10,857 $12,642 ======= =======
See accompanying notes to the condensed financial statements. 4 DAOU SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited condensed financial statements of DAOU Systems, Inc. ("DAOU" or the "Company") at March 31, 2001 and for the three-month periods ended March 31, 2001 and 2000 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, 2001 and the results of operations for the three-month periods ended March 31, 2001 and 2000. The results of operations for the three-months ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. 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, 2001. The Company has two operating divisions: Application Services and Technology Services. The Application Services division provides clients with strategic consulting (eHealth, mHealth, HIPAA, and application selection), software implementation, project management, and support services, including staff augmentation. The Technology Services division provides clients with solutions in key areas, including network infrastructure (servers, data and voice networks, and security), web development and integration projects, help desk solutions (remote or on-site) and network management. 2. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about the future that affect the amounts reported in the financial statements and disclosures made in the accompanying notes of the financial statements. The actual results could differ from those estimates. 3. Lines of Credit On June 29, 1999, the Company obtained an $8.0 million revolving line of credit, which expires June 29, 2001. The line of credit bears interest at prime plus 1% per annum and is secured by substantially all of the assets of the Company and contains customary covenants and restrictions. There are no compensating balance requirements and borrowings under the line of credit are limited to 80% of qualifying receivables. At March 31, 2001, the Company was not in compliance with certain debt covenants; however, the Company obtained a waiver from the lender through the term of the line of credit. No amounts were outstanding under this revolving line of credit as of March 31, 2001. 4. 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. 5 Diluted net loss per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options and warrants. For the three months ended March 31, 2001 and 2000, 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 anti-dilutive. The following table details the computation of basic and diluted net loss per share: (In thousands, except per share information) (unaudited)
Three Months Ended March 31, 2001 2000 --------------------------- Numerator: Net loss available to common stockholders $ (622) $(4,650) Denominator: Denominator for basic net loss per share-weighted average common shares outstanding 17,831 17,712 --------------------------- Denominator for diluted net loss per share-adjusted weighted average common shares outstanding 17,831 17,712 =========================== Basic net loss per share $ (0.03) $ (0.26) =========================== Diluted net loss per share $ (0.03) $ (0.26) ===========================
5. Comprehensive Loss Comprehensive income (loss) for the three months ended March 31, 2001 and 2000 totaled $(655,000) and $(4,651,000), respectively. The difference from reported net loss arises from the unrealized gains and losses on short-term investments. 6. 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, 2001, the Company has accrued but undeclared preferred stock dividends of approximately $1.3 million, which is payable in shares of Series A Preferred Stock. 7. Restructuring Plan In connection with its restructuring plan, the Company recorded restructuring charges in fiscal 2000, totaling $2,133,000. Such charges were determined in accordance with Staff Accounting Bulletin No. 100, RESTRUCTURING AND IMPAIRMENT CHARGES, and Emerging Issues Task Force No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). 6 The following table summarizes the restructuring and other related charges paid in 2001 and remaining charges in accrued liabilities as of March 31, 2001.
Restructuring Charges -------------------------------------------------------------- Accrued as of Paid in Three Accrued as of December 31, Months Ended March 31, 2000 March 31, 2001 2001 -------------------------------------------------------------- Severance costs for involuntary employee terminations $ 388,000 $388,000 $ - Costs related to closure and combination of facilities 918,000 315,000 603,000 -------------------------------------------------------------- $1,306,000 $703,000 $603,000 ==============================================================
8. Disclosure of Segment Information For the three months ended March 31, 2001 and 2000 the Company has the following two reportable segments: Application Services division and Technology Services division. The Application Services division provides clients with the following: . Strategic consulting (eHealth, mHealth, HIPAA, and application selection) . Software implementation . Project management . Support services, including staff augmentation The Technology Services division provides clients with solutions in key areas, including: . Network infrastructure (servers, data and voice networks and security) . Web development and integration projects . Help desk solutions (remote or on-site) . Network management The Company manages segment reporting at a gross margin level. Selling, general and administrative expenses, and fixed 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.
Technology Application Services Services Total ---------------------------------------------------------------- Three months ended March 31, 2001 (In 000's) - -------------------------------------------- Total revenues $ 8,154 $4,606 $12,760 Cost of services 6,287 3,137 9,424 ---------------------------------------------------------------- Gross profit 1,867 1,469 3,336 Gross profit percent 23% 32% 26% Sales and marketing 926 General and administrative 2,915 ------- Loss from operations $ (505) ======= Three months ended March 31, 2000 (In 000's) - -------------------------------------------- Total revenues $11,778 $5,797 $17,575 Cost of services 10,279 5,677 15,956 ---------------------------------------------------------------- Gross profit 1,499 120 1,619 Gross profit percent 13% 2% 9% Sales and marketing 1,790 General and administrative 4,464 ------- Loss from operations $(4,635) =======
7 9. Termination of Outsourcing Agreement The Company provided on-site outsourcing services to a customer under a five- year outsourcing agreement which began January 1, 1999. On March 30, 2001, the Company entered into a termination agreement in which the outsourcing agreement terminated as of March 31, 2001. Under the termination agreement, the customer will pay the Company a transition fee of $643,000, which will be recorded in the second and third quarters of 2001, and all of the Company's on-site employees transferred to the customer effective April 1, 2001. 10. 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. They filed an amended consolidated complaint on February 24, 1999 and a second amended consolidated complaint on January 21, 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 February 22, 2000 in the federal litigation. That motion was heard on February 20, 2001 and the court took the matter under submission. 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. 8 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 Forms 10-K and 10- K/A-1 for the year ended December 31, 2000 on file with the SEC, and in the Company's Proxy Statement Schedule 14A Information filed with the SEC on May 14, 2001. 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. Recent Events On March 30, 2001, the Company entered into a termination agreement with Saint Mary's Health Network ("SMHN") to terminate its outsourcing contract, effective March 31, 2001. The decision to discontinue the agreement was mutual and an agreeable settlement was reached to immediately transfer the Company's on-site employees to SMHN. The settlement included a transition fee from SMHN in lieu of an extended transition period. The transition fee of $643,000 will be recognized as revenue ratably over the second and third quarters, offsetting the negative impact of discontinuing the entire contract during that period. The Company will continue to provide selected IT project support to SMHN on an ongoing basis. On April 24, 2001, the Company received notice from The Nasdaq Stock Market that its common stock will be quoted on the OTC Bulletin Board ("OTC"), under the symbol "DAOU", effective immediately. The Company's stock previously had been quoted on the The Nasdaq National Market, but the Company was no longer in compliance with the $1 minimum bid price requirement for continued listing. Overview DAOU performs applications consulting and implementation, traditional network services, remote help desk and related technology support services, and integrates legacy systems with emerging technologies, such as wireless and other portable computing solutions for the U.S. healthcare industry. The Company's service offerings are segmented into two divisions: Application Services and Technology Services. Application Services - provides clients with strategic consulting (eHealth, mHealth, HIPAA, and application selection), software implementation, project management, and support services, including staff augmentation. 9 Technology Services - provides clients with solutions in key areas, including network infrastructure, application development and integration projects, help desk solutions and network management. The Company provides its professional services primarily on a "time and expense" basis, under which revenues are generally recognized as services are performed. Billings for these services occur on a semi-monthly or monthly basis. The Company also provides support and management services, for which revenues are recognized ratably over the period that these services are provided. Revenues on fixed-fee contracts are recognized using the percentage-of-completion method with progress to completion measured by labor costs incurred to date compared to total estimated labor costs. The Company's gross margin with respect to fixed- fee contracts varies significantly depending on the percentage of such services consisting of third-party products (with respect to which the Company obtains a lower margin) 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. 10 Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net revenues.
Three Months Ended March 31, ----------------------- 2001 2000 ----- ---- Revenues 100% 100% Cost of revenues 74 91 ----- ---- Gross profit 26 9 Selling, general and administrative expenses 30 35 ----- ---- Loss from operations (4) (26) Interest income, net 1 1 ----- ---- Loss before income taxes (3) (25) Provision for income taxes - - ----- ---- Net loss (3) (25) ===== ====
Three Months Ended March 31, 2001 and 2000 The Company's revenues decreased 27% or $4.8 million to $12.8 million for the three months ended March 31, 2001 from $17.6 million for the three months ended March 31, 2000, primarily due to a decrease in revenue from the applications implementation services in the provider segment and network infrastructure services. In addition, the Company terminated two large unprofitable outsourcing contracts in the second quarter of 2000 and eliminated certain underperforming lines of services, including desktop computing. On March 30, 2001 the Company entered into an agreement to terminate an outsourcing contract for its largest customer effective March 31, 2001. The termination agreement included the transition of all on-site employees to the customer and a transition fee payable to the Company in the amount of $643,000. The transition fee will be recognized ratably over the second and third quarters of 2001. Revenues related to this contract were $2.3 million for the three months ended March 31, 2001 and 2000. Services to DAOU's five largest customers accounted for 38% or $4.8 million of total revenues for the three months ended March 31, 2001. Cost of revenues decreased 41% or $6.6 million to $9.4 million for the three months ended March 31, 2001 from $16.0 million for the three months ended March 31, 2000, primarily as a result of reductions in personnel and material costs in line with the decrease in revenues and termination of unprofitable contracts. The Company further reduced the number of employees during 2000 and in the first quarter of 2001 in connection with its restructuring plan. Total employees as of March 31, 2001, were 272 compared to 648 as of March 31, 2000. Gross profit as a percentage of revenues increased to 26% for the three months ended March 31, 2001 compared to 9% for the three months ended March 31, 2000, primarily due to an increase in the billable utilization rate and the termination of certain unprofitable outsourcing contracts. Sales and marketing expenses decreased 50% or $0.9 million to $0.9 million for the three months ended March 31, 2001 from $1.8 million for the three months ended March 31, 2000, primarily due to a restructuring of the sales force. Sales and marketing expenses represented approximately 7% and 10% of total revenues for the three months ended March 31, 2001 and 2000, respectively. General and administrative expenses decreased 36% or $1.6 million to $2.9 million for the three months ended March 31, 2001 from $4.5 million for the three months ended March 31, 2000, primarily due to a reduction in corporate and subsidiary personnel and related overhead expenses. The Company has reduced the on-going general and administrative costs from the same period in 2000, primarily as a result of synergies related to the integration of acquired companies, the closure of certain administrative offices and a reduction in administrative staff. General and administrative expenses represented approximately 23% and 25% of total revenues for the three months ended March 31, 2001 and 2000, respectively. Other income, net, was $139,000 and $169,000 for the three months ended March 31, 2001 and 2000, respectively. Other income is primarily interest income on cash and cash equivalents and short-term investments. Provision for income taxes was $61,000 for the three months ended March 31,2001 due to various states' income taxes. The provision for income taxes is based on the Company's effective tax rate. Due to the Company's operating loss and the loss carryforwards, no provision for taxes was recorded for the three months ended March 31, 2000. The Company has fully reserved for the net deferred tax assets resulting from previously recorded tax benefits. 11 Liquidity and Capital Resources On March 31, 2001, the Company had working capital of $18.1 million, an increase of $200,000 from $17.9 million on December 31, 2000. For the three months ended March 31, 2001, cash provided by operating activities was $382,000 compared to cash used in operating activities of $2.5 million for the three months ended March 31, 2000. The increase resulted primarily from increased gross margin and reduced operating expenses; and decreases in accounts receivable and contract work in progress; offset by decreases in accrued salaries and benefits. Net cash used in investing activities was $29,000 in the current period, compared to net cash used in investing activities of $323,000 in the comparable prior period, primarily due to fewer equipment purchases. 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. Accrued dividends payable in shares of Series A Preferred Stock was $1,253,000 as of March 31, 2001. 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. At March 31, 2001, the Company was not in compliance with certain debt covenants; however, the Company obtained a waiver from the lender through the term of the line of credit. No amounts are outstanding under this revolving line of credit and there are no outstanding letters of credit as of March 31, 2001. Although the Company has an accumulated deficit as of March 31, 2001, the Company believes that its existing cash and short term investments together with anticipated cash from operating activities will be sufficient to meet its capital requirements for the foreseeable future. The Company may draw down its credit facility, 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. However, there can be no assurance that the Company will be able to sell additional equity or debt securities or be able to obtain additional financing on terms acceptable to it, if at all. 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. 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, 2001, 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. 12 PART II OTHER INFORMATION Item 1. Legal Proceedings On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998, separate complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of California. A group of shareholders has been appointed the lead plaintiffs. They filed an amended consolidated complaint on February 24, 1999 and a second amended consolidated complaint on January 21, 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 February 22, 2000 in the federal litigation. That motion was heard on February 20, 2001 and the court took the matter under submission. The Company believes that the allegations set forth in all of the foregoing complaints are without merit and intends to defend against these allegations vigorously. No assurance as to the outcome of this matter can be given, however, and an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations and financial condition. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ---------- ----------- 10.1* Employment Agreement, dated October 2, 2000, by and between the Company and Neil R. Cassidy - ---------------- * Filed herewith (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, 2001. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Date: May 14, 2001 DAOU SYSTEMS, INC. By: /s/ James T. Roberto --------------------------------- James T. Roberto President and Chief Executive Officer, Duly authorized officer By: /s/ Neil R. Cassidy -------------------------------- Neil R. Cassidy Executive Vice President, Chief Financial Officer, and Secretary, Principal financial and accounting officer. 14 Exhibit Index 10.1* Employment Agreement, dated October 2, 2000, by and between the Company and Neil R. Cassidy
* Filed herewith EX-10.1 2 dex101.txt EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is by and between DAOU --------- Systems, Inc., a Delaware corporation ("Employer"), and Neil R. Cassidy, an -------- individual resident of California ("Employee"). -------- AGREEMENT The parties to this Agreement, intending to be legally bound, agree as follows: 1. Effective Date. Employee's employment with Employer under this -------------- Agreement commenced October 2, 2000 (the "Effective Date"). -------------- 2. Employment Terms and Duties. --------------------------- 2.1 Employment. Employer employs Employee, and Employee accepts ---------- employment by Employer (the "Employment"), upon the terms and conditions set ---------- forth in this Agreement. 2.2 At-Will Employment. Employee's employment relationship with ------------------ Employer is at-will, terminable at any time and for any reason with or without notice by either Employer or Employee. Employer may terminate Employee with or without Cause (as defined below in Section 7.1). Although certain provisions of this Agreement describe events that could occur at a particular time in the future, nothing in this Agreement may be construed as a guarantee of Employee's employment for any length of time. 2.3 Duties. As of the Effective Date, Employee will serve as ------ Executive Vice President and Chief Financial Officer and will have such duties as are assigned or delegated to Employee by the President of Employer (the "President"). Employee will: (i) devote his entire business time, attention, --------- skill, and energy exclusively to the business of Employer; (ii) use his best efforts to promote the success of Employer's business; and (iii) cooperate fully with the President and the Board of Directors of Employer in the advancement of the best interests of Employer. 2.4 Compliance with Employer's Policies. Employee acknowledges and ----------------------------------- agrees that compliance with Employer's policies, practices and procedures is a term and condition of the Employment under this Agreement. Employee agrees to comply with the terms and conditions of Employer's Employee Confidentiality and Inventions Agreement, a copy of which is attached to this Agreement as Exhibit A and is incorporated by this reference. - --------- 2.5 Place of Employment. As of the Effective Date, Employee performs ------------------- his duties from a home office, and from Employer's corporate offices as necessary. Employer agrees to maintain the current telecommuting arrangement for so long as that arrangement does not impact negatively Employer's business or Employee's ability to perform his duties. Employer may, in its sole discretion, require that Employee perform his duties from Employer's corporate offices on up to and including a full-time basis. If Employer exercises its discretion under this Section 2.5, Employer will provide a relocation package for Employee in an amount Employer determines is appropriate. 3. Compensation. ------------ 3.1 Salary. Employee will be paid an annual salary of One Hundred and ------ Eighty Thousand Dollars ($180,000) (the "Salary"), less any applicable state and ------ federal taxes or other payroll deductions. The Salary will be payable in equal periodic installments according to Employer's customary payroll practices. Any adjustment to the Salary is at the sole discretion of Employer. 3.2 Benefits. Employee may participate in such sick leave, pension, -------- profit sharing, life insurance, hospitalization, long term disability, major medical and other employee benefit plans of Employer (collectively, the "Benefits"), that may be in effect from time to time for management level -------- employees, to the extent that Employee is eligible under the terms of those plans. 3.3 Additional Compensation. As additional compensation for the ----------------------- services rendered by Employee pursuant to this Agreement, Employee is eligible for a quarterly bonus of up to $20,000 in accordance with Employer's Incentive Compensation Plan (the "Additional Compensation"). Employee is eligible for a ----------------------- pro-rated portion of the Additional Compensation for the period of 2000 after the Effective Date. In order to be eligible for the Additional Compensation, Employee shall be employed by Employer on the date that the Additional Compensation, if any, is customarily distributed by Employer. 4. Growth Incentive. ---------------- 4.1 Grant of Options. As soon as practicable after the Effective Date ---------------- Employer will grant to Employee stock options to purchase up to One Hundred Fifty Thousand (150,000) shares of Employer's Common Stock (the "Options"), of ------- which 150,000 Options shall be issuable under Employer's 1996 Stock Option Plan (the "Plan"). To the extent permissible under the Internal Revenue Code of 1986, ---- as amended, the Options will consist of 100,000 incentive stock options and 50,000 non-qualified stock options. The exercise price for the Options will be the closing price per share of the Company's Common Stock on the date of grant. In addition to the terms set forth in this Section 4, all of the Options (whether or not issued pursuant to the Plan) will be subject to such other terms, conditions and limitations as generally are included in the Plan and in any related stock option agreement, as well as applicable state and federal laws including, but not limited to, tax and securities laws. The Options will vest as set forth below in Section 4.2. 2 4.2 Vesting of the Options. The Options will vest as follows: ---------------------- (a) The 100,000 incentive stock options will vest in three (3) increments: 33,333 shares of Common Stock will vest on the first and second anniversaries, respectively, of the Effective Date, and 33,334 shares will vest on the third anniversary of the Effective Date; (b) The 50,000 non-qualified options will vest in three (3) increments: 16,667 shares of Common Stock will vest on the first and second anniversaries, respectively, of the Effective Date, and 16,666 shares will vest on the third anniversary of the Effective Date; (c) all unvested Options will vest and become exercisable in the event that Employee is terminated without Cause as defined in Section 7.1 or in the event of a Change in Control as defined in Section 7.2(b). 4.3 Continued Employment. Except as described in Section 4.2(c) of -------------------- this Agreement, vesting of the Options pursuant to this Agreement is earned only by continuing as an employee of Employer at the will of Employer (not through the act of being granted the Option or acquiring shares hereunder). This Agreement, the transactions contemplated under it and the vesting schedule set forth in this Agreement do not constitute an express or implied promise of continued employment for any period. 5. Facilities and Expenses. Employer will pay on behalf of Employee (or ----------------------- reimburse Employee for) reasonable expenses incurred by Employee at the request of, or on behalf of, Employer in the performance of Employee's duties pursuant to this Agreement, and in accordance with Employer's employment policies, including reasonable expenses incurred by Employee (a) while attending conventions, seminars and other business meetings, (b) for appropriate business entertainment activities, and (c) for appropriate promotional expenses. In addition, Employer will reimburse Employee for the reasonable costs of equipping a home office (e.g. computer, phone line, printer and facsimile). Employee shall file expense reports with respect to such expenses in accordance with Employer's policies. 6. Vacations and Holidays. Employee will be entitled to up to four weeks ---------------------- paid vacation per year. Employee may carry-over from one year to the next any accrued but unused vacation up to a maximum of six weeks of vacation. Once Employee accrues the maximum vacation, he will not accrue additional vacation until he takes enough vacation to bring his accrual below the maximum. Employee may take vacation at such time or times as approved by the President. Employee is entitled to holidays in accordance with the holiday policies of Employer in effect for its employees from time to time. 7. Payment upon Termination of Employment. Upon termination of Employee's -------------------------------------- Employment, Employer will be obligated to pay to Employee only such compensation as is provided in this Section 7. 7.1 Termination of Employee without Cause. In the event Employee's ------------------------------------- employment is terminated by the Company for a reason other than Cause (as defined in section 7.2(c)), except under circumstances in which such termination constitutes a Change of Control Termination (as defined in section 7.2(a) below), Employee will receive any earned portion of 3 Salary and accrued but unused vacation through the date of such termination (the "Termination Date") and severance payments in an aggregate amount equal to (a) ---------------- the Salary plus (b) an amount equal to the Additional Compensation, if any, paid to Employee during the twelve (12) month period preceding the Termination Date (the "Severance Payment"). All payments will be less Applicable state and federal taxes and/or other payroll deductions. The Severance Payment will be paid in a lump sum within 45 days of termination. Further, if Employee elects to continue insurance coverage as afforded to Employee according to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), Employer (or ----- its successor) will reimburse Employee the amount of the premiums incurred by Employee during the period beginning on the Termination Date and 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 Employer assuming any responsibility Employee has for formally electing to continue coverage. 7.2 Termination of Employee without Cause or Resignation by Employee ---------------------------------------------------------------- for Good Reason following a Change in Control. In the event of a Change in - --------------------------------------------- Control Termination (as defined below), Employee will receive any earned portion of Salary and accrued but unused vacation through the Termination Date, less applicable state and federal taxes and/or other payroll deductions. Further, if Employee elects to continue insurance coverage as afforded to Employee according to COBRA, Employer (or its successor) will reimburse Employee the amount of the premiums incurred by Employee during the period beginning on the Termination Date and 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 that Employee has for formally electing to continue coverage. (a) A "Change in Control Termination" of the employment ----------------------------- relationship occurs if (i) Employee's employment is terminated by the Company (or its successor or subsidiary) for a reason other than Cause or (ii) Employee resigns for Good Reason (as defined below), within twenty four (24) months following a Change in Control (as defined below). (b) "Change in Control" is defined to have occurred if, and only ----------------- if: (i) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes ------------ the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of Employer representing 50% or more of the combined voting power of Employer's then outstanding securities entitled to vote in the election of directors of Employer; (ii) there occurs a reorganization, merger, consolidation or other corporate transaction involving Employer ("Transaction"), in each case, ----------- with respect to which the stockholders of Employer immediately prior to such Transaction do not, immediately after the Transaction, own more than fifty percent (50%) of the combined voting power of Employer or other corporation resulting from such Transaction; or 4 (iii) all or substantially all of the assets of Employer are sold, liquidated or distributed. (c) Definition of Cause. A termination for "Cause" occurs if ------------------- ----- Employee is terminated for any one of the following reasons: (i) Employee's material breach of this Agreement; (ii) Employee's material failure to adhere to any written policy of Employer generally applicable to officers of Employer if Employee has been given a reasonable opportunity to comply with such policy or cure his failure to comply (which reasonable opportunity must be granted during the ten-day period preceding termination); (iii) the appropriation (or attempted appropriation) of a material business opportunity of Employer, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of Employer; (iv) the misappropriation (or attempted misappropriation) of any of Employer's funds or property; (v) the conviction of, or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; or (vi) willful misconduct. (d) Resignation by Employee for Good Reason. Employee shall have --------------------------------------- the right to terminate his employment with Employer, and such termination shall, for purposes of this Agreement, be considered a resignation by Employee for "Good Reason" if Employer: (i) changes Employee's position and title from ----------- Executive Vice President and Chief Financial Officer to a title and position of decreased responsibility or salary; or (ii) Employee's place of employment is located more than 50 miles from the current corporate location in San Diego, California. Employee's resignation will not be for Good Reason unless Employee communicates to Employer in writing his intent to resign for Good Reason; and (ii) Employer does not remedy the circumstances giving rise to Good Reason in a manner which is reasonably satisfactory to Employee within thirty (30) days of Employer's receipt of such written notice. (e) Employee Obligations upon Resignation for Good Reason. If ----------------------------------------------------- Employee resigns his employment for Good Reasons following a Change in Control, payment of the Severance Payment further is contingent upon Employee's willingness, at the Employer's (or its successor's) request, to continue performing his duties on behalf of Employer (or its successor) in good faith for up to sixty (60) days following the occurrence of the events described in Section 7.2; provided, however, that Employee shall not be required to travel. -------- ------- Employer (or its successor) will pay Employee his regular Salary and Employee will continue to accrue vacation according to the Company's (or its successor's) regular policies during the up-to sixty (60) day period and Employee will receive the Severance Payment upon completion of that period. 7.3 Termination of Employment following Death or Disability. Where the ------------------------------------------------------- Employment is terminated following Employee's death or where the Employment is terminated as a result of Employee suffering a disability which cannot be reasonably accommodated and which renders him unable to perform the essential functions of his position for 120 days, Employee is eligible for payment of the Salary and accrued but unused vacation through the Termination Date. 7.4 Termination for Any Other Reason. In the event that Employee's -------------------------------- employment terminates under any circumstance other than that described in Sections 7.1 and 7.2, 5 Employee will be entitled to receive the portion of the Salary earned and any vacation accrued and owing to Employee only through the Termination Date. 7.5 Benefits. Except where specifically provided by this Agreement, -------- Employee's accrual of, or participation in plans providing for, the Benefits will cease at the effective date of Employee's termination, and Employee will be entitled to accrued Benefits pursuant to such plans only as provided in such plans. 7.6 Release in Exchange for Payment. Employee's receipt of any ------------------------------- severance payment or COBRA payment described in section 7.1 or 7.2 is conditioned upon Employee executing a release of all claims effective as of the Termination Date, in substantially the form attached to this Agreement as Exhibit B. - --------- 8. General Provisions. ------------------ 8.1 Representations and Warranties by Employee. Employee represents ------------------------------------------ and warrants to Employer that the execution of this Agreement and the performance by Employee of his obligations under this Agreement will not: (a) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to Employee; or (b) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which Employee is a party or by which Employee is or may be bound. 8.2 Obligations Contingent on Performance. The obligations of ------------------------------------- Employer hereunder, including its obligation to pay the compensation provided for herein, are contingent upon Employee's performance of Employee's obligations hereunder. 8.3 Waiver. The rights and remedies of the parties to this Agreement ------ are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law: (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 8.4 Binding Effect; Delegation of Duties Prohibited. This Agreement ----------------------------------------------- shall inure to the benefit of, and shall be binding upon, the parties and their respective successors, assigns, heirs, and legal representatives, including any entity with which Employer may merge or consolidate or to which all or substantially all of its assets may be transferred. The duties and covenants of Employee under this Agreement, being personal, may not be delegated. 8.5 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 6 confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Employer: DAOU Systems, Inc. 5120 Shoreham Place San Diego, CA 92122 Attention: President Facsimile No.: (619) 452-2789 With a copy to: Baker & McKenzie 101 West Broadway, Twelfth Floor San Diego, California 92101-3890 Attention: Clark Libenson, Esq. --------- Facsimile No.: (619) 236-0429 If to Employee: Neil R. Cassidy Home office address on file with the Company Facsimile No.: on file with the Company 8.6 Entire Agreement; Amendments. This Agreement, including its ---------------------------- exhibits, contains the entire agreement between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings, oral or written, between the parties with respect to the subject matter of this Agreement. In particular, this Agreement supersedes and replaces the Retention Agreement Employee executed on March 1, 2000, and that Retention Agreement now is without effect or enforceability. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties to this Agreement. 8.7 Governing Law. This Agreement will be governed by the laws of ------------- the State of California without regard to conflicts of law principles. 8.8 Jurisdiction. Any proceeding seeking to enforce any provision of, ------------ or based on any right arising out of, this Agreement will be brought against any of the parties in the courts of the state in which the defendant in such action or proceeding resides or is domiciled, or, if it has or can acquire jurisdiction, in the United States District Court for the district of the state in which such defendant resides or is domiciled, and each of the parties consents to the jurisdiction of such courts (and of the appropriate appellate courts) in any such action or proceeding and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any party anywhere in the world. 8.9 No Undue Influence. This Agreement is executed voluntarily and ------------------ without any duress or undue influence. Employee acknowledges that he has read this Agreement and executed it with his full and free consent. No provision of this Agreement shall be construed against any party by virtue of the fact that such party or its counsel drafted such provision or the entirety of this Agreement. 7 8.10 Arbitration. Employee and Employer agree that any dispute or ----------- claim including all contract, tort, discrimination, harassment and other statutory claims arising under or relating to Employee's employment or termination of that employment with Employer, and including the arbitrability of those claims, but excepting claims under the applicable workers compensation law and unemployment insurance claims ("arbitrable claims") alleged against Employer and/or its agents, and/or any claims against Employee by Employer shall be resolved exclusively by arbitration. HOWEVER, Employee and Employer agree that this arbitration provision shall not apply to any disputes or claims Employee or Employer have relating to or arising out of the misuse or misappropriation of Employer's trade secrets or Confidential Information. Such arbitration shall be final and binding on the parties and shall be the exclusive remedy for arbitrable claims. Employee and Employer waive any rights either may have to a jury trial in regard to the arbitrable claims. Arbitration shall be conducted by the American Arbitration Association in San Diego, California (or mutually agreed upon city) under the National Rules for the Resolution of Employment Disputes. In any arbitration the burden of proof shall be allocated as provided by applicable law. Employer agrees to pay the fees and costs of the arbitrator, as may be required by applicable law. However, the arbitrator shall have the same authority as a court to award equitable relief, damages, costs and fees as provided by law for the particular claim asserted. 8.11 Section Headings, Construction. The section headings in this ------------------------------ Agreement are provided for convenience only and will not affect its construction or interpretation. 8.12 Severability. If any provision of this Agreement is held ------------ invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 8.13 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. DAOU SYSTEMS, INC. NEIL CASSIDY: By: /s/ James T. Roberto By: /s/ Neil R. Cassidy ------------------------------- ----------------------------------- James T. Roberto, President and Neil R. Cassidy Chief Executive Officer 8 -----END PRIVACY-ENHANCED MESSAGE-----