-----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, FJQaqokmjXbOphXz29GCmD9v4avbpMCIwKd95pCvG8NyE0lRezQBhm3wybN7Uizu HxXgEpCGws0LoiBRiSf0mQ== 0000912057-00-024700.txt : 20000516 0000912057-00-024700.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024700 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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: 634180 BUSINESS ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 BUSINESS PHONE: 6194522221 MAIL ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 10-Q 1 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, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ___________, Commission File No.: 000-22073 DAOU SYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 33-0284454 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5120 Shoreham Place San Diego, California 92122 (Address of principal executive offices) (Zip Code) (858) 452-2221 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No --- --- The number of shares of Registrant's Common Stock, par value $.001 per share, outstanding as of May 12, 2000: 17,712,368 1 DAOU SYSTEMS, INC. Index to Form 10-Q
PART I. FINANCIAL INFORMATION Page ---------- Item 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets at March 31, 2000 (unaudited) and December 31, 1999 3 Condensed Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15
2 PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements DAOU Systems, Inc. Condensed Consolidated Balance Sheets (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
MARCH 31, DECEMBER 31, 2000 1999 (UNAUDITED) ------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 12,642 $ 15,480 Short-term investments, available-for-sale 59 68 Accounts receivable, net of allowance for doubtful accounts of $1,849 and $1,868 at March 31, 2000 and December 31, 1999, respectively 16,857 21,912 Contract work in progress 3,743 2,816 Income tax receivable - 378 Other current assets 1,660 670 ------------------------------------ Total current assets 34,961 41,324 Due from officers/stockholders 95 98 Equipment, furniture and fixtures, net 4,126 4,319 Other assets 246 319 ------------------------------------ TOTAL ASSETS $ 39,428 $ 46,060 ==================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable and other accrued liabilities $ 3,019 $ 4,698 Accrued salaries and benefits 3,706 4,248 Current portion of severance payable 210 210 ------------------------------------ Total current liabilities 6,935 9,156 Long-term liabilities 567 548 Commitments and contingencies Redeemable convertible preferred stock, $.001 par value. Authorized 3,520 shares; issued and outstanding 2,182 shares at March 31, 2000 and December 31, 1999 11,566 11,382 Stockholders' equity: Common stock, $.001 par value. Authorized shares 50,000 shares; issued and outstanding 17,712 shares at March 31, 2000 and December 31, 1999 18 18 Additional paid-in capital 37,395 37,395 Deferred compensation (155) (192) Accumulated other comprehensive income (44) (43) Retained deficit (16,854) (12,204) ------------------------------------ Total stockholders' equity 20,360 24,974 ------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,428 $ 46,060 ====================================
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 DAOU Systems, Inc. Condensed Consolidated Statements of Operations (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 ------------------ ------------------ Revenues $ 17,575 $ 27,323 Cost of revenues 15,956 21,820 ------------------ ------------------ Gross profit 1,619 5,503 Operating expenses: Sales and marketing 1,790 2,905 General and administrative 4,464 5,336 ------------------ ------------------ 6,254 8,241 ------------------ ------------------ Loss from operations (4,635) (2,738) Interest income (expense), net 169 (86) ------------------ ------------------ Loss before income taxes (4,466) (2,824) Provision (benefit) for income taxes - (1,156) ------------------ ------------------ Net loss (4,466) (1,668) Accrued dividends on preferred stock (184) - ------------------ ------------------ Net loss available to common stockholders $ (4,650) $ (1,668) ================== ================== Basic and diluted net loss per common share $ (0.26) $ (0.09) ================== ================== Shares used in computing basic and diluted net loss per common share: 17,712 17,689 ================== ==================
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL statements. 4 DAOU Systems, Inc. Condensed Consolidated Statements of Cash Flows (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 ----------------- ------------------ OPERATING ACTIVITIES Net loss $ (4,466) $ (1,668) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 637 458 Provision for uncollectible accounts 75 98 Deferred income taxes - (1,158) Changes in operating assets and liabilities: Accounts receivable 4,980 (615) Contract work in process (927) 4,212 Other current assets (612) (170) Accounts payable and accrued liabilities (1,679) (1,686) Accrued salaries and benefits (542) 185 Other accounts 19 44 ----------------- ------------------ Net cash used in operating activities (2,515) (552) INVESTING ACTIVITIES: Purchases of equipment, furniture and fixtures (407) (337) Changes in other assets and maturities of short-term investments 84 74 ----------------- ------------------ Net cash used in investing activities (323) (265) FINANCING ACTIVITIES: Repayments of long-term debt and line of credit - (1,322) ----------------- ------------------ Net cash used in financing activities - (1,322) ----------------- ------------------ Decrease in cash and cash equivalents (2,838) (2,139) Cash and cash equivalents at beginning of period 15,480 6,756 ----------------- ------------------ Cash and cash equivalents at end of period $ 12,642 $ 4,617 ================= ==================
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 5 DAOU SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited condensed consolidated financial statements of DAOU Systems, Inc. ("DAOU" or the "Company") at March 31, 2000 and for the three-month periods ended March 31, 2000 and 1999 have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information. Accordingly, they do not include all information and footnotes required by GAAP for a complete set of financial statements. These financial statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary to fairly present the financial position of the Company at March 31, 2000 and the results of operations for the three month periods ended March 31, 2000 and 1999. The results of operations for the three months ended March 31, 2000 are not necessarily indicative of the results to be expected for the year ending December 31, 2000. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in revenues, expenses and net income or losses will continue. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financials should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 30, 2000 and in the Company's Proxy Statement Schedule 14A Information filed with the SEC on May 1, 2000. 2. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about the future that affect the amounts reported in the financial statements and disclosures made in the accompanying notes of the financial statements. The actual results could differ from those estimates. 3. Lines of Credit On June 29, 1999, the Company secured a replacement $8.0 million revolving line of credit, which expires June 29, 2001. The line of credit bears interest at prime plus 1% per annum and is secured by substantially all of the assets of the Company and contains customary covenants and restrictions. There are no compensating balance requirements and borrowings under the line of credit are limited to 80% of qualifying receivables. No amounts were outstanding under this revolving line of credit as of March 31, 2000. 4. Related Party Transactions In 1999, the Company provided implementation services to a company in which the Chairman of the Board is an investor. The Company has $514,000 in accounts receivable outstanding at March 31, 2000 related to the implementation services provided during 1999. 5. Net Loss Per Share Net loss per share is computed in accordance with FASB Statement No. 128, EARNINGS PER SHARE. Basic net loss per share is computed using the weighted average number of common shares outstanding during each period. 6 Diluted net loss per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options and warrants. In 1999, diluted loss per share is unchanged from basic loss per share because the effects of the assumed conversion of stock options and warrants would be antidilutive. The following table details the computation of basic and diluted net loss per share: (In thousands, except per share information) (unaudited)
Three Months Ended March 31, 2000 1999 ---------------- --------------- Numerator: Net loss available to common stockholders $ (4,650) $ (1,668) Denominator: Denominator for basic net loss per share - weighted average common shares outstanding 17,712 17,689 Effect of dilutive securities: Warrants - - Common stock options - - Preferred stock - - ---------------- --------------- - - ---------------- --------------- Denominator for diluted net loss per share -adjusted weighted average common shares outstanding 17,712 17,689 ================ =============== Basic net loss per share $ (0.26) $ (0.09) ================ =============== Diluted net loss per share $ (0.26) $ (0.09) ================ ===============
6. Comprehensive Loss Comprehensive loss for the three months ended March 31, 2000 and 1999 totaled $(4,651,000) and $(1,577,000), respectively. The difference from reported net loss arises from the unrealized gains and losses on short-term investments. 7. Series A Preferred Stock Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at the rate of six percent per annum, payable in the form of shares of Series A Preferred Stock. Such dividend rate shall increase an additional one-percent per annum for each successive year after the second anniversary of the purchase date. As of March 31, 2000, the Company has accrued but undeclared preferred stock dividends of $492,000, payable in shares of Series A Preferred Stock. 7 8. Disclosure of Segment Information For the three months ended March 31, 2000 and 1999, the Company has the following five reportable segments: information technology (IT) consulting and managed care implementation, communications infrastructure, applications implementation, integration services, and outsourcing. Beginning in early 2000, the Company formed a new segment, Enosus. The IT consulting and managed care implementation group focuses on providing senior consultants to assist healthcare management to plan and meet their business and IT objectives. The communications infrastructure group installs, implements and maintains IT infrastructure for healthcare organizations. The applications implementation group provides IT consulting resources to hospitals and other healthcare organizations. The integration services group concentrates on integration of existing healthcare systems (financial, clinical and management) to reduce overall costs and improve the quality of care. The outsourcing group performs a full range of IT outsourcing services including co-source or outsource of call centers, help desks, desktop support, server management, network management, voice management and complete IT department outsourcing. Enosus provides Internet professional services and solutions to healthcare and other organizations executing an eBusiness strategy. The Company manages segment reporting at a gross margin level. Sales and marketing, general and administrative expenses, and capital assets are managed at the corporate level separately from the segments and therefore are not separately allocated to the segments. The Company's segments are managed on an integrated basis in order to serve clients by assembling multi-disciplinary teams, which provide comprehensive services across its principal services.
IT Consulting and Managed Care Communications Application Integration Implementation Infrastructure Implementation Services Outsourcing Enosus Total -------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 2000 - ------------------------- Total revenues $ 1,400 $ 3,948 $ 4,397 $ 2,512 $ 5,271 $ 47 $ 17,575 Cost of services 1,323 3,453 4,354 2,175 4,489 160 15,956 -------------------------------------------------------------------------------------------- Gross profit 77 495 43 337 782 (113) 1,619 Gross profit percent 6% 13% 1% 13% 15% (240)% 9% Sales and marketing 1,790 General and administrative 4,464 -------- Loss from operations $ (4,635) ======== THREE MONTHS ENDED MARCH 31, 1999 - ------------------------- Total revenues $ 2,342 $ 8,450 $ 7,351 $ 3,421 $ 5,759 $ - $ 27,323 Cost of services 1,496 9,695 4,054 2,178 4,397 - 21,820 -------------------------------------------------------------------------------------------- Gross profit 846 (1,245) 3,297 1,243 1,362 5,503 - Gross profit percent 36% (15)% 45% 36% 24% 20% Sales and marketing 2,905 General and administrative 5,336 -------- Loss from operations $ (2,738) ========
9. Contingencies On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998, separate complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of California. A group of shareholders has been appointed the lead plaintiffs and they filed an amended consolidated complaint on February 24, 1999. The new complaint realleges the same theory of liability previously asserted, namely the alleged improper use of the percentage-of-completion accounting method for revenue 8 recognition. These complaints were brought on behalf of a purported class of investors in the Company's Common Stock and do not allege specific damage amounts. In addition, on October 7, 1998 and October 15, 1998, separate complaints were filed in the Superior Court of San Diego, California. These additional complaints mirror the allegations set forth in the federal complaints and assert common law fraud and the violation of certain California statutes. By stipulation of the parties, the state court litigation has been stayed pending the resolution of a motion to dismiss that was filed on April 12, 2000 in the federal litigation. The Company believes that the allegations set forth in all of the foregoing complaints are without merit and intends to defend against these allegations vigorously. No assurance as to the outcome of this matter can be given, however, and an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations and financial condition. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "expect" or similar expressions. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and are subject to numerous known and unknown risks and uncertainties. The forward-looking statements included herein are based on current expectations and entail various risks and uncertainties as those set forth herein and in the Company's other SEC filings, including those more fully set forth in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of the Company's Form 10-K for the year ended December 31, 1999 on file with the SEC, and in the Company's Proxy Statement Schedule 14A Information filed with the SEC on May 1, 2000. These risks and uncertainties could cause the Company's actual results to differ materially from those projected in the forward-looking statements. The Company disclaims any obligation to update or publicly announce revisions to any such statements to reflect future events or developments. OVERVIEW DAOU provides integrated information technology (IT) solutions and services to the U.S. healthcare and Internet professional services industries. The Company's capabilities range from strategic planning (using IT to support key business goals), to the design and integration of IT components (voice, video and data networks, application implementation, Internet infrastructure, data warehouses), to the management and delivery of operational services (IT department, desktop management, ASP services, network management), and to Internet solutions and professional services supporting organizations executing an eBusiness strategy. The Company's service offerings are segmented into the following business units: - - IT CONSULTING AND MANAGED CARE IMPLEMENTATION (IT Consulting) - develops business and IT strategic plans and solves execution challenges for managed care and healthcare delivery organizations, installs and integrates managed care applications, and manages IT systems. - - COMMUNICATIONS INFRASTRUCTURE - focuses on the IT infrastructure in healthcare enterprises, primarily IDNs, hospitals, academic medical centers and medical groups, provides networking, desktop, and voice, video and data solutions. - - APPLICATION IMPLEMENTATION - supplies hospitals and other healthcare organizations with temporary, certified consultants who are capable of installing and servicing approximately 90% of the most common healthcare software applications. - - INTEGRATION SERVICES - focuses on integration of the customers information systems with existing or new infrastructure that allow healthcare organizations to share and access data housed across multiple platforms and environments. - - OUTSOURCING - performs a full range of IT outsourcing services including co-source or outsource of call centers, help desks, desktop support, server management, network management, voice management and complete IT department outsourcing. - - ENOSUS - provides Internet professional services and solutions to organizations executing an eBusiness strategy. The Company's service offerings represent aggregated end-to-end healthcare IT solutions. Depending on the specific needs of its customers, the Company's relationships may begin anywhere along the IT solution process, 10 growing within one of the groups or developing cohesively across the complete end-to-end IT solution process from conceptualization to operation. The Company's gross margin with respect to fixed-fee based service contracts varies significantly depending on the percentage of third-party products versus professional services provided by the Company. Payments received in advance of services performed are recorded as deferred revenues. Certain contract payment terms may result in customer billing occurring at a pace slower than revenue recognition. The resulting revenues recognized in excess of amounts billed and project costs are included in contract work in progress on the Company's balance sheet. In 1999, the Company began to focus on providing its professional services on a "time and expense" basis, under which revenues are recognized as the services are performed. Billings for these services occur on a semi-monthly or monthly basis. The Company also provides support and management service revenues, which are recognized ratably over the period that these services are provided. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net revenues.
Three Months Ended March 31, 2000 1999 ----------------- ------------- Revenues 100% 100% Cost of revenues 91 80 ----------------- ------------- Gross profit 9 20 Operating expenses 35 30 ----------------- ------------- Loss from operations (26) (10) Interest income (expense), net 1 0 ----------------- ------------- Income (loss) before income taxes (25) (10) Provision (benefit) for income taxes - (4) ----------------- ------------- Net income (loss) (25) (6) ================= =============
The Company's revenues decreased 36% or $9.7 million to $17.6 million for the three months ended March 31, 2000 from $27.3 million for the three months ended March 31, 1999, primarily due to a continued lag in the Company's core health care information technology business, attributable largely to weak post Year 2000 market demand, and due to the closure of the Company's cabling division, DAOU On-line, Inc. Services to DAOU's five largest customers accounted for 33% or $5.8 million of total revenues for the three months ended March 31, 2000. Cost of revenues decreased 27% or $5.8 million to $16.0 million for the three months ended March 31, 2000 from $21.8 million for the three months ended March 31, 1999, primarily as a result of a decrease in revenue. Gross margin percentage decreased to 9% for the three months ended March 31, 2000 from 20% for the three months ended March 31, 1999, as a result of the reduced demand for professional services. Sales and marketing expenses decreased 38% or $1.1 million to $1.8 million for the three months ended March 31, 2000 from $2.9 million for the three months ended March 31, 1999, primarily due to the continued consolidation of sales and marketing efforts into the corporate office and a reduction of sales expenditures. Sales and marketing expenses represented approximately 10% and 11% of total revenues for the three months ended March 31, 2000 and 1999, respectively. General and administrative expenses decreased 15% or $800,000 to $4.5 million for the three months ended March 31, 2000 from $5.3 million for the three months ended March 31, 1999, primarily as a result of lower expenses caused by the integration of acquired companies and decreases in legal, travel and recruiting costs. General and administrative expenses represented approximately 25% and 20% of total revenues for the three months ended 11 March 31, 2000 and 1999, respectively. Other income (expense), net, was $169,000 and $(86,000) for the three months ended March 31, 2000 and 1999, respectively. Other income is primarily interest income on cash and cash equivalents, and short-term investments. Other expense consists primarily of interest associated with the Company's business lines of credit. The increase in net other income (expense), net, was primarily due to higher average cash reserves available for investment and reduced interest expense after the payoff of outstanding debt in 1999. Income taxes provided in 2000 are based on the Company's estimated effective tax rate. During 1999, the Company was estimating that it would receive tax benefit for its losses. In the fourth quarter, the tax benefit previously recorded was reversed due to the total loss in 1999. LIQUIDITY AND CAPITAL RESOURCES On March 31, 2000, the Company had working capital of $28.0 million, a decrease of $4.2 million from $32.2 million on December 31, 1999. For the three months ended March 31, 2000, cash used in operating activities was $2.5 million compared to cash used in operating activities of $552,000 for the three months ended March 31, 1999. This change resulted primarily from the loss from operations. Net cash used in investing activities was $323,000 in the current period, compared to net cash used in investing activities of $265,000 in the comparable prior period. This change resulted primarily from slightly increased equipment purchases for the three months ended March 31, 2000. Net cash used in financing activities was $0 for the three months ended March 31, 2000, compared to net cash used in financing activities of $1.3 million in the comparable prior period. This change resulted primarily from repayments of debt and lines of credit of acquired companies of $1.3 million during the three months ended March 31, 1999. On June 29, 1999, the Company secured an $8.0 million revolving line of credit that expires on June 29, 2001. The line of credit bears interest at prime plus 1% per annum, is secured by substantially all of the assets of the Company and contains customary covenants and restrictions. There are no compensating balance requirements and borrowings under the line of credit are limited to 80% of qualifying receivables. No amount remained outstanding under this revolving line of credit as of March 31, 2000. Although the Company has an accumulated deficit as of March 31, 2000, the Company believes that its available funds together with anticipated cash from operating activities will be sufficient to meet its capital requirements, including the start-up costs for Enosus, for the foreseeable future. The Company may sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities or issuance of equity securities in future acquisitions would result in dilution to the Company's stockholders and the incurrence of additional debt could result in additional interest expense. In July 1999, the Company issued 2,181,818 shares of Series A Preferred Stock. The Series A Preferred Stock accrues dividends at a six percent annual rate. Such rate will increase one percent each year after the second anniversary of the issue date of the Series A Preferred Stock. The dividend is payable in shares of Series A Preferred Stock except in the case of redemption or liquidation. The holders of the Series A Preferred Stock have the right to cause the Company to redeem their stock for an aggregate amount equal to $12 million, plus accrued dividends, which were $492,000 as of March 31, 2000, upon the occurrence of certain events that are outside the Company's control. If the Company is forced to redeem the Series A Preferred Stock, then the Company may be forced to sell additional equity or debt securities, or draw down its credit facility. The Company may not be able to raise additional capital on terms favorable to the Company, if at all. 12 BUSINESS RISKS In addition to the factors addressed in the preceding sections, certain dynamics of the Company's markets and operations create fluctuations in the Company's quarterly results. Uncertainty and cost containment in healthcare and competitive conditions present various other risks to operating results which are more fully described in the Company's Form 10-K filed with the SEC and other SEC filings. YEAR 2000 The Company has experienced no significant disruptions in its critical information technology and non-information technology systems and believes these systems responded successfully to the year 2000 date change. The Company is not aware of any material problems resulting from year 2000 compliance issues, either with its internal systems, or with the products and services of third parties. The Company will continue to monitor its critical computer applications, as well as those of its suppliers and vendors throughout the year 2000 to ensure that any latent year 2000 compliance matters that may arise are addressed promptly. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in interest rates, primarily from its variable-rate long-term debt arrangements and, to a lessor extent, its investments in certain available-for-sale marketable securities. Under its current policies, the Company does not use interest rate derivatives instruments to manage this exposure to interest rate changes. The Company does not have the option to convert its variable-rate long-term debt arrangement to fixed-rate debt arrangements for a nominal transaction fee. At March 31, 2000, the Company had no outstanding balance on its variable-rate debt. A hypothetical 1% adverse move in the interest rates along the entire interest rate yield curve would not materially effect the fair value of the Company's financial instruments that are exposed to changes in interest rates. 13 PART II OTHER INFORMATION 1. Legal Proceedings On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998, separate complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of California. A group of shareholders has been appointed the lead plaintiffs and they filed an amended consolidated complaint on February 24, 2000. The new complaint realleges the same theory of liability previously asserted, namely the alleged improper use of the percentage-of-completion accounting method for revenue recognition. These complaints were brought on behalf of a purported class of investors in the Company's Common Stock and do not allege specific damage amounts. In addition, on October 7, 1998 and October 15, 1998, separate complaints were filed in the Superior Court of San Diego, California. These additional complaints mirror the allegations set forth in the federal complaints and assert common law fraud and the violation of certain California statutes. By stipulation of the parties, the state court litigation has been stayed pending the resolution of a motion to dismiss, which was filed on April 12, 2000 in the federal litigation. That motion has been fully briefed and awaits the Court's ruling which will occur at the June 12, 2000 hearing on the matter. The Company believes that the allegations set forth in all of the foregoing complaints are without merit and intends to defend against these allegations vigorously. No assurance as to the outcome of this matter can be given, however, and an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations and financial condition. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit No. Description ----------- ----------- 10.1 Retention and Severance Agreement, dated as of March 1, 2000, by and between DAOU Systems, Inc. and Eric Ringwall 10.2 Retention and Severance Agreement, dated as of March 1, 2000, by and between DAOU Systems, Inc. and Stephen M. Casey 10.3 Retention and Severance Agreement, dated as of March 1, 2000, by and between DAOU Systems, Inc. and Donald R. Myll 27.1 Financial Data Schedule
(b) Current Reports on Form 8-K. The Registrant did not file any Current Reports on Form 8-K with the Commission during the quarter ended March 31, 2000. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: May 12, 2000 DAOU SYSTEMS, INC.
SIGNATURE TITLE DATE - --------------------------------------------------------------------------------------------------------- /s/ Larry D. Grandia President and Chief Executive Officer May 12, 2000 - ------------------------ (Principal Executive Officer) Larry D. Grandia /s/ Donald R. Myll Executive Vice President, Chief Financial Officer and Secretary May 12, 2000 - ------------------------ (Principal Financial and Accounting Officer) Donald R. Myll
15 Exhibit Index 10.1 Retention and Severance Agreement, dated as of March 1, 2000, by and between DAOU Systems, Inc. and Eric Ringwall 10.2 Retention and Severance Agreement, dated as of March 1, 2000, by and between DAOU Systems, Inc. and Stephen M. Casey 10.3 Retention and Severance Agreement, dated as of March 1, 2000, by and between DAOU Systems, Inc. and Donald R. Myll 27.1 Financial Data Schedule 16 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 RETENTION AND SEVERANCE AGREEMENT THIS RETENTION AND SEVERANCE AGREEMENT (this "AGREEMENT"), dated as of March 1, 2000, is made by and between DAOU Systems, Inc., a Delaware corporation ("DAOU"), and Eric Ringwall ("EMPLOYEE"). RECITALS WHEREAS, DAOU and each of its wholly-owned subsidiaries (collectively, the COMPANY") recognize that the possibility of a Change in Control (as defined below) of DAOU exists and that such possibility, including the uncertainty that such possibility may raise among the Company's key employees, may result in the departure or distraction of such employees to the detriment of the Company and DAOU's stockholders; WHEREAS, DAOU's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued employment of the Company's key employees without distraction from the possibility of a Change in Control of DAOU or any related events and circumstances; WHEREAS, Employee is a key employee of the Company; WHEREAS, the Company considers that providing Employee with certain retention and severance benefits will operate as an incentive for Employee to remain employed by the Company in the event of a Change in Control of DAOU. NOW THEREFORE, to induce Employee to remain employed by the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, DAOU and Employee agree as follows: AGREEMENT 1. DEFINITIONS. 1.1 "BASE SALARY" shall mean the Employee's gross annual salary as of the Termination Date. 1.2 "CAUSE" shall mean: (a) [Reserved.] (b) Employee's material failure to adhere to any written policy of the Company generally applicable to officers of the Company if Employee has been given a reasonable opportunity (but in no event later than thirty (30) days) to comply with such policy or cure his failure to comply; (c) the appropriation (or attempted appropriation) of a material business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (d) the misappropriation (or attempted misappropriation) of any of the Company's funds or property; (e) the conviction of, or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; (f) willful misconduct; (g) physical or mental disability or other inability to perform the essential functions of his position, with or without reasonable accommodation; or (h) death. 1.3 "CHANGE OF CONTROL" is defined to have occurred if, and only if, during Employee's employment: (a) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of DAOU representing fifty percent (50%) or more of the combined voting power of DAOU's then outstanding securities entitled to vote in the election of directors of DAOU; (b) there occurs a reorganization, merger, consolidation or other corporate transaction involving DAOU (a "TRANSACTION"), in each case, with respect to which the stockholders of DAOU immediately prior to such Transaction do not, immediately after the Transaction, own more than fifty percent (50%) of the combined voting power of DAOU or other corporation resulting from such Transaction; or (c) all or substantially all of the assets of DAOU are sold, liquidated or distributed. 1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.5 "CONTINGENT COMPENSATION PAYMENT" shall mean any payment (or benefit) in the nature of compensation that is made or supplied (under this Agreement or otherwise) to a "disqualified individual" (as defined in Section 280G(c) of the Code) and that is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Control of the Company. 1.6 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. 1.7 "EXCISE TAX" shall mean the amount, if any, of the excise tax payable pursuant to Section 4999 of the Code by Employee with respect to a Contingent Compensation Payment. 2 1.8 "GROSS-UP PAYMENT" shall mean an amount equal to the sum of (i) the amount of the Excise Tax payable with respect to a Contingent Compensation Payment, and (ii) the amount necessary to pay all additional taxes imposed on (or economically borne by) Employee (including the Excise Tax, state and federal income taxes and all applicable withholding taxes) attributable to the receipt of such Gross-Up Payment. For purposes of the preceding sentence, all taxes attributable to the receipt of the Gross-Up Payment shall be computed assuming the application of the maximum tax rates provided by law. 1.9 "RETENTION BONUS" shall mean the payment made pursuant to SECTION 4 of this Agreement. 1.10 "RESIGNATION FOR GOOD REASON" shall mean the voluntary resignation by Employee of his employment with the Company within two (2) years following a Change in Control and within three (3) months of the following "GOOD REASONS": (a) any reduction in Employee's Base Salary or Target Bonus; (b) any significant reduction in Employee's responsibilities and authority; or (c) a relocation by the Company of Employee's place of Employment outside a thirty-five (35) mile radius of Employee's current place of employment. An event described in Section 1.10(a) through (c) will not constitute Good Reason unless Employee provides written notice to the Company (or its successor) of his intention to resign for Good Reason and unless the Company (or its successor) does not cure the Good Reason within ten (10) days of the Company's (or its successor's) receipt of the written notice. 1.11 "TARGET BONUS" shall mean the variable annual cash compensation that Employee is eligible to receive, prior to a Change in Control, in the event targeted goals are achieved for the year. 1.12 "TERMINATION DATE" shall mean the date of termination of Employee's employment relationship with the Company. 1.13 "TERMINATION PAYMENTS" shall mean any payment or distribution of compensation or benefits made pursuant to SECTIONS 5.1 (a)-(d) of this Agreement. 2. TITLE AND DUTIES. Employee currently holds the positions of Chief Technology Officer of DAOU and Executive Vice President and Chief Operating Officer of Enosus, Inc. Employee will: (i) devote his entire business time, attention, skill, and energy exclusively to the business of the Company; (ii) use his best efforts to promote the success of the Company's business; and (iii) cooperate fully with the President and the Board of Directors of the Company in the advancement of the best interests of the Company. 3. AT-WILL EMPLOYMENT. Employee reaffirms that Employee's employment relationship with the Company is at-will, terminable at any time and for any reason by either the Company or Employee. While certain paragraphs of this Agreement describe events that could occur at a 3 particular time in the future, nothing in this Agreement may be construed as a guarantee of employment of any length. 4. RETENTION BONUS. If the Employee is continuously employed by the Company from the date of this Agreement through the consummation of a Change in Control, then, within fifteen (15) days after the consummation of such Change in Control, DAOU (or its successor) shall pay to Employee a lump sum amount equal to Two Hundred Seventy-Five Thousand Dollars ($275,000), less applicable state and federal taxes and/or other payroll deductions (the "RETENTION BONUS"). 5. TERMINATION PAYMENTS. 5.1 If, within two (2) years immediately following a Change in Control, Employee's employment with the Company (or its successor or subsidiary) terminates as the result of (i) termination by the Company (or its successor or subsidiary) of Employee's employment for a reason other than Cause or (ii) Employee's Resignation for Good Reason: (a) Employee will receive a pro-rata share of the Base Salary and Target Bonus accrued and owing to Employee through the Termination Date, less applicable state and federal taxes and/or other payroll deductions, and accrued but unused vacation, sick days and floating holidays through the Termination Date in accordance with the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions; (b) Within fifteen (15) days after the Termination Date, DAOU (or its successor) will pay to Employee a severance payment in a lump-sum amount equal to Five Hundred Fifty Thousand Dollars ($550,000), less applicable state and federal taxes and/or other payroll deductions; (c) GROSS-UP PAYMENT. In the event that (i) DAOU undergoes a Change in Control, and (ii) any payment to Employee under this Agreement triggers an obligation to pay an Excise Tax, then DAOU shall, within fifteen (15) days after the date on which such payment to Employee is made, pay to Employee the relevant Gross-Up Payment. (d) If Employee elects to continue insurance coverage as afforded to Employee according to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), DAOU (or its successor) will reimburse Employee the amount of the premiums incurred by Employee during the period beginning on the Termination Date and extend for twelve (12) months following the Termination Date. Nothing in this Agreement will extend Employee's COBRA period beyond the period allowed under COBRA, nor is the Company assuming any responsibility which Employee has for formally electing to continue coverage; 5.2 The payments set forth in SECTIONS 5.1(b), (c) AND (d) above are in exchange for, and contingent upon Employee's execution of a release of all claims as of the Termination Date, in substantially the form attached to this Agreement as EXHIBIT 1. 5.3 If Employee's employment terminates (i) for any reason after the two (2) year period immediately following a Change in Control or (ii) during that two (2) year period (A) for 4 Cause or (B) due to Employee's resignation without Good Reason, then DAOU (or its successor) will pay to Employee a pro-rata share of the Base Salary and Target Bonus accrued and owing to Employee through the Termination Date, less applicable state and federal taxes and/or other payroll deductions, and accrued but unused vacation, sick days and floating holidays through the Termination Date in accordance with the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions. 5.4 If Employee resigns his employment for Good Reasons described in Section 1.10 (b) above, payment of the above Termination Payments is further contingent upon Employee's willingness, at the Company's (or its successor's) request, to continue performing his duties on behalf of the Company (or its successor) in good faith for up to sixty (60) days following the occurrence of the events described in Section 1.10 (b); PROVIDED, HOWEVER, that Employee shall not be required to travel to perform his duties in good faith. DAOU (or its successor) will pay to Employee a pro-rata share of the Base Salary and Target Bonus and accrued but unused vacation, sick days and floating holidays according to the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions, during the up-to sixty (60) day period and will receive the Termination Payments upon completion of that period. 6. RETIREMENT AND PROFIT-SHARING PLANS. Notwithstanding anything in this Agreement to the contrary, Employee's rights in any retirement, pension or profit-sharing plans offered by the Company shall be governed by the rules of such plans as well as by applicable law. 7. TAX CONSEQUENCES. The Company makes no representations regarding the tax consequence of any provision of this Agreement. Employee is advised to consult with his own tax advisor with respect to the tax treatment of any payment contained in this Agreement. 8. [Reserved.] 9. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this Agreement shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association ("AAA") or of the Judicial Arbitration and Mediation Services ("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. The parties will be entitled to conduct discovery (i.e., investigation of facts through depositions and other means), which shall be governed by Section 1283.05 of the California Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and authority to enter orders relating to such discovery as are allowed under the CCP. The arbitrator shall apply California substantive law in all respects. The party prevailing in the resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all reasonable attorneys' fees and costs incurred in pursuit of the claim, without regard to any statute, schedule, or rule of court purported to restrict such award. 10. GENERAL PROVISIONS. 5 10.1 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of California. 10.2 ASSIGNMENT. Employee may not assign, pledge or encumber his interest in this Agreement or any part thereof. 10.3 AMENDMENTS; WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by both of the parties. No waiver of any provision or consent to any exception to the terms of this Agreement or any agreement contemplated hereby will be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent, and instance so provided. 10.4 SEVERABILITY. The provisions of this Agreement are severable; and, if any provision will be held to be invalid or otherwise unenforceable, in whole or in part, then the remainder of the provisions, or enforceable parts of this Agreement, will not be affected. 10.5 NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to the Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, CA 92122 ATTENTION: Chief Executive Officer Facsimile No.: (619) 452-2789 With a copy to: Baker & McKenzie 101 West Broadway, Twelfth Floor San Diego, California 92101-3890 ATTENTION: Carlos D. Heredia, Esq. Facsimile No.: (619) 236-0429 If to Employee: Eric Ringwall 13628 Sunset View Road Poway, CA 92064 Facsimile No.: (858) 486-3465 10.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter of this Agreement, and supersedes all prior and 6 contemporaneous negotiations, agreements and understandings between the parties, oral or written. 10.7 MODIFICATION; WAIVERS. No modification, termination or attempted waiver of this Agreement will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced. 10.8 FEES AND EXPENSES. If any proceeding is brought for the enforcement or interpretation of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with any provisions of this Agreement, then the successful or prevailing party will be entitled to recover from the other party reasonable attorneys' fees and other costs incurred in that proceeding (including, in the case of an arbitration, arbitration fees and expenses), in addition to any other relief to which such party may be entitled. 10.9 AMENDMENT. This Agreement may be amended or supplemented only by a writing signed by both of the parties hereto. 10.10 DUPLICATE COUNTERPARTS. This Agreement may be executed in duplicate counterparts, each of which shall be deemed an original; PROVIDED, HOWEVER, that such counterparts shall together constitute only one instrument. 10.11 INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.12 DRAFTING AMBIGUITIES. Each party to this Agreement and its counsel have reviewed and revised this Agreement. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any of the amendments to this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DAOU SYSTEMS, INC. By: /s/ Larry Grandia -------------------------------------------------- Larry Grandia, President and Chief Executive Officer EMPLOYEE: /s/ Eric Ringwall -------------------------------------------------- Eric Ringwall 8 EXHIBIT 1 GENERAL RELEASE THIS GENERAL RELEASE (this "RELEASE") is entered into effective as of ______________, ____, (the "EFFECTIVE DATE") by and between DAOU Systems, Inc., a Delaware corporation, having its principal offices at 5120 Shoreham Place, San Diego, California 92122 (the "COMPANY"), and Eric Ringwall ("EMPLOYEE"), with reference to the following facts: RECITALS A. The parties entered into a Retention and Severance Agreement, dated as of March 1, 2000 (the "AGREEMENT"), pursuant to which the parties agreed that upon the occurrence of certain conditions, Employee would become eligible for certain Termination Payments (as defined in the Agreement) in exchange for Employee's release of the Company from all claims which Employee may have against the Company as of the Termination Date (as defined in the Agreement). Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them in the Agreement. B. The parties desire to dispose of, fully and completely, all claims, which Employee may have against the Company in, the manner set forth in this Release. AGREEMENT 1. RELEASE. Employee, for himself and his heirs, successors and assigns, each fully releases, and discharges the Company, its officers, directors, employees, shareholders, attorneys, accountants, other professionals, insurers and agents of the other (collectively "AGENTS"), and all entities related to each party, including, but not limited to, their respective heirs, executors, administrators, personal representatives, assigns, parent, subsidiary and sister corporations, affiliates, partners and co-venturers (collectively "RELATED ENTITIES"), from all rights, claims, demands, actions, causes of action, liabilities and obligations of every kind, nature and description whatsoever, Employee now has, owns or holds or has at anytime had, owned or held or may have against the Company, Agents or Related Entities from any source whatsoever, whether or not arising from or related to the facts recited in this Release. Employee specifically releases and waives any and all claims arising under any express or implied contract, rule, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the California Fair Employment and Housing Act, and the Age Discrimination in Employment Act, as amended ("ADEA"). 2. SECTION 1542 WAIVER. This Release is intended as a full and complete release and discharge of any and all claims that Employee may have against the Company, its Agents or Related Entities. In making this release, Employee intends to release the Company, its Agents and Related Entities from liability of any nature whatsoever for any claim of damages or injury or for equitable or declaratory relief of any kind, whether the claim, or any facts on which such claim might be based, is known or unknown to him. Employee expressly waives all rights under Section 1542 of the California Civil Code, which Employee understands provides as follows: 1 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee acknowledges that he may discover facts different from or in addition to those that he now believes to be true with respect to this Release. Employee agrees that this Release shall remain effective notwithstanding the discovery of any different or additional facts. 3. WAIVER OF CERTAIN CLAIMS. Employee acknowledges that he has been advised in writing of his right to consult with an attorney prior to executing the waivers set out in this Release, and that he has been given a 21-day period in which to consider entering into the release of ADEA claims, if any. In addition, Employee acknowledges that he has been informed that he may revoke a signed waiver of the ADEA claims for up to seven (7) days after executing this Release. 4. NO UNDUE INFLUENCE. This Release is executed voluntarily and without any duress or undue influence. Employee acknowledges he has read this Release and executed it with his full and free consent. No provision of this Release shall be construed against any party by virtue of the fact that such party or its counsel drafted such provision or the entirety of this Release. 5. GOVERNING LAW. This Release is made and entered into in the State of California and accordingly the rights and obligations of the parties hereunder shall in all respects be construed, interpreted, enforced and governed in accordance with the laws of the State of California as applied to contracts entered into by and between residents of California to be wholly performed within California, without regard to conflicts of law principles. 6. SEVERABILITY. If any provision of this Release is held to be invalid, void or unenforceable, the balance of the provisions of this Release shall, nevertheless, remain in full force and effect and shall in no way be affected, impaired or invalidated. 7. CONSULTATION WITH COUNSEL. Employee acknowledges and agrees that he has had the opportunity to consult and review this Release with counsel. 8. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this Release shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association ("AAA") or of the Judicial Arbitration and Mediation Services ("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. The parties will be entitled to conduct discovery (i.e., investigation of facts through depositions and other means), which shall be governed by Section 1283.05 of the California Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and authority to enter 2 orders relating to such discovery as are allowed under the CCP. The arbitrator shall apply California substantive law in all respects. The party prevailing in the resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all reasonable attorneys' fees and costs incurred in pursuit of the claim, without regard to any statute, schedule, or rule of court purported to restrict such award. Dated: -------------------------- ---------------------------- Eric Ringwall 3 EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 RETENTION AND SEVERANCE AGREEMENT THIS RETENTION AND SEVERANCE AGREEMENT (this "AGREEMENT"), dated as of March 1, 2000, is made by and between DAOU Systems, Inc., a Delaware corporation ("DAOU"), DAOU-Sentient, Inc., a Delaware corporation and a wholly-owned subsidiary of DAOU ("DAOU-SENTIENT"), and Stephen M. Casey ("EMPLOYEE"). RECITALS WHEREAS, DAOU and each of its wholly-owned subsidiaries (collectively, the COMPANY") recognize that the possibility of a Change in Control (as defined below) of DAOU exists and that such possibility, including the uncertainty that such possibility may raise among the Company's key employees, may result in the departure or distraction of such employees to the detriment of the Company and DAOU's stockholders; WHEREAS, DAOU's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued employment of the Company's key employees without distraction from the possibility of a Change in Control of DAOU or any related events and circumstances; WHEREAS, Employee is a key employee of the Company; WHEREAS, Employee has entered into an Employment Agreement with DAOU-Sentient dated as of March 30, 1998 (the "EMPLOYMENT AGREEMENT"); WHEREAS, the Company considers that providing Employee with certain retention and severance benefits will operate as an incentive for Employee to remain employed by the Company in the event of a Change in Control of DAOU. NOW THEREFORE, to induce Employee to remain employed by the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, DAOU, DAOU-Sentient and Employee agree as follows: AGREEMENT 1. DEFINITIONS. 1.1 "BASE SALARY" shall mean the Employee's gross annual salary as of the Termination Date. 1.2 "CAUSE" shall mean: (a) Employee's material breach of the Employment Agreement; (b) Employee's material failure to adhere to any written policy of the Company generally applicable to officers of the Company if Employee has been given a reasonable opportunity (but in no event later than thirty (30) days) to comply with such policy or cure his failure to comply after receiving notice of such failure; (c) Employee's appropriation (or attempted appropriation) of a material business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (d) Employee's misappropriation (or attempted misappropriation) of any of the Company's funds or property; (e) the conviction of Employee, or the entering of a guilty plea or plea of no contest by Employee with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; (f) willful misconduct; (g) Employee's physical or mental disability or other inability to perform the essential functions of his position, with or without reasonable accommodation; or (h) Employee's death. 1.3 "CHANGE OF CONTROL" is defined to have occurred if, and only if, during Employee's employment: (a) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of DAOU representing fifty percent (50%) or more of the combined voting power of DAOU's then outstanding securities entitled to vote in the election of directors of DAOU; (b) there occurs a reorganization, merger, consolidation or other corporate transaction involving DAOU (a "TRANSACTION"), in each case, with respect to which the stockholders of DAOU immediately prior to such Transaction do not, immediately after the Transaction, own more than fifty percent (50%) of the combined voting power of DAOU or other corporation resulting from such Transaction; or (c) all or substantially all of the assets of DAOU are sold, liquidated or distributed. 1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.5 [Reserved.] 1.6 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. 1.7 [Reserved.] 1.8 [Reserved.] 2 1.9 "RETENTION BONUS" shall mean the payment made pursuant to SECTION 4 of this Agreement. 1.10 "RESIGNATION FOR GOOD REASON" shall mean the voluntary resignation by Employee of his employment with the Company within two (2) years following a Change in Control and within three (3) months of any of the following "GOOD REASONS": (a) any reduction in Employee's Base Salary or Target Bonus; (b) any significant reduction in Employee's responsibilities and/or authority; or (c) a relocation by the Company of Employee's place of Employment outside a twenty-five (25) mile radius of Employee's current place of employment. An event described in Section 1.10(a) through (c) will not constitute Good Reason unless Employee provides written notice to the Company (or its successor) of his intention to resign for Good Reason and unless the Company (or its successor) does not cure the Good Reason within ten (10) days of the Company's (or its successor's) receipt of the written notice. 1.11 "TARGET BONUS" shall mean the variable annual cash compensation that Employee is eligible to receive, prior to a Change in Control, as additional compensation or as an incentive bonus in the event targeted goals are achieved for the year. 1.12 "TERMINATION DATE" shall mean the date of termination of Employee's employment relationship with the Company. 1.13 "TERMINATION PAYMENTS" shall mean any payment or distribution of compensation or benefits made pursuant to SECTIONS 5.1 (a)-(d) of this Agreement. 2. TITLE AND DUTIES. Employee currently holds the positions of Director and President and Chief Executive Officer of DAOU-Sentient and Director and President and Chief Executive Officer of Enosus, Inc, a wholly-owned subsidiary of DAOU. Employee will: (i) devote his entire business time, attention, skill, and energy exclusively to the business of the Company; (ii) use his best efforts to promote the success of the Company's business; and (iii) cooperate fully with the President and the Board of Directors of the Company in the advancement of the best interests of the Company. 3. AT-WILL EMPLOYMENT. Employee reaffirms that Employee's employment relationship with the Company is at-will, terminable at any time and for any reason by either the Company or Employee. While certain paragraphs of this Agreement describe events that could occur at a particular time in the future, nothing in this Agreement may be construed as a guarantee of employment of any length. 4. RETENTION BONUS. If the Employee is continuously employed by the Company from the date of this Agreement through the consummation of a Change in Control, then, within fifteen (15) days after the consummation of such Change in Control, DAOU (or its successor) shall pay to Employee a lump sum amount equal to Two Hundred Seventy-Five Thousand Dollars 3 ($275,000), less applicable state and federal taxes and/or other payroll deductions (the "RETENTION BONUS"). Such payment of the Retention Bonus shall be in addition to any compensation paid to Employee hereunder or under the Employment Agreement. 5. TERMINATION PAYMENTS. The provisions of this Section 5 of this Agreement shall replace the provisions of Section 8 of the Employment Agreement, and the Employment Agreement shall be deemed to be amended accordingly. 5.1 If, within two (2) years immediately following a Change in Control, Employee's employment with the Company (or its successor) terminates as the result of (i) termination by the Company (or its successor) of Employee's employment for a reason other than Cause or (ii) Employee's Resignation for Good Reason: (a) Employee will receive a pro-rata share of the Base Salary and Target Bonus accrued and owing to Employee through the Termination Date, less applicable state and federal taxes and/or other payroll deductions, and accrued but unused vacation, sick days and floating holidays through the Termination Date in accordance with the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions; (b) Within fifteen (15) days after the Termination Date, DAOU (or its successor) shall pay to Employee a severance payment in a lump-sum amount equal to Five Hundred Fifty Thousand Dollars ($550,000), less applicable state and federal taxes and/or other payroll deductions; (c) [Reserved.] (d) If Employee elects to continue insurance coverage as afforded to Employee according to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), DAOU (or its successor) will reimburse Employee the amount of the premiums incurred by Employee during the period beginning on the Termination Date and extend for twelve (12) months following the Termination Date. Nothing in this Agreement will extend Employee's COBRA period beyond the period allowed under COBRA, nor is the Company assuming any responsibility which Employee has for formally electing to continue coverage; 5.2 The Termination Payments set forth in SECTIONS 5.1(b), (c) AND (d) above are in exchange for, and contingent upon Employee's execution of a release of all claims as of the Termination Date, in substantially the form attached to this Agreement as EXHIBIT 1. 5.3 If Employee's employment terminates at any time prior to a Change of Control or after the two (2) year period immediately following a Change in Control as the result of (i) termination by the Company (or its successor) of Employee's employment for a reason other than Cause, or (ii) Employee's Resignation for Good Reason, Employee will be entitled to receive (A) payments in an aggregate amount equal to the Base Salary, payable over a twelve (12) month period following the Termination Date, (B) that part of the Target Bonus, if any, for the fiscal year in which such termination occurs, prorated through the end of the calendar month during which such termination occurs and (C) accrued but unused vacation, sick days and floating holidays through the Termination Date in accordance with the Company's (or its 4 successor's) regular policies, each less applicable state and federal taxes and/or other payroll deductions. 5.4 If Employee's employment with the Company terminates (i) for Cause or (ii) due to Employee's resignation without Good Reason, then DAOU (or its successor) will pay to Employee a pro-rata share of the Base Salary and Target Bonus accrued and owing to Employee through the Termination Date, less applicable state and federal taxes and/or other payroll deductions, and accrued but unused vacation, sick days and floating holidays through the Termination Date in accordance with the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions. 5.5 If Employee resigns his employment for Good Reasons described in Section 1.10 (b) above, payment of the above Termination Payments is further contingent upon Employee's willingness, at the Company's (or its successor's) request, to continue performing his duties on behalf of the Company (or its successor) in good faith for up to sixty (60) days following the occurrence of the events described in Section 1.10 (b); PROVIDED, HOWEVER, that Employee shall not be required to travel to perform his duties in good faith. DAOU (or its successor) will pay to Employee a pro-rata share of the Base Salary and Target Bonus and accrued but unused vacation, sick days and floating holidays according to the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions, during the up-to sixty (60) day period and will receive the Termination Payments upon completion of that period. 5.6 Upon the Termination Date, Employee shall be entitled to take possession of the office furnishings which are located in his office at DAOU-Sentient, including a desk, a credenza, a bookshelf and chairs. 6. RETIREMENT AND PROFIT-SHARING PLANS. Notwithstanding anything in this Agreement to the contrary, Employee's rights in any retirement, pension or profit-sharing plans offered by the Company shall be governed by the rules of such plans as well as by applicable law. 7. TAX CONSEQUENCES. The Company makes no representations regarding the tax consequence of any provision of this Agreement. Employee is advised to consult with his own tax advisor with respect to the tax treatment of any payment contained in this Agreement. 8. TAX ADJUSTMENT. Notwithstanding the foregoing or any other provision of this Agreement to the contrary, if tax counsel selected by the Company and acceptable to Employee determines that any portion of any payment under this Agreement would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, the payments to be made to Employee under this Agreement shall be reduced (but not below zero) such that the value of the aggregate payments that Employee is entitled to receive under this Agreement, and any other agreement or plan or program of the Company, shall be one dollar ($1) less than the maximum amount of payments which Employee may receive without becoming subject to the tax imposed by Section 4999 of the Code. 9. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this Agreement shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association ("AAA") or of the Judicial Arbitration 5 and Mediation Services ("JAMS"), and will be conducted under the Expedited Procedures for Commercial Arbitration Rules of the AAA, or such similar procedures as may be in effect (the "Rules"). The arbitration shall be held in Montgomery County, Maryland. The parties will select the arbitrator from a list maintained by the AAA or JAMS and the parties agree that they will have five (5) Business Days in which to return the list to AAA or JAMS with their objections and preferences. Discovery will be limited to no more than seven (7) depositions by each side and written document requests, requesting the production of specific documents. The parties to the dispute will voluntarily produce any and all documents that they intend to use at the hearing before the close of discovery, subject to supplementation for purposes of rebuttal of good cause shown. The period for taking discovery shall be sixty (60) Business Days, commencing upon the day that the answer is due under the Rules. The arbitrator will hold a pre-hearing conference within three (3) Business Days of the close of discovery and will schedule the hearing within thirty (30) Business Days of the close of discovery. After the arbitrator is selected, the arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. All fees and costs will be allocated to the parties to the arbitration as determined by the arbitrator. Each party will initially pay its own fees and costs associated with the arbitration and each party will pay one-half of the arbitrator's fees up front, subject to the arbitrator's final determination on fees and costs. 10. GENERAL PROVISIONS. 10.1 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of California. 10.2 ASSIGNMENT. Employee may not assign, pledge or encumber his interest in this Agreement or any part thereof. 10.3 AMENDMENTS; WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by both of the parties. No waiver of any provision or consent to any exception to the terms of this Agreement or any agreement contemplated hereby will be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent, and instance so provided. 10.4 SEVERABILITY. The provisions of this Agreement are severable; and, if any provision will be held to be invalid or otherwise unenforceable, in whole or in part, then the remainder of the provisions, or enforceable parts of this Agreement, will not be affected. 10.5 NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): 6 If to the Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, CA 92122 ATTENTION: Chief Executive Officer Facsimile No.: (619) 452-2789 With a copy to: Baker & McKenzie 101 West Broadway, Twelfth Floor San Diego, California 92101-3890 ATTENTION: Carlos D. Heredia, Esq. Facsimile No.: (619) 236-0429 If to Employee: Stephen M. Casey 21608 Goshen Oaks Road Laytonsville, Maryland 20882 Facsimile No.: 301-929-7677 With a copy to: Linowes and Blocher LLP 1010 Wayne Avenue, Suite 1000 Silver Spring, Maryland 20910 ATTENTION: John R. Orrick, Jr. Facsimile No. 301-495-9044. 10.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter of this Agreement, and supersedes all prior and contemporaneous negotiations, agreements and understandings between the parties, oral or written. To the extent that the provisions of the Employment Agreement do not conflict with this Agreement, such provisions of the Employment Agreement shall remain in full force and effect. 10.7 MODIFICATION; WAIVERS. No modification, termination or attempted waiver of this Agreement will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced. 10.8 AMENDMENT. This Agreement may be amended or supplemented only by a writing signed by both of the parties hereto. 10.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original; PROVIDED, HOWEVER, that such counterparts shall together constitute only one instrument. 10.10 INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.11 DRAFTING AMBIGUITIES. Each party to this Agreement and its counsel have reviewed and revised this Agreement. The rule of construction that any ambiguities are to be 7 resolved against the drafting party shall not be employed in the interpretation of this Agreement or any of the amendments to this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DAOU SYSTEMS, INC. By: /s/ Larry Grandia ------------------------------- Larry Grandia, President and Chief Executive Officer DAOU-SENTIENT, INC. By: /s/ Donald R. Myll ------------------------------- Donald R. Myll Vice President EMPLOYEE: /s/ Stephen M. Casey ----------------------------------- Stephen M. Casey 9 EXHIBIT 1 GENERAL RELEASE THIS GENERAL RELEASE (this "RELEASE") is entered into effective as of ______________, ____, (the "EFFECTIVE DATE") by and between DAOU Systems, Inc., a Delaware corporation, having its principal offices at 5120 Shoreham Place, San Diego, California 92122 (the "COMPANY"), and Stephen M. Casey ("EMPLOYEE"), with reference to the following facts: RECITALS A. The parties entered into a Retention and Severance Agreement, dated as of March 1, 2000 (the "AGREEMENT"), pursuant to which the parties agreed that upon the occurrence of certain conditions, Employee would become eligible for certain Termination Payments (as defined in the Agreement) in exchange for Employee's release of the Company from all claims which Employee may have against the Company as of the Termination Date (as defined in the Agreement). Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them in the Agreement. B. The parties desire to dispose of, fully and completely, all claims, which Employee may have against the Company in, the manner set forth in this Release. AGREEMENT 1. RELEASE. Employee, for himself and his heirs, successors and assigns, each fully releases, and discharges the Company, its officers, directors, employees, shareholders, attorneys, accountants, other professionals, insurers and agents of the other (collectively "AGENTS"), and all entities related to each party, including, but not limited to, their respective heirs, executors, administrators, personal representatives, assigns, parent, subsidiary and sister corporations, affiliates, partners and co-venturers (collectively "RELATED ENTITIES"), from all rights (except for those rights that Employee may have as a stockholder of the Company), claims, demands, actions, causes of action, liabilities and obligations of every kind, nature and description whatsoever, Employee now has, owns or holds or has at anytime had, owned or held or may have against the Company, Agents or Related Entities from any source whatsoever, whether or not arising from or related to the facts recited in this Release. Employee specifically releases and waives any and all claims arising under any express or implied contract, rule, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the California Fair Employment and Housing Act, and the Age Discrimination in Employment Act, as amended ("ADEA"). 2. SECTION 1542 WAIVER. This Release is intended as a full and complete release and discharge of any and all claims that Employee may have against the Company, its Agents or Related Entities. In making this release, Employee intends to release the Company, its Agents and Related Entities from liability of any nature whatsoever for any claim of damages or injury or for equitable or declaratory relief of any kind, whether the claim, or any facts on which such claim might be based, is known or unknown to him. Employee expressly waives all rights under Section 1542 of the California Civil Code, which Employee understands provides as follows: 1 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee acknowledges that he may discover facts different from or in addition to those that he now believes to be true with respect to this Release. Employee agrees that this Release shall remain effective notwithstanding the discovery of any different or additional facts. 3. WAIVER OF CERTAIN CLAIMS. Employee acknowledges that he has been advised in writing of his right to consult with an attorney prior to executing the waivers set out in this Release, and that he has been given a 21-day period in which to consider entering into the release of ADEA claims, if any. In addition, Employee acknowledges that he has been informed that he may revoke a signed waiver of the ADEA claims for up to seven (7) days after executing this Release. 4. NO UNDUE INFLUENCE. This Release is executed voluntarily and without any duress or undue influence. Employee acknowledges he has read this Release and executed it with his full and free consent. No provision of this Release shall be construed against any party by virtue of the fact that such party or its counsel drafted such provision or the entirety of this Release. 5. GOVERNING LAW. This Release is made and entered into in the State of California and accordingly the rights and obligations of the parties hereunder shall in all respects be construed, interpreted, enforced and governed in accordance with the laws of the State of California as applied to contracts entered into by and between residents of California to be wholly performed within California, without regard to conflicts of law principles. 6. SEVERABILITY. If any provision of this Release is held to be invalid, void or unenforceable, the balance of the provisions of this Release shall, nevertheless, remain in full force and effect and shall in no way be affected, impaired or invalidated. 7. CONSULTATION WITH COUNSEL. Employee acknowledges and agrees that he has had the opportunity to consult and review this Release with counsel. 8. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this Release shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association ("AAA") or of the Judicial Arbitration and Mediation Services ("JAMS"), and will be conducted under the Expedited Procedures for Commercial Arbitration Rules of the AAA, or such similar procedures as may be in effect (the "Rules"). The arbitration shall be held in Montgomery County, Maryland. The parties will select the arbitrator from a list maintained by the AAA or JAMS and the parties agree that they will have five (5) Business Days in which to return the list to AAA or JAMS with their objections and preferences. Discovery will be limited to no more than seven (7) depositions by each side and written document requests, requesting the production of specific documents. The 2 parties to the dispute will voluntarily produce any and all documents that they intend to use at the hearing before the close of discovery, subject to supplementation for purposes of rebuttal of good cause shown. The period for taking discovery shall be sixty (60) Business Days, commencing upon the day that the answer is due under the Rules. The arbitrator will hold a pre-hearing conference within three (3) Business Days of the close of discovery and will schedule the hearing within thirty (30) Business Days of the close of discovery. After the arbitrator is selected, the arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. All fees and costs will be allocated to the parties to the arbitration as determined by the arbitrator. Each party will initially pay its own fees and costs associated with the arbitration and each party will pay one-half of the arbitrator's fees up front, subject to the arbitrator's final determination on fees and costs. Dated: ------------------------------- --------------------------------- Stephen M. Casey 3 EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 RETENTION AND SEVERANCE AGREEMENT THIS RETENTION AND SEVERANCE AGREEMENT (this "AGREEMENT"), dated as of March 1, 2000, is made by and between DAOU Systems, Inc., a Delaware corporation ("DAOU"), and Donald R. Myll ("EMPLOYEE"). RECITALS WHEREAS, DAOU and each of its wholly-owned subsidiaries (collectively, the COMPANY") recognize that the possibility of a Change in Control (as defined below) of DAOU exists and that such possibility, including the uncertainty that such possibility may raise among the Company's key employees, may result in the departure or distraction of such employees to the detriment of the Company and DAOU's stockholders; WHEREAS, DAOU's Board of Directors has determined that appropriate steps should be taken to reinforce and encourage the continued employment of the Company's key employees without distraction from the possibility of a Change in Control of DAOU or any related events and circumstances; WHEREAS, Employee is a key employee of the Company; WHEREAS, the Company considers that providing Employee with certain retention and severance benefits will operate as an incentive for Employee to remain employed by the Company in the event of a Change in Control of DAOU. NOW THEREFORE, to induce Employee to remain employed by the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, DAOU and Employee agree as follows: AGREEMENT 1. DEFINITIONS. 1.1 "BASE SALARY" shall mean the Employee's gross annual salary as of the Termination Date. 1.2 "CAUSE" shall mean: (a) Employee's material breach of the Employment Agreement, dated as of September 8, 1999 (the "EMPLOYMENT AGREEMENT"), by and between Employee and DAOU; (b) Employee's material failure to adhere to any written policy of the Company generally applicable to officers of the Company if Employee has been given a reasonable opportunity (but in no event later than thirty (30) days) to comply with such policy or cure his failure to comply; (c) the appropriation (or attempted appropriation) of a material business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; (d) the misappropriation (or attempted misappropriation) of any of the Company's funds or property; (e) the conviction of, or the entering of a guilty plea or plea of no contest with respect to, a felony, the equivalent thereof, or any other crime with respect to which imprisonment is a possible punishment; (f) willful misconduct; (g) physical or mental disability or other inability to perform the essential functions of his position, with or without reasonable accommodation; or (h) death. 1.3 "CHANGE OF CONTROL" is defined to have occurred if, and only if, during Employee's employment: (a) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of DAOU representing fifty percent (50%) or more of the combined voting power of DAOU's then outstanding securities entitled to vote in the election of directors of DAOU; (b) there occurs a reorganization, merger, consolidation or other corporate transaction involving DAOU (a "TRANSACTION"), in each case, with respect to which the stockholders of DAOU immediately prior to such Transaction do not, immediately after the Transaction, own more than fifty percent (50%) of the combined voting power of DAOU or other corporation resulting from such Transaction; or (c) all or substantially all of the assets of DAOU are sold, liquidated or distributed. 1.4 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.5 "CONTINGENT COMPENSATION PAYMENT" shall mean any payment (or benefit) in the nature of compensation that is made or supplied (under this Agreement or otherwise) to a "disqualified individual" (as defined in Section 280G(c) of the Code) and that is contingent (within the meaning of Section 280G(b)(2)(A)(i) of the Code) on a Change in Control of the Company. 1.6 "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. 2 1.7 "EXCISE TAX" shall mean the amount, if any, of the excise tax payable pursuant to Section 4999 of the Code by Employee with respect to a Contingent Compensation Payment. 1.8 "GROSS-UP PAYMENT" shall mean an amount equal to the sum of (i) the amount of the Excise Tax payable with respect to a Contingent Compensation Payment, and (ii) the amount necessary to pay all additional taxes imposed on (or economically borne by) Employee (including the Excise Tax, state and federal income taxes and all applicable withholding taxes) attributable to the receipt of such Gross-Up Payment. For purposes of the preceding sentence, all taxes attributable to the receipt of the Gross-Up Payment shall be computed assuming the application of the maximum tax rates provided by law. 1.9 "RETENTION BONUS" shall mean the payment made pursuant to SECTION 4 of this Agreement. 1.10 "RESIGNATION FOR GOOD REASON" shall mean the voluntary resignation by Employee of his employment with the Company within two (2) years following a Change in Control and within three (3) months of the following "GOOD REASONS": (a) any reduction in Employee's Base Salary or Target Bonus; (b) any significant reduction in Employee's responsibilities and authority relative to Employee's current position as Executive Vice President and Chief Financial Officer of DAOU, including, but not limited to, requiring Employee to report to anyone other than the Chief Executive Officer of the acquiring entity of DAOU following a Change in Control; or (c) a relocation by the Company of Employee's place of Employment outside a forty (40) mile radius of Employee's current place of employment. An event described in Section 1.10(a) through (c) will not constitute Good Reason unless Employee provides written notice to the Company (or its successor) of his intention to resign for Good Reason and unless the Company (or its successor) does not cure the Good Reason within ten (10) days of the Company's (or its successor's) receipt of the written notice. 1.11 "TARGET BONUS" shall mean the variable annual cash compensation that Employee is eligible to receive, prior to a Change in Control, in the event targeted goals are achieved for the year. 1.12 "TERMINATION DATE" shall mean the date of termination of Employee's employment relationship with the Company. 1.13 "TERMINATION PAYMENTS" shall mean any payment or distribution of compensation or benefits made pursuant to SECTIONS 5.1 (a)-(d) of this Agreement. 2. TITLE AND DUTIES. Employee currently holds the positions of Executive Vice President and Chief Financial Officer of DAOU and Treasurer of Enosus, Inc., a Delaware corporation and wholly-owned subsidiary of DAOU. Employee will: (i) devote his entire business time, attention, skill, and energy exclusively to the business of the Company; (ii) use his best efforts to 3 promote the success of the Company's business; and (iii) cooperate fully with the President and the Board of Directors of the Company in the advancement of the best interests of the Company. 3. AT-WILL EMPLOYMENT. Employee reaffirms that Employee's employment relationship with the Company is at-will, terminable at any time and for any reason by either the Company or Employee. While certain paragraphs of this Agreement describe events that could occur at a particular time in the future, nothing in this Agreement may be construed as a guarantee of employment of any length. 4. RETENTION BONUS. If the Employee is continuously employed by the Company from the date of this Agreement through the consummation of a Change in Control, then, within fifteen (15) days after the consummation of such Change in Control, DAOU (or its successor) shall pay to Employee a lump sum amount equal to Two Hundred Seventy Thousand Dollars ($270,000), less applicable state and federal taxes and/or other payroll deductions (the "RETENTION BONUS"). Such payment of the Retention Bonus shall be in addition to any compensation paid to Employee hereunder or under the Employment Agreement. 5. TERMINATION PAYMENTS. 5.1 If, within two (2) years immediately following a Change in Control, Employee's employment with the Company (or its successor or subsidiary) terminates as the result of (i) termination by the Company (or its successor or subsidiary) of Employee's employment for a reason other than Cause or (ii) Employee's Resignation for Good Reason: (a) Employee will receive a pro-rata share of the Base Salary and Target Bonus accrued and owing to Employee through the Termination Date, less applicable state and federal taxes and/or other payroll deductions, and accrued but unused vacation, sick days and floating holidays through the Termination Date in accordance with the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions; (b) Within fifteen (15) days after the Termination Date, DAOU (or its successor) will pay to Employee a severance payment in a lump-sum amount equal to Five Hundred Forty Thousand Dollars ($540,000), less applicable state and federal taxes and/or other payroll deductions; (c) GROSS-UP PAYMENT. In the event that (i) DAOU undergoes a Change in Control, and (ii) any payment to Employee under this Agreement triggers an obligation to pay an Excise Tax, then DAOU shall, within fifteen (15) days after the date on which such payment to Employee is made, pay to Employee the relevant Gross-Up Payment. (d) If Employee elects to continue insurance coverage as afforded to Employee according to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), DAOU (or its successor) will reimburse Employee the amount of the premiums incurred by Employee during the period beginning on the Termination Date and extend for twelve (12) months following the Termination Date. Nothing in this Agreement will extend Employee's COBRA period beyond the period allowed under COBRA, nor is the Company assuming any responsibility which Employee has for formally electing to continue coverage; 4 5.2 The payments set forth in SECTIONS 5.1(b), (c) AND (d) above are in exchange for, and contingent upon Employee's execution of a release of all claims as of the Termination Date, in substantially the form attached to this Agreement as EXHIBIT 1. 5.3 If Employee's employment terminates (i) for any reason after the two (2) year period immediately following a Change in Control or (ii) during that two (2) year period (A) for Cause or (B) due to Employee's resignation without Good Reason, then DAOU (or its successor) will pay to Employee a pro-rata share of the Base Salary and Target Bonus accrued and owing to Employee through the Termination Date, less applicable state and federal taxes and/or other payroll deductions, and accrued but unused vacation, sick days and floating holidays through the Termination Date in accordance with the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions. 5.4 If Employee resigns his employment for Good Reasons described in Section 1.10 (b) above, payment of the above Termination Payments is further contingent upon Employee's willingness, at the Company's (or its successor's) request, to continue performing his duties on behalf of the Company (or its successor) in good faith for up to sixty (60) days following the occurrence of the events described in Section 1.10 (b); PROVIDED, HOWEVER, that Employee shall not be required to travel to perform his duties in good faith. DAOU (or its successor) will pay to Employee a pro-rata share of the Base Salary and Target Bonus and accrued but unused vacation, sick days and floating holidays according to the Company's (or its successor's) regular policies, less applicable state and federal taxes and/or other payroll deductions, during the up-to sixty (60) day period and will receive the Termination Payments upon completion of that period. 6. RETIREMENT AND PROFIT-SHARING PLANS. Notwithstanding anything in this Agreement to the contrary, Employee's rights in any retirement, pension or profit-sharing plans offered by the Company shall be governed by the rules of such plans as well as by applicable law. 7. TAX CONSEQUENCES. The Company makes no representations regarding the tax consequence of any provision of this Agreement. Employee is advised to consult with his own tax advisor with respect to the tax treatment of any payment contained in this Agreement. 8. [Reserved.] 9. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this Agreement shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association ("AAA") or of the Judicial Arbitration and Mediation Services ("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. The parties will be entitled to conduct discovery (i.e., investigation of facts through depositions and other means), which shall be governed by Section 1283.05 of the California Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and authority to enter orders relating to such discovery as are allowed under the CCP. The arbitrator shall apply California substantive law in all respects. The party prevailing in the resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all 5 reasonable attorneys' fees and costs incurred in pursuit of the claim, without regard to any statute, schedule, or rule of court purported to restrict such award. 10. GENERAL PROVISIONS. 10.1 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of California. 10.2 ASSIGNMENT. Employee may not assign, pledge or encumber his interest in this Agreement or any part thereof. 10.3 AMENDMENTS; WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by both of the parties. No waiver of any provision or consent to any exception to the terms of this Agreement or any agreement contemplated hereby will be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent, and instance so provided. 10.4 SEVERABILITY. The provisions of this Agreement are severable; and, if any provision will be held to be invalid or otherwise unenforceable, in whole or in part, then the remainder of the provisions, or enforceable parts of this Agreement, will not be affected. 10.5 NOTICES. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to the Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, CA 92122 ATTENTION: Chief Executive Officer Facsimile No.: (619) 452-2789 With a copy to: Baker & McKenzie 101 West Broadway, Twelfth Floor San Diego, California 92101-3890 ATTENTION: Carlos D. Heredia, Esq. Facsimile No.: (619) 236-0429 If to Employee: Donald R. Myll 5120 Shoreham Place San Diego, CA 92122 Facsimile No.: (619) 452-2789 6 10.6 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter of this Agreement, and supersedes all prior and contemporaneous negotiations, agreements and understandings between the parties, oral or written. In particular, this Agreement specifically amends and supersedes Section 7.1 of the Employment Agreement, but does not amend or supersede any other provisions of the Employment Agreement, which provisions shall remain in full force and effect. Notwithstanding the foregoing, in the event that Employee receives any payment pursuant to Section 5 hereof, Employee shall not be entitled to, and shall not receive, any payment pursuant to Section 7 or Section 8 of the Employment Agreement; and, in the event that (i) there is no Change in Control of DAOU, and (ii) Employee receives any payment under Section 7 or Section 8 of the Employment Agreement, then Employee shall not be entitled to, and shall not receive, any payment pursuant to Section 5 hereof. 10.7 MODIFICATION; WAIVERS. No modification, termination or attempted waiver of this Agreement will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced. 10.8 FEES AND EXPENSES. If any proceeding is brought for the enforcement or interpretation of this Agreement, or because of any alleged dispute, breach, default or misrepresentation in connection with any provisions of this Agreement, then the successful or prevailing party will be entitled to recover from the other party reasonable attorneys' fees and other costs incurred in that proceeding (including, in the case of an arbitration, arbitration fees and expenses), in addition to any other relief to which such party may be entitled. 10.9 AMENDMENT. This Agreement may be amended or supplemented only by a writing signed by both of the parties hereto. 10.10 DUPLICATE COUNTERPARTS. This Agreement may be executed in duplicate counterparts, each of which shall be deemed an original; PROVIDED, HOWEVER, that such counterparts shall together constitute only one instrument. 10.11 INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 10.12 DRAFTING AMBIGUITIES. Each party to this Agreement and its counsel have reviewed and revised this Agreement. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any of the amendments to this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DAOU SYSTEMS, INC. By: /s/ Larry Grandia ----------------------------------- Larry Grandia, President and Chief Executive Officer EMPLOYEE: /s/ Donald R. Myll ----------------------------------- Donald R. Myll 8 EXHIBIT 1 GENERAL RELEASE THIS GENERAL RELEASE (this "RELEASE") is entered into effective as of ______________, ____, (the "EFFECTIVE DATE") by and between DAOU Systems, Inc., a Delaware corporation, having its principal offices at 5120 Shoreham Place, San Diego, California 92122 (the "COMPANY"), and Donald R. Myll ("EMPLOYEE"), with reference to the following facts: RECITALS A. The parties entered into a Retention and Severance Agreement, dated as of March 1, 2000 (the "AGREEMENT"), pursuant to which the parties agreed that upon the occurrence of certain conditions, Employee would become eligible for certain Termination Payments (as defined in the Agreement) in exchange for Employee's release of the Company from all claims which Employee may have against the Company as of the Termination Date (as defined in the Agreement). Capitalized terms not otherwise defined herein shall have the respective meanings ascribed to them in the Agreement. B. The parties desire to dispose of, fully and completely, all claims, which Employee may have against the Company in, the manner set forth in this Release. AGREEMENT 1. RELEASE. Employee, for himself and his heirs, successors and assigns, each fully releases, and discharges the Company, its officers, directors, employees, shareholders, attorneys, accountants, other professionals, insurers and agents of the other (collectively "AGENTS"), and all entities related to each party, including, but not limited to, their respective heirs, executors, administrators, personal representatives, assigns, parent, subsidiary and sister corporations, affiliates, partners and co-venturers (collectively "RELATED ENTITIES"), from all rights, claims, demands, actions, causes of action, liabilities and obligations of every kind, nature and description whatsoever, Employee now has, owns or holds or has at anytime had, owned or held or may have against the Company, Agents or Related Entities from any source whatsoever, whether or not arising from or related to the facts recited in this Release. Employee specifically releases and waives any and all claims arising under any express or implied contract, rule, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, the California Fair Employment and Housing Act, and the Age Discrimination in Employment Act, as amended ("ADEA"). 2. SECTION 1542 WAIVER. This Release is intended as a full and complete release and discharge of any and all claims that Employee may have against the Company, its Agents or Related Entities. In making this release, Employee intends to release the Company, its Agents and Related Entities from liability of any nature whatsoever for any claim of damages or injury or for equitable or declaratory relief of any kind, whether the claim, or any facts on which such claim might be based, is known or unknown to him. Employee expressly waives all rights under Section 1542 of the California Civil Code, which Employee understands provides as follows: 1 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Employee acknowledges that he may discover facts different from or in addition to those that he now believes to be true with respect to this Release. Employee agrees that this Release shall remain effective notwithstanding the discovery of any different or additional facts. 3. WAIVER OF CERTAIN CLAIMS. Employee acknowledges that he has been advised in writing of his right to consult with an attorney prior to executing the waivers set out in this Release, and that he has been given a 21-day period in which to consider entering into the release of ADEA claims, if any. In addition, Employee acknowledges that he has been informed that he may revoke a signed waiver of the ADEA claims for up to seven (7) days after executing this Release. 4. NO UNDUE INFLUENCE. This Release is executed voluntarily and without any duress or undue influence. Employee acknowledges he has read this Release and executed it with his full and free consent. No provision of this Release shall be construed against any party by virtue of the fact that such party or its counsel drafted such provision or the entirety of this Release. 5. GOVERNING LAW. This Release is made and entered into in the State of California and accordingly the rights and obligations of the parties hereunder shall in all respects be construed, interpreted, enforced and governed in accordance with the laws of the State of California as applied to contracts entered into by and between residents of California to be wholly performed within California, without regard to conflicts of law principles. 6. SEVERABILITY. If any provision of this Release is held to be invalid, void or unenforceable, the balance of the provisions of this Release shall, nevertheless, remain in full force and effect and shall in no way be affected, impaired or invalidated. 7. CONSULTATION WITH COUNSEL. Employee acknowledges and agrees that he has had the opportunity to consult and review this Release with counsel. 8. DISPUTE RESOLUTION PROCEDURES. Any dispute or claim arising out of this Release shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association ("AAA") or of the Judicial Arbitration and Mediation Services ("JAMS"). The arbitration shall be held in San Diego, California. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. The parties will be entitled to conduct discovery (i.e., investigation of facts through depositions and other means), which shall be governed by Section 1283.05 of the California Code of Civil Procedure (the "CCP"). The arbitrator shall have all power and authority to enter 2 orders relating to such discovery as are allowed under the CCP. The arbitrator shall apply California substantive law in all respects. The party prevailing in the resolution of any such claim will be entitled, in addition to such other relief as may be granted, to an award of all reasonable attorneys' fees and costs incurred in pursuit of the claim, without regard to any statute, schedule, or rule of court purported to restrict such award. Dated: --------------------- ---------------------------------------- Donald R. Myll 3 EX-27.1 5 EXHIBIT 27.1
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 12,642,000 59,000 18,706,000 (1,849,000) 0 34,961,000 10,640,000 (6,514,000) 39,428,000 6,935,000 0 11,566,000 0 18,000 20,342,000 39,428,000 17,575,000 17,575,000 15,956,000 15,956,000 6,254,000 0 17,000 (4,466,000) 0 (4,466,000) 0 0 0 (4,466,000) (0.26) (0.26)
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