<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1997
REGISTRATION STATEMENT NO. 333-18155
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO.1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DAOU SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5995 330284454
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Identification No.)
organization) Classification Code Number)
</TABLE>
----------------
5120 SHOREHAM PLACE
SAN DIEGO, CALIFORNIA 92122
(619) 452-2221
(Address and telephone number of principal executive offices and principal place
of business)
----------------
DANIEL J. DAOU
PRESIDENT
5120 SHOREHAM PLACE
SAN DIEGO, CALIFORNIA 92122
(619) 452-2221
(Name, address and telephone number of Agent for Service)
----------------
COPIES TO:
<TABLE>
<S> <C>
JOHN J. HENTRICH, ESQ. FREDERICK T. MUTO, ESQ.
CARLOS D. HEREDIA, ESQ. JEREMY D. GLASER, ESQ.
BAKER & MCKENZIE COOLEY GODWARD LLP
101 WEST BROADWAY, TWELFTH FLOOR 4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CALIFORNIA 92101 SAN DIEGO, CALIFORNIA 92037
(619) 236-1441 (619) 550-6045
</TABLE>
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If the Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
JANUARY 21, 1997
3,850,000 SHARES
[LOGO]
COMMON STOCK
---------
Of the 3,850,000 shares of Common Stock (the "Common Stock") offered hereby,
2,900,000 shares are being sold by DAOU Systems, Inc. ("DAOU" or the "Company"),
and 950,000 shares are being sold by the Selling Stockholders named herein under
"Principal and Selling Stockholders" (the "Selling Stockholders"). The Company
will not receive any of the proceeds from shares sold by the Selling
Stockholders. Prior to this offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol DAOU.
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS TO
TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses of the offering estimated at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
577,500 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland on or about February ,
1997.
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
HAMBRECHT & QUIST
THE DATE OF THIS PROSPECTUS IS FEBRUARY , 1997.
<PAGE>
[INSIDE FRONT COVER PAGE]
PHOTOGRAPH DESCRIPTIONS AND CAPTIONS
1. Top border: DAOU masthead and logo in color. Caption: Healthcare Information
Technology Solutions -- DAOU Systems designs, implements, supports and manages
computer network systems for large, complex healthcare provider organizations,
such as integrated delivery systems. Advanced computer networks enable provider
organizations to access information such as patient records, X-rays and billing
information at each location where care is provided.
2. Center left side: Color photo of DAOU engineer configuring a network of
computer servers at DAOU's on-site computer lab. Caption: Network Services --
The Company combines its knowledge of the specialized information needs of the
healthcare industry with its expertise in computer technology to design and
install advanced, reliable and cost-effective computer network solutions. The
Company uses the products and applications of various hardware and software
vendors to create advanced computer network systems.
- Network Design
- Network Implementation
3. Bottom right side corner: Color photo of individual viewing Palomar-Palmerado
Health System's website which was created by the Company. Caption: Network
Management Services -- As computer networks become increasingly complex,
provider organizations are experiencing difficulties in hiring, training and
retaining qualified personnel who can maintain the performance of their computer
network systems. DAOU's network management services are designed to continuously
monitor and enhance the efficiency and functionality of a provider
organization's computer network system. The Company offers the following
management services to its customers:
- Enterprise Network Management Services
- DAOU Employees On-Site
- Continuous Network Planning
- "Burst Mode" Implementation
- Network Support
- I/S Outsourcing
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
DAOU-SM- AND THE DAOU LOGO ARE SERVICE MARKS OF THE COMPANY. TRADEMARKS AND
SERVICE MARKS OF OTHER COMPANIES ARE ALSO REFERRED TO IN THIS PROSPECTUS.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH
STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS,
INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS.
DAOU Systems, Inc. ("DAOU" or the "Company") designs, implements, supports
and manages advanced computer network systems for hospitals, integrated
healthcare delivery systems ("IDSs"), and other healthcare provider
organizations ("provider organizations"). DAOU combines its knowledge of the
specialized information needs of the healthcare industry with its technological
expertise in computer network systems to provide advanced, reliable and
cost-effective computer network solutions to provider organizations. The Company
believes that its success is attributable to its healthcare industry focus,
depth and breadth of technological expertise, ability to objectively evaluate
its customers' computer network systems due to its vendor independence and its
history of successful customer engagements. Since 1987, the Company has provided
computer network services to over 350 customers ranging in size from single-site
organizations to multi-state organizations with over 80 sites. The Company's
customers include Catholic Medical Center of Brooklyn and Queens, Inc., New York
("CMC"); Mercy Health Services, Farmington Hills, Michigan ("Mercy"); Atlantic
Health System, Morristown, New Jersey; Lutheran Health Systems, Fargo, North
Dakota; Candler Health System, Savannah, Georgia ("Candler"); and St. Mary's
Health Network, Reno, Nevada.
Pressure to control escalating healthcare costs is causing healthcare
providers to consolidate and form multi-entity provider organizations such as
IDSs. This consolidation has resulted in the need for prompt access to
consistent and comprehensive patient information at multiple locations where
care is provided. The existing information systems in these provider
organizations are frequently inadequate because they were developed to meet the
needs of a single facility, such as a hospital or an outpatient surgery center.
In addition, the increasing variety of hardware and software applications
utilized throughout provider organizations has resulted in connectivity and
compatibility problems for many computer networks. Consequently, provider
organizations have found it increasingly difficult to internally implement and
manage their computer network systems and are looking to third parties for the
technological expertise and personnel to meet their information systems
requirements. DAOU believes that the ongoing consolidation among healthcare
provider organizations and the increasing complexity and rapid evolution of
computer network system technologies have created a significant opportunity for
companies specializing in providing computer network system solutions to
provider organizations.
DAOU offers a broad array of services to assist hospitals, IDSs and other
provider organizations in designing, implementing, supporting and managing
complex computer network systems consistent with their unique and changing
information needs. The Company's design services include an assessment of the
customer's existing computer network system and the preparation of voice, video
and data network specifications, technical design documentation and diagrams.
DAOU's implementation services include the purchase, delivery and installation
of enterprise-wide computer network systems. The Company's support and
management services include remote and on-site network management services, as
well as information systems outsourcing ("I/S outsourcing"), and are typically
provided under multi-year contracts. The Company provides network support
services to its customers through its regional sales and support structure and a
24-hour technical support hotline available seven days a week. DAOU typically
provides its services on a fixed-price, fixed-time frame basis.
DAOU's strategy is to be a leading provider of advanced computer network
systems and network management services to healthcare provider organizations by
continuing to focus its sales and marketing efforts on major medical centers and
hospitals around which IDSs are forming, expanding and developing services that
complement its existing services, and continuing to develop its expertise in
emerging technologies.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,900,000 shares
Common Stock offered by the Selling 950,000 shares
Stockholders..................................
Common Stock to be outstanding after the 11,167,678 shares (1)
offering......................................
Use of proceeds................................. Working capital and other general
corporate purposes.
Proposed Nasdaq National Market symbol.......... DAOU
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................................... $ 2,728 $ 3,483 $ 8,521 $ 14,330 $ 19,311
Gross profit.................................................. 947 1,161 2,336 5,855 5,755
Income (loss) from operations................................. 1 (54) 33 2,024 5
Net income (loss)............................................. 5 (52) 26 1,240 83
Pro forma net income per share(2)............................. $ 0.01
Shares used in computing pro forma net income per share(2).... 8,888
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
AS
ACTUAL ADJUSTED(3)
--------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments..................................... $ 2,284 $ 36,845
Total assets.......................................................................... 11,910 46,471
Long-term debt, less current portion.................................................. -- --
Redeemable preferred stock............................................................ 8,190 --
Total stockholders' equity............................................................ 857 43,608
</TABLE>
- --------------
(1) Excludes (i) 941,413 shares of Common Stock issuable upon exercise of stock
options outstanding under the Company's 1996 Stock Option Plan with a
weighted average exercise price of $5.16 per share at December 31, and (ii)
133,285 shares of Common Stock issuable upon exercise of outstanding
warrants at an exercise price of $4.99 per share. See "Management -- 1996
Stock Option Plan," "Certain Transactions," "Description of Capital Stock"
and Note 6 of Notes to Financial Statements.
(2) See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma net income per share.
(3) Adjusted to give effect to the conversion of all outstanding shares of the
Company's Preferred Stock into 1,603,430 shares of Common Stock upon the
completion of this offering and to the estimated net proceeds of this
offering based upon an assumed initial public offering price of $13.00 per
share. See "Use of Proceeds."
--------------
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." EXCEPT
AS SET FORTH IN THE FINANCIAL STATEMENTS AND AS OTHERWISE NOTED, ALL INFORMATION
IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO THE REINCORPORATION OF
THE COMPANY IN DELAWARE PRIOR TO THE COMPLETION OF THIS OFFERING AND THE
CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO COMMON STOCK UPON
THE COMPLETION OF THIS OFFERING. SEE "CAPITALIZATION" AND "DESCRIPTION OF
CAPITAL STOCK."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN
STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE
FINANCIAL PERFORMANCE OF THE COMPANY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT
SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS,
INCLUDING THE MATTERS SET FORTH BELOW, WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
MANAGEMENT OF GROWTH. The Company is currently experiencing a period of
rapid growth which has placed significant and increasing demands on the
Company's management and operational, technical, financial and other resources.
The Company's revenues increased 35% in 1996, from $14.3 million in 1995 to
$19.3 million in 1996, and increased 68% in 1995, from $8.5 million in 1994 to
$14.3 million in 1995. In addition, since January 1, 1995, the Company's
workforce increased from 78 to 126 full-time employees as of December 31, 1996.
Further increases in staffing levels are expected during 1997 although the
Company does not believe that these rates of growth are sustainable. This growth
has resulted in new and increased responsibilities for management personnel and
has placed significant demands on the Company's management and operating and
financial systems. The Company will be required to continue to develop and
improve its operational, financial and other internal systems to accommodate the
increased number of transactions and customers and the increased size of the
Company's operations, workforce and facilities. There can be no assurance,
however, that the Company's management or systems will be adequate to support
the Company's existing or future operations. Any failure to develop and improve
the Company's systems or to hire and retain appropriate personnel to manage its
operations could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, any future
unexpected shortfall in revenues without a corresponding and timely reduction in
staffing and other expenses (or redeployment of employees to other customer
projects), or any staffing increase that is unaccompanied by a corresponding
increase in revenues, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NEED TO ATTRACT AND RETAIN KEY EMPLOYEES AND QUALIFIED NETWORK ENGINEERS.
The Company's success and execution of its business strategy will depend in
large part on the continued services of its key management and technical
personnel. The loss of the services of one or more of the Company's key
employees or the inability to hire additional key personnel as needed could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company's business involves the delivery of computer
network services and is labor-intensive. As a result, its future success will
depend in large part on its ability to hire, train and retain qualified network
engineers who together have expertise in a wide array of network and computer
systems and a broad understanding of the provider organizations that the Company
serves. Competition for qualified network engineers is intense and is expected
to increase. In particular, competition is intense for the limited number of
qualified management personnel and senior network engineers. There can be no
assurance that the Company will be successful in attracting and retaining such
personnel. While the Company is currently experiencing low rates of turnover,
there can be no assurance that these rates of turnover will not increase in the
future. Any inability of the Company to hire, train and retain a sufficient
number of qualified network engineers could impair the Company's ability to
adequately manage and complete its existing projects or to obtain new projects,
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Recruiting and Training of Technical Employees."
5
<PAGE>
VARIABILITY OF QUARTERLY OPERATING RESULTS. A substantial majority of the
Company's operating expenses, particularly personnel and related costs,
depreciation and rent, are relatively fixed in advance of any particular
quarter. However, variations in the Company's revenues and operating results may
occur from time to time, as a result of various factors, including: (i) the
reduction in size, delay in commencement, interruption or termination of one or
more significant projects or contracts; (ii) the commencement or completion
during a quarter of one or more significant projects; (iii) the failure to
estimate accurately the resources required to complete new or ongoing projects;
(iv) the relatively longer sales cycle in obtaining new customers and larger
contracts; (v) the timing and extent of employee training or the loss of key
employees; (vi) competition; (vii) the development and introduction of new
services; and (viii) general economic conditions which may affect the buying
decisions of the Company's current and prospective customers. In addition, the
Company plans to continue to expand its operations by hiring additional network
engineers and other employees, and adding new offices, systems and other
infrastructure. The resulting increase in operating expenses will generally be
incurred prior to any increase in revenues. Consequently, the Company's
business, financial condition and results of operations would be materially and
adversely affected if revenues do not increase to support such expenses. A
variation in the timing of the commencement or completion of customer
assignments, particularly at or near the end of any quarter, may cause
significant variations in operating results from quarter to quarter and could
result in losses for a particular quarter. In addition, an unanticipated delay
or termination of a major project could require the Company to maintain or
terminate under-utilized employees which could, in either case, result in higher
than expected expenses during a quarter. The Company believes that quarterly
revenues and operating results are likely to vary significantly in the future
and that period-to-period comparisons of its revenues and operating results are
not necessarily meaningful and should not be relied on as indications of future
performance. Furthermore, these variations in revenues and operating results
could cause significant variations in the price of the Company's Common Stock.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CUSTOMER CONCENTRATION. The Company has derived, and believes that it will
continue to derive, a significant portion of its revenues from a relatively
limited number of large customer contracts. In 1996, the Company's five largest
customers accounted for approximately 72% of total revenues, with CMC, Mercy and
Candler accounting for approximately 21%, 18% and 15% of such revenues,
respectively. In 1995, the Company's five largest customers accounted for
approximately 77% of total revenues, with Mercy and Candler accounting for
approximately 48% and 11% of such revenues, respectively. The volume of work
performed for specific customers is likely to vary from year to year, and a
major customer in one year may not provide the same level of revenues in any
subsequent year. In particular, the annual revenues under the Company's
five-year contract with Candler are subject to annual budgetary approval and may
decrease from year to year. The loss of any large customer could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Consolidation and Uncertainty in the Healthcare
Industry" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
PROJECT RISKS. The Company's computer network systems are designed to
provide access to and accurate delivery of a wide range of information within a
provider organization, including information used by clinicians in the diagnosis
and treatment of patients. Many of the Company's projects are critical to the
operation of its customers' businesses and, therefore, the Company may expose
itself to potentially adverse risks in the event that the Company's services do
not meet the desired expectations of its customers. For example, the failure to
perform services that meet a customer's expectations may result in the Company
not being paid for services rendered and may damage the Company's reputation and
adversely affect its ability to attract new business. In addition, any failure
by the Company's computer network systems to provide accurate, reliable and
timely information could result in claims against the Company. For example,
where the unavailability of such information to a provider of healthcare
services is alleged to have resulted in any physical or emotional injury to a
patient, such provider may become subject to a medical malpractice, product
liability or other claim. The Company could then become subject to a claim
relating to its installation or management of a computer network system. The
Company is also subject to claims by its customers for actions of the Company's
employees which may have caused
6
<PAGE>
damages to customers' businesses or otherwise. Although the Company maintains
errors or omissions insurance, there can be no assurance that such insurance
coverage would adequately cover any claims asserted against the Company and any
such claim could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the Company will not be subject to claims that will result in
liability in excess of its insurance coverage or that appropriate insurance will
continue to be available to the Company in the future at commercially reasonable
rates. See "Business -- Information Technology Services."
LONG SALES AND PROJECT DELIVERY CYCLES. The Company's sales process is
often subject to delays associated with the lengthy approval process that
typically accompanies significant capital expenditures by a customer. During
this process, the Company expends substantial time, effort and resources
marketing its services, preparing contract proposals and negotiating contracts.
Any failure by the Company to procure a signed contract after expending
significant time, effort and resources could have a material adverse effect on
the Company's business, financial condition and results of operations. The
delivery of computer network services generally requires a significant
commitment of resources by the Company and by the customer. The length of time
required to complete a project may depend on many factors outside the control of
the Company, including the state of the customer's existing information systems,
budgetary constraints and the customer's ability to commit the personnel and
other resources necessary to complete elements of the project for which the
customer is responsible. In certain instances, projects have been prolonged
substantially as a result of delays attributable to customers. The Company's
contracts with certain of its customers provide for a reduction in the
implementation fee if, among other things, the Company fails to meet certain
milestones on a timely basis. Consequently, the failure of the Company to
deliver its services on a timely and cost-efficient basis could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Sales and Marketing" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
COMPETITION. The healthcare network services industry is comprised of a
large number of participants and is subject to rapid change and intense
competition. The Company's competitors include system integrators, value added
resellers ("VARs"), consulting companies, local and regional network services
firms, telecommunications providers and network equipment, computer systems and
healthcare software vendors, many of which have significantly greater financial,
technical and marketing resources and greater name recognition than does the
Company. In particular, the Company competes with (i) large information
technology companies such as Hewlett-Packard Company ("Hewlett-Packard"),
Electronic Data Systems Corporation ("EDS"), and Integrated Systems Solutions
Corporation, a subsidiary of International Business Machines Corporation
("IBM"); (ii) healthcare information technology companies such as HBO & Company;
and (iii) smaller regional network systems firms. In addition, the Company has
faced, and expects to continue to face, additional competition from new entrants
into its markets. Other healthcare information technology companies not
presently offering or emphasizing network systems services and large network
services companies not currently focusing on healthcare may enter the Company's
markets. Increased competition could result in price reductions, fewer customer
projects, under-utilization of employees, reduced operating margins and loss of
market share, any of which could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. The failure of the Company to compete successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, most of the Company's customers have
internal network support and service capabilities and could choose to satisfy
their needs through internal resources rather than through outside service
providers. As a result, the decision by the Company's customers or potential
customers to perform network services internally could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."
FIXED-PRICE, FIXED-TIME FRAME CONTRACTS. The Company offers the majority of
its computer network systems services on a fixed-price, fixed-time frame basis,
rather than on a time-and-expense
7
<PAGE>
basis. Consequently, the Company bears the risk of cost over-runs in connection
with these projects. The Company's failure to estimate accurately the resources
and time required for a project or its failure to complete its contractual
obligations within the fixed-time frame committed could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONTRACT CANCELLATION RIGHTS; ABSENCE OF LONG-TERM CONTRACTS. Although the
Company enters into agreements with certain of its customers which contemplate
multi-year contract terms, the Company's customers are generally able to reduce
or cancel their use of the Company's services before the end of the contract
term. As a result, the Company believes that the number and size of its existing
projects are not reliable indicators or measures of future revenues. In
addition, the Company has in the past provided, and is likely in the future to
provide, services to customers without long-term contracts. When a customer
defers, modifies or cancels a project, the Company must be able to rapidly
redeploy network engineers and other personnel to other projects in order to
minimize the under-utilization of employees and the resulting adverse impact on
operating results. In addition, the Company's operating expenses are relatively
fixed and cannot be reduced on short notice to compensate for unanticipated
variations in the number or size of projects in progress. As a result, any
termination, significant reduction or modification of its business relationships
with any of its significant customers or with a number of smaller customers
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business -- Sales and
Marketing."
CONSOLIDATION AND UNCERTAINTY IN THE HEALTHCARE INDUSTRY. Substantially all
of the Company's revenues are derived from customers involved in the healthcare
industry. As a result, the Company's business, financial condition and results
of operations are influenced by conditions affecting this industry. Many
provider organizations are consolidating to create larger organizations with
greater regional market power and are forming affiliations for purchasing
products and services. This consolidation could reduce the Company's target
market and result in the termination of certain engagements of the Company. In
particular, this consolidation has resulted, and is likely to continue to
result, in the acquisition of certain of the Company's customers, and such
customers may scale back or terminate their relationship with the Company
following their acquisition. For example, Candler, the Company's first I/S
outsourcing customer, recently signed a letter of intent with St. Joseph's
Hospital to form a joint operating company. The Company anticipates that the
chief executive officer of St. Joseph's Hospital will manage the surviving
entity. The Company believes that it will likely continue its I/S outsourcing
contract with Candler, due in large part to its successful engagement with
Candler and a contractual penalty of $600,000 payable to the Company in the
event of the early termination of this contract due to Candler's merger with St.
Joseph's Hospital. There can be no assurance, however, that the surviving entity
will continue its business relationship with the Company. Moreover, these
consolidating and affiliating enterprises could also have greater bargaining
power which could lead to reductions in the amounts paid to the Company for its
services. The reduction in the size of the Company's target market or the
failure of the Company to maintain adequate price levels could have a material
adverse effect on the Company's business, financial condition and results of
operations. The healthcare industry is also subject to changing political,
economic and regulatory influences that may affect the procurement practices and
operations of participants in the healthcare industry. The Company cannot
predict with any certainty what impact, if any, these developments could have on
its business, financial condition and results of operations. See "Business --
Industry Overview."
RAPID TECHNOLOGICAL CHANGE. The Company has derived, and expects to
continue to derive, substantially all of its revenues from projects based on
complex computer networks. The markets for computer network products and
services are continuing to develop and are subject to rapid change. The
Company's success will depend in part on its ability to offer services that keep
pace with continuing changes in technology, evolving industry standards and
changing customer preferences and to hire, train and retain network engineers
who can fulfill the increasingly complex needs of its customers. There can be no
assurance that the Company will be successful in addressing these developments
in a timely
8
<PAGE>
manner. Any delay or failure by the Company to address these developments could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, there can be no assurance that products,
systems or technologies developed by third parties will not render certain of
the Company's services noncompetitive or obsolete. See "Business -- Information
Technology Services."
DEPENDENCE ON THIRD-PARTY HARDWARE AND SOFTWARE VENDORS. The network
systems solutions delivered by the Company utilize the products of third-party
hardware and software vendors. A significant portion of the Company's
implementation service revenues are derived from the purchase and resale of
these products. Although the Company has distribution agreements with certain
product vendors, there can be no assurance that these agreements will be
renewed. Any significant adverse change in any of these relationships could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Information Technology Services."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS. The Company may in the future
pursue acquisitions of complementary businesses as it seeks to compete in the
rapidly changing industry of healthcare information technology. Acquisitions
involve numerous risks, including difficulties in the assimilation of the
operations and personnel of the acquired business, the diversion of management's
attention from other business concerns, risks of entering markets in which the
Company has no direct prior experience, and the potential loss of key employees
of the acquired business. In addition, future acquisitions by the Company may
result in potentially dilutive issuances of equity securities, the incurrence of
additional debt and amortization expenses related to goodwill and other
intangible assets, which could adversely affect the Company's business,
financial condition and results of operations. The Company currently does not
have any plans, proposals, arrangements or understandings with respect to any
future acquisitions.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS. Since its inception, the Company
has financed its operations through cash provided by operations, the sale of
equity and through debt. In the event that the Company is unable to generate
sufficient revenues to fund its operations in the future, the Company may be
required to raise additional funds to meet its capital and operating
requirements through public or private financing, including equity financing.
Any additional equity financing may be dilutive to stockholders, and debt
financing, if available, will require payment of interest and may involve
restrictive covenants that could impose limitations on the operating flexibility
of the Company. Adequate funds for the Company's operations may not be available
when needed and, if available, may not be on terms attractive to the Company.
The failure to obtain funding on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT. Upon the completion of
this offering, the present executive officers, directors and their respective
affiliates will beneficially own approximately 44.1% of the outstanding Common
Stock (41.9% if the Underwriters' over-allotment option is exercised in full).
As a result, these stockholders will be able to exercise significant influence
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such concentration
of ownership may also have the effect of delaying or preventing a change in
control of the Company. See "Principal and Selling Stockholders" and
"Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this
offering, there has been no public market for the Common Stock and there can be
no assurance that an active trading market will develop or be sustained. The
initial public offering price will be determined by negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters
based on several factors, and may not reflect the price at which the Common
Stock will trade after this offering. In addition, the stock market historically
has experienced volatility which has affected the market price of securities of
many companies and which sometimes has been unrelated to the operating
performance of such companies. The trading price of the Common Stock could also
be subject to significant fluctuations in
9
<PAGE>
response to variations in quarterly results of operations, announcements of new
services by the Company or its competitors, changes in earnings estimates by
analysts, government regulatory action, general trends in the industry, overall
market conditions and other factors. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market after this offering, or the possibility of such sales
occurring, could adversely affect prevailing market prices for the Common Stock.
Of the 11,167,678 shares to be outstanding after this offering, the 3,850,000
shares of Common Stock offered hereby will be freely tradeable without
restriction in the public market, unless such shares are held by "affiliates" of
the Company, as such term is defined in Rule 144 ("Rule 144") under the
Securities Act of 1933, as amended (the "Securities Act"). The remaining
7,317,678 shares will be "restricted securities" as such term is defined in Rule
144. Pursuant to certain lock-up agreements, all of the Company's stockholders
and option holders, including the Company's executive officers and directors who
beneficially hold an aggregate of approximately 4,948,160 shares, have agreed
not to offer, sell or otherwise dispose of any of their shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Alex. Brown & Sons Incorporated. The Company has also entered
into an agreement with the representatives of the Underwriters that it will not
offer, sell or otherwise dispose of shares of Common Stock for a period of 180
days from the date of this Prospectus other than pursuant to the Company's 1996
Stock Option Plan and currently outstanding warrants. The representatives of the
Underwriters may, in their sole discretion and at any time without notice,
release all or any portion of the shares subject to such lock-up agreements.
Upon the completion of this offering, the beneficial owners of approximately
2,220,800 shares of Common Stock and 133,285 shares of Common Stock issuable
upon the exercise of outstanding warrants will be entitled to certain rights
with respect to the registration of such shares under the Securities Act. In
addition, the Company intends to file a Registration Statement on Form S-8 after
the date of this Prospectus in order to register an aggregate of 1,367,925
shares of Common Stock reserved for issuance under its 1996 Stock Option Plan,
of which options to purchase a total of 941,413 shares were outstanding as of
December 31, 1996. See "Principal and Selling Stockholders," "Shares Eligible
for Future Sale" and "Underwriting."
POTENTIAL ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER
PROVISIONS. Certain provisions of Delaware law applicable to the Company could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company, including Section 203 of the Delaware General Corporation Law,
which prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years from the date the
person became an interested stockholder unless certain conditions are met. In
addition, the Board of Directors of the Company may issue shares of Preferred
Stock without stockholder approval on such terms as the Board may determine. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. In addition, the Company's Certificate of Incorporation and
Bylaws provide for a classified board of directors, eliminate the right of
stockholders to act by written consent without a meeting, require advanced
stockholder notice to nominate directors and raise matters at the annual
stockholders meeting, eliminate cumulative voting in the election of directors
and allow for the removal of directors only for cause and with a two-thirds vote
of the Company's outstanding shares. All of the foregoing could have the effect
of delaying, deferring or preventing a change in control of the Company and
could limit the price that certain investors might be willing to pay in the
future for shares of the Company's Common Stock. See "Management" and
"Description of Capital Stock -- Certain Change of Control Provisions."
ABSENCE OF DIVIDENDS. The Company has never declared nor paid cash
dividends on its capital stock. The Company currently intends to retain any
earnings for funding growth and, therefore, does not intend to pay any cash
dividends in the foreseeable future. See "Dividend Policy."
DILUTION. The initial public offering price is substantially higher than
the pro forma net tangible book value per share of Common Stock. Investors
purchasing shares of Common Stock in this offering will therefore incur
immediate and substantial net tangible book value dilution. See "Dilution."
10
<PAGE>
THE COMPANY
DAOU Systems, Inc. was incorporated in California in 1987 and intends to
reincorporate in Delaware prior to the completion of this offering. Unless the
context otherwise requires, references in this Prospectus to "DAOU" and the
"Company" refer to DAOU Systems, Inc., a Delaware corporation, and where
applicable to its California predecessor. The Company's executive offices are
located at 5120 Shoreham Place, San Diego, California 92122. Its telephone
number is (619) 452-2221.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,900,000 shares of
Common Stock offered hereby at an assumed initial offering price of $13.00 per
share are estimated to be $34.6 million ($41.5 million if the over-allotment
option is exercised in full), after deducting the underwriting discounts and
commissions and the estimated expenses of this offering.
The Company expects to use the net proceeds from this offering principally
for working capital and general corporate purposes. The Company may also use a
portion of the proceeds to fund acquisitions of complementary businesses,
although there are no current plans, proposals, arrangements or understandings,
and the Company is not currently engaged in negotiations, with respect to any
such transactions. Pending such uses, the Company intends to invest the net
proceeds of this offering in short-term, interest bearing, investment grade
securities.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never declared nor paid cash dividends on its capital stock.
The Company currently intends to retain any earnings for funding growth and,
therefore, does not intend to pay any cash dividends in the foreseeable future.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis; (ii) on a pro forma basis after giving
effect to the conversion of all outstanding shares of Preferred Stock into
1,603,430 shares of Common Stock upon the completion of this offering and (iii)
as adjusted to give effect to the receipt by the Company of the net proceeds
from the sale of 2,900,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $13.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable preferred stock................................................... $ 8,190 $ -- $ --
Stockholders' equity (1):
Preferred stock: $.001 par value, 5,000,000 shares authorized, actual, pro
forma and as adjusted; no shares issued and outstanding, actual pro forma
and as adjusted.......................................................... -- -- --
Common stock: $.001 par value, 50,000,000 shares authorized, actual, pro
forma and as adjusted; 6,664,248 shares issued and outstanding, actual;
8,267,678 shares issued and outstanding, pro forma; and 11,167,678 shares
issued and outstanding, as adjusted (2).................................. 7 8 11
Additional paid-in capital................................................. 1,246 8,863 43,421
Deferred compensation...................................................... (1,166) (1,166) (1,166)
Accretion of redeemable preferred stock.................................... (572) -- --
Retained earnings.......................................................... 1,342 1,342 1,342
--------- --------- ------------
Total stockholders' equity 857 9,047 43,608
--------- --------- ------------
Total capitalization................................................... $ 9,047 $ 9,047 $ 43,608
--------- --------- ------------
--------- --------- ------------
</TABLE>
- --------------
(1) The Company does not have any short-term or long-term debt.
(2) Excludes (i) 941,413 shares of Common Stock issuable upon exercise of stock
options outstanding under the Company's 1996 Stock Option Plan with a
weighted average exercise price of $5.16 per share at December 31, 1996 and
(ii) 133,285 shares of Common Stock issuable upon exercise of outstanding
warrants at an exercise price of $4.99 per share. See "Management -- 1996
Stock Option Plan," "Certain Transactions," "Description of Capital Stock"
and Note 6 of Notes to Financial Statements.
12
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
December 31, 1996 was approximately $9.0 million or $1.09 per share. Pro forma
net tangible book value per share represents the amount of the Company's
stockholders' equity, less intangible assets, divided by 8,267,678 shares of
Common Stock outstanding after giving effect to the conversion of all
outstanding shares of Preferred Stock into 1,603,430 shares of Common Stock upon
the completion of this offering.
Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after the completion of this offering. After giving
effect to the sale of the 2,900,000 shares of Common Stock offered hereby at an
assumed offering price of $13.00 per share, and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the Company's pro forma net tangible book value at December 31, 1996
would have been approximately $43.6 million, or $3.90 per share. This represents
an immediate increase in pro forma net tangible book value of $2.81 per share to
existing stockholders and an immediate dilution in net tangible book value of
$9.10 per share to new investors purchasing Common Stock in this offering. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 13.00
Pro forma net tangible book value per share at December 31, 1996.......... $ 1.09
Increase per share attributable to new investors.......................... 2.81
---------
Pro forma net tangible book value per share after the offering.............. 3.90
---------
Net tangible book value dilution per share to new investors................. $ 9.10
---------
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1996, after giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock upon the completion of this offering, the
difference between the existing stockholders and the purchasers of shares in the
offering (at an assumed offering price of $13.00 per share) with respect to the
number of shares purchased from the Company, the total consideration paid and
the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 8,267,678 74.0% $ 8,010,000 17.5% $ 0.97
New investors..................................... 2,900,000 26.0 37,700,000 82.5 $ 13.00
------------- ----- -------------- -----
Total......................................... 11,167,678 100.0% $ 45,710,000 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
- --------------
(1) Sales by Selling Stockholders in this offering will cause the number of
shares held by the existing stockholders to be reduced to 7,317,678, or
approximately 65.5% of the total number of shares of Common Stock to be
outstanding after this offering. See "Principal and Selling Stockholders."
The foregoing computations assume no exercise of stock options or warrants
outstanding at December 31, 1996. At December 31, 1996, there were outstanding
stock options to purchase an aggregate of 941,413 shares of Common Stock at a
weighted average exercise price of $5.16 per share. In addition, at December 31,
1996, 133,285 shares of Common Stock were issuable upon exercise of outstanding
warrants at an exercise price of $4.99 per share. To the extent these stock
options and warrants are exercised, there will be further dilution to purchasers
in this offering. See "Management -- 1996 Stock Option Plan," "Certain
Transactions," "Description of Capital Stock" and Note 6 of Notes to Financial
Statements.
13
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of the Company and Notes thereto
included elsewhere in this Prospectus. The statements of operations data for the
years ended December 31, 1994, 1995 and 1996 and the balance sheet data at
December 31, 1995 and 1996 are derived from the Company's financial statements
that have been audited by Ernst & Young LLP, independent auditors, included
elsewhere in this Prospectus. The selected balance sheet data as of December 31,
1994 is derived from the Company's audited balance sheet not included in this
Prospectus. The selected financial data as of December 31, 1992 and 1993 and for
the years then ended is derived from unaudited financial data not included in
this Prospectus. The unaudited financial data include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the Company's financial position at those
dates and results of operations for those periods.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $ 2,728 $ 3,483 $ 8,521 $ 14,330 $ 19,311
Cost of revenues................................................... 1,781 2,322 6,185 8,475 13,556
--------- --------- --------- --------- ---------
Gross profit....................................................... 947 1,161 2,336 5,855 5,755
Operating expenses:
Sales and marketing.............................................. 390 640 796 938 1,853
General and administrative....................................... 556 575 1,507 2,893 3,897
--------- --------- --------- --------- ---------
Total operating expenses........................................... 946 1,215 2,303 3,831 5,750
--------- --------- --------- --------- ---------
Income (loss) from operations...................................... 1 (54) 33 2,024 5
Interest income (expense) net...................................... 4 2 12 67 197
--------- --------- --------- --------- ---------
Income (loss) before income taxes.................................. 5 (52) 45 2,091 202
Provision for income taxes......................................... -- -- 19 851 119
--------- --------- --------- --------- ---------
Net income (loss).................................................. 5 (52) 26 1,240 83
Accretion of redeemable preferred stock............................ -- -- -- 87 485
--------- --------- --------- --------- ---------
Net income (loss) attributable to common stock..................... $ 5 $ (52) $ 26 $ 1,153 $ (402)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income per share(1).................................. $ 0.01
---------
---------
Shares used in computing pro forma net income per share(1)......... 8,888
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......... $ 81 $ 278 $ 264 $ 6,285 $ 2,284
Total assets.............................................. 557 1,474 1,727 12,545 11,910
Long-term debt, less current portion...................... 8 4 -- -- --
Redeemable preferred stock................................ -- -- -- 7,705 8,190
Total stockholders' equity................................ 52 -- 29 1,182 857
</TABLE>
- ----------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma net income per share.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE
RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH
STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS
FACTORS IDENTIFIED IN THIS PROSPECTUS, INCLUDING THE MATTERS SET FORTH UNDER THE
CAPTION "RISK FACTORS," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
The Company designs, implements, supports and manages advanced computer
network systems for hospitals, IDSs and other provider organizations. The
Company believes that its success is attributable to its healthcare industry
focus, depth and breadth of technological expertise, ability to objectively
evaluate its customers' computer network systems due to its vendor independence
and its history of successful customer engagements. The Company's design
services include an assessment of the customer's existing computer network
system, the preparation of voice, video and data network specifications,
technical design documentation and diagrams. DAOU's implementation services
include the purchase, delivery and installation of enterprise-wide computer
network systems. In 1996, revenues from design services averaged approximately
$49,000 per project. In addition, revenues in 1996 from enterprise-wide
implementation service engagements ranged from approximately $500,000 to $4.6
million per project, while revenues from other implementation projects averaged
approximately $70,000. Implementation service revenues consist of third-party
hardware and software products, as well as the Company's professional services.
The Company's gross margin with respect to implementation services varies
significantly depending on the percentage of such services consisting of
products (with respect to which the Company obtains a lower margin) versus
professional services. The Company's support and management services include
remote and on-site network management, as well as I/S outsourcing. The Company
typically provides these services under multi-year contracts.
Historically, the majority of the Company's revenues have been derived from
network design and implementation services which are generally provided on a
fixed-fee basis. These revenues are recognized using the
percentage-of-completion method with progress to completion measured by labor
costs incurred to date compared to total estimated labor costs. The Company may
also provide design and implementation services on a "time and expense" basis
for which revenues are also recognized as services are performed. A design
project typically lasts from three to five months. The time to complete
implementation projects generally ranges from three to six months, although
certain projects have required up to 13 months for completion.
Support and management service revenues are recognized ratably over the
period that these services are provided. The Company anticipates that revenues
from support and management services will increase as a percent of total
revenues in the future. 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
classified as contract work in progress on the Company's balance sheet.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
The Company's revenues were $19.3 million and $14.3 million for the years
ended December 31, 1996 and 1995, respectively, representing an increase of 35%.
Revenues increased primarily due to the introduction of the Company's I/S
outsourcing services for Candler in April 1996. Services to CMC, Mercy and
Candler accounted for approximately $4.1 million, $3.4 million and $2.9 million
of total revenues in 1996, representing approximately 21%, 18% and 15% of total
revenues, respectively.
15
<PAGE>
Cost of revenues was $13.6 million and $8.5 million for the years ended
December 31, 1996 and 1995, respectively, representing an increase of 60%. Gross
margin was 30% and 41% for the years ended December 31, 1996 and 1995,
respectively. This decrease in gross margin was primarily due to the increased
content of professional services in certain implementation projects during 1995,
as well as the lower gross margin related to the Company's I/S outsourcing
services initiated in 1996. The Company believes that the 1996 gross margin is
more indicative of future results than its 1995 gross margin due to the
anticipated growth of its I/S outsourcing services relative to other services.
Sales and marketing expenses were $1.9 million and $938,000 for the years
ended December 31, 1996 and 1995, respectively, representing an increase of 98%.
This increase was primarily due to the establishment of a regional sales
structure, an increase in sales and marketing personnel and the expansion of the
Company's marketing programs. Sales and marketing expenses were 10% and 7% of
revenues for the years ended December 31, 1996 and 1995, respectively. The
Company intends to continue investing in its sales infrastructure and expects
that sales and marketing expenses will continue to increase in dollar terms to
support the anticipated growth in the Company's business.
General and administrative expenses were $3.9 million and $2.9 million for
the years ended December 31, 1996 and 1995, respectively, representing an
increase of 35%. The primary factors contributing to this increase were costs
associated with the Company's larger corporate facility, implementation of a
management information system and the addition of senior management during 1996.
General and administrative expenses were 20% of revenues for the years ended
December 31, 1996 and 1995. The Company expects that general and administrative
expenses will continue to increase in dollar terms to support the anticipated
growth in the Company's business.
Net interest income was $197,000 and $67,000 for the years ended December
31, 1996 and 1995, respectively. Interest income consists of interest on
short-term investments, cash and cash equivalents and notes receivable from
officers and stockholders. Interest expense consists of interest associated with
the Company's business line of credit and term financing of insurance premiums,
but was not significant during either period.
YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company's revenues were $14.3 million and $8.5 million for the years
ended December 31, 1995 and 1994, respectively, representing an increase of 68%.
Revenues increased primarily due to growth in design and implementation service
revenues. Increases in both the number and size of management service projects
from both new and existing customers resulted in a 42% increase in management
service revenues in 1995. Services to Mercy accounted for $6.8 million, or
approximately 48%, of total revenues in 1995.
Cost of revenues was $8.5 million and $6.2 million for the years ended
December 31, 1995 and 1994, respectively, representing an increase of 37%. Cost
of revenues increased primarily due to greater product costs associated with
implementation projects and increased labor costs associated with new management
service contracts. Gross margin was 41% and 27% of revenues for the years ended
December 31, 1995 and 1994, respectively. This increase was attributable
primarily to the higher content of professional services in implementation
projects, an increase in the number of management service contracts, a reduction
in the use of third-party professional services and increased utilization of
internal engineering resources.
Sales and marketing expenses were $938,000 and $796,000 for the years ended
December 31, 1995 and 1994, respectively, representing an increase of 18%. This
increase was due primarily to the growth in revenues and the number of people
involved in sales activities, as well as the introduction of a new corporate
marketing strategy. Sales and marketing expenses were 7% and 9% of revenues for
the years ended December 31, 1995 and 1994, respectively. This decrease as a
percentage of revenues was due primarily to increased revenues and decreased
commissions.
16
<PAGE>
General and administrative expenses were $2.9 million and $1.5 million for
the years ended December 31, 1995 and 1994, respectively, representing an
increase of 92%. This increase was due to one-time relocation costs and expenses
of approximately $205,000 associated with the Company's move to new corporate
facilities and continued growth in administrative staffing levels in finance,
purchasing and human resources. General and administrative expenses were 20% and
18% of revenues for the years ended December 31, 1995 and 1994, respectively.
Excluding one-time relocation expenses, there was no significant change on a
percentage of revenue basis.
INCOME TAXES
In 1996, 1995 and 1994, the effective tax rates were 59%, 41% and 42%,
respectively, and exceeded the expected combined federal and state statutory
rate of 40% primarily due to the nondeductibility of certain operating expenses,
including the amortization expense related to compensatory stock options granted
during 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through a combination of cash generated from operations and the private sale of
equity securities. As of December 31, 1996, the Company had raised $7.6 million,
net of issuance costs, from the private sale of equity securities. At December
31, 1996, the Company had $2.3 million in cash and cash equivalents and $1.5
million available under a revolving line of credit. Advances under the revolving
line of credit bear interest at the bank's reference rate (8.25% at December 31,
1996) plus 0.5% per annum. Through December 31, 1996, there have been no
borrowings under the revolving line of credit, which expires October 1, 1997.
This line of credit is secured by substantially all of the assets of the Company
and contains customary covenants and restrictions. As of December 31, 1996, the
Company was in compliance with all such covenants and restrictions.
During the year ended December 31, 1996, cash used in operating activities
was $3.2 million, which resulted primarily from an increase in unbilled
receivables and cash expended for contract costs reported as contract work in
progress on the Company's balance sheet (see Note 1 of Notes to Financial
Statements). The net cash used in operating activities was offset by the
liquidation of short-term investments upon maturity.
The Company believes that the net proceeds from this offering, together with
available funds, will be sufficient to meet its capital requirements for the
foreseeable future. The Company may also utilize cash to acquire or invest in
complementary businesses, although the Company does not have any plans,
proposals, arrangements or understandings with respect to any future
acquisitions. The Company may sell additional equity or debt securities or
obtain additional credit facilities. The sale of additional equity securities
could result in additional dilution to the Company's stockholders and the
incurrence of additional debt could result in additional interest expense.
17
<PAGE>
QUARTERLY RESULTS AND SEASONALITY
The following table presents quarterly operating results for each of the
last eight quarters. This information has been derived from unaudited financial
statements and has been prepared on the same basis as the Company's audited
financial statements which appear elsewhere in this Prospectus. In the opinion
of the Company's management, this information reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information in accordance with generally accepted
accounting principles. The operating results for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 2,597 $ 1,390 $ 3,096 $ 7,247 $ 2,329 $ 5,201 $ 4,827
Cost of revenues..................... 847 1,013 2,005 4,610 1,675 3,668 3,307
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit......................... 1,750 377 1,091 2,637 654 1,533 1,520
Operating expenses:
Sales and marketing................ 273 216 202 247 330 376 461
General and administrative......... 372 478 827 1,216 791 944 926
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............. 645 694 1,029 1,463 1,121 1,320 1,387
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations........ 1,105 (317) 62 1,174 (467) 213 133
Interest income (expense), net....... -- (4) (2) 73 70 50 43
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.... 1,105 (321) 60 1,247 (397) 263 176
Provision (benefit) for income
taxes............................... 399 (149) 61 540 (234) 155 104
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).................... $ 706 $ (172) $ (1) $ 707 $ (163) $ 108 $ 72
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC. 31,
1996
-----------
<S> <C>
Revenues............................. $ 6,954
Cost of revenues..................... 4,906
-----------
Gross profit......................... 2,048
Operating expenses:
Sales and marketing................ 686
General and administrative......... 1,236
-----------
Total operating expenses............. 1,922
-----------
Income (loss) from operations........ 126
Interest income (expense), net....... 34
-----------
Income (loss) before income taxes.... 160
Provision (benefit) for income
taxes............................... 94
-----------
Net income (loss).................... $ 66
-----------
-----------
</TABLE>
The following table sets forth, as a percentage of revenues, certain
unaudited quarterly statements of operations data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENT OF REVENUES:
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin......................... 67.4 27.1 35.2 36.4 28.1 29.5 31.5
Sales and marketing.................. 10.5 15.5 6.5 3.4 14.2 7.2 9.6
General and administrative........... 14.3 34.4 26.7 16.8 34.0 18.2 19.2
Income (loss) from operations........ 42.6 (22.8) 2.0 16.2 (20.1) 4.1 2.8
Net income (loss).................... 27.2 (12.4) 0.0 9.8 (9.8) 2.2 1.5
<CAPTION>
DEC. 31,
1996
-----------
<S> <C>
AS A PERCENT OF REVENUES:
Revenues............................. 100.0%
Gross margin......................... 29.5
Sales and marketing.................. 9.9
General and administrative........... 17.8
Income (loss) from operations........ 1.8
Net income (loss).................... 1.0
</TABLE>
A substantial majority of the Company's operating expenses, particularly
personnel and related costs, depreciation and rent, are relatively fixed in
advance of any particular quarter. However, variations in the Company's revenues
and operating results occur from time to time, as a result of various factors,
including: (i) the reduction in size, delay in commencement, interruption or
termination of one or more significant projects or contracts; (ii) the
completion during a quarter of one or more significant projects; (iii) the
failure to estimate accurately the resources required to complete new or ongoing
projects; (iv) the relatively longer sales cycle in obtaining new customers and
larger contracts; (v) the timing and extent of employee training or the loss of
key employees; (vi) competition; (vii) the development and introduction of new
services; and (viii) general economic conditions which may affect the buying
decisions of the Company's current and prospective customers. In addition, the
Company plans to continue to expand its operations by hiring additional network
engineers and other employees, and
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<PAGE>
adding new offices, systems and other infrastructure. The resulting increase in
operating expenses will generally be incurred prior to any increase in revenues.
Consequently, the Company's business, financial condition and results of
operations would be materially and adversely affected if revenues do not
increase to support such expenses. A variation in the timing of the commencement
or completion of customer assignments, particularly at or near the end of any
quarter, may cause significant variations in operating results from quarter to
quarter and could result in losses for a particular quarter. In addition, an
unanticipated delay or termination of a major project could require the Company
to maintain or terminate under-utilized employees which could, in either case,
result in higher than expected expenses during a quarter. The Company believes
that quarterly revenues and operating results are likely to vary significantly
in the future and that period-to-period comparisons of its revenues and
operating results are not necessarily meaningful and should not be relied on as
indications of future performance. Furthermore, these variations in revenues and
operating results could cause significant variations in the price of the
Company's Common Stock.
19
<PAGE>
BUSINESS
THE COMPANY
DAOU Systems, Inc. ("DAOU" or the "Company") designs, implements, supports
and manages advanced computer network systems for hospitals, integrated
healthcare delivery systems ("IDSs"), and other healthcare provider
organizations ("provider organizations"). DAOU combines its knowledge of the
specialized information needs of the healthcare industry with its technological
expertise in computer network systems to provide advanced, reliable and
cost-effective computer network solutions to provider organizations. The Company
believes that its success is attributable to its healthcare industry focus,
depth and breadth of technological expertise, ability to objectively evaluate
its customers' computer network systems due to its vendor independence and its
history of successful customer engagements. The Company's design services
include an assessment of the customer's existing computer network system and the
preparation of voice, video and data network specifications, technical design
documentation and diagrams. DAOU's implementation services include the purchase,
delivery and installation of enterprise-wide computer network systems. The
Company's support and management services are typically provided under
multi-year contracts and include remote and on-site network management services,
as well as information systems outsourcing ("I/S outsourcing"). The Company
provides network support services to its customers through its regional sales
and support structure and a 24-hour technical support hotline available seven
days a week. DAOU typically provides its services on a fixed-price, fixed-time
frame basis. Since 1987, the Company has provided computer network services to
over 350 customers ranging in size from single-site organizations to multi-state
organizations with over 80 sites. The Company's customers include Catholic
Medical Center of Brooklyn and Queens, Inc., New York ("CMC"); Mercy Health
Services, Farmington Hills, Michigan ("Mercy"); Atlantic Health System,
Morristown, New Jersey; Lutheran Health Systems, Fargo, North Dakota; Candler
Health System, Savannah, Georgia ("Candler"); and St. Mary's Health Network,
Reno, Nevada.
INDUSTRY OVERVIEW
Pressure by employers, health insurers and government payors to control
escalating healthcare costs is driving a movement in the healthcare industry
towards managed care and new forms of reimbursement for healthcare providers.
Payors are also demanding that providers differentiate their services by
demonstrating quality of care. These economic and competitive pressures are
causing healthcare providers to consolidate and form multi-entity provider
organizations such as IDSs. IDSs may consist of hospitals, primary care and
multi-specialty physician groups, out-patient care facilities and home
healthcare providers, and are designed to serve economically the healthcare
needs of a regional population. The consolidation of provider organizations and
the formation of IDSs have resulted in changing healthcare information needs as
these organizations increasingly require prompt access to consistent and
comprehensive patient information at each location where care is provided.
The existing information systems in many provider organizations were
developed to meet the needs of a single facility, such as a hospital or an
out-patient surgery center. The consolidation of these facilities and the
formation of IDSs create complex organizations with many disparate and
specialized information system infrastructures. The Company believes that these
infrastructures frequently are inadequate to support the flow and integration of
information necessary to efficiently manage a complex provider organization. A
typical multi-site IDS, for example, requires a computer network that is capable
of supporting multiple applications and processing high volumes of data across
geographically remote locations. In addition, the increasing variety of hardware
and software applications utilized throughout provider organizations has
resulted in connectivity and compatibility problems for many computer networks.
These networks must not only meet the heightened information needs of provider
organizations, but also have the capability to migrate to emerging technologies.
As a result of the competitive healthcare environment and the growing
complexity of computer network systems, provider organizations have found it
increasingly difficult to implement and manage these systems. In addition, the
Company believes that the high demand for qualified network engineers and other
technical personnel has made it increasingly difficult for provider
organizations to recruit and
20
<PAGE>
train qualified information technology professionals. Consequently, many
provider organizations are looking to third parties for the technological
expertise and personnel to meet their information systems requirements. DAOU
believes that the ongoing consolidation among healthcare provider organizations
and the increasing complexity and rapid evolution of computer network system
technologies have created a significant opportunity for companies specializing
in providing computer network system solutions to provider organizations.
THE DAOU SOLUTION
DAOU provides a broad array of services to assist hospitals, IDSs and other
provider organizations in designing, implementing, supporting and managing
complex computer network systems consistent with their unique and changing
information needs. The Company believes that the delivery of a combination of
design, implementation and management services better enables the Company's
personnel to fully understand the customer's computing and operating
environments, install computer networks that meet the customer's specialized
requirements, train the customer's users and internal network management staff
prior to the full migration to a new computer network system and provide
effective, ongoing support and management of the computer network. DAOU has
extensive experience resolving the integration, implementation and management
issues faced by provider organizations. In addition, the Company has substantial
knowledge of numerous software applications developed by healthcare information
system and software vendors, as well as extensive expertise in advanced
information technologies and computer network systems, including WANs,
network/host security, high-performance LANs, Internet/Intranet and asynchronous
transfer mode ("ATM") technologies. DAOU uses the products and applications of
various hardware and software vendors to integrate the existing computing and
communication devices and equipment of legacy systems to create advanced
computer network systems. In addition, the Company does not manufacture hardware
or develop software, nor does it have exclusive arrangements with any vendors of
these products. DAOU believes that this vendor independence enables it to
objectively assess its customers' information technology requirements and select
the optimal mix of applications and products. The Company believes that its
cumulative experience, healthcare focus and technology expertise enable it to
deliver advanced computer network systems and services on a timely basis and at
fixed prices.
STRATEGY
The Company's objective is to be a leading provider of advanced computer
network systems and network management services to healthcare provider
organizations. The principal elements of the Company's strategy are:
- EXPAND AND STRENGTHEN CUSTOMER RELATIONSHIPS. The Company will continue to
focus its sales and marketing efforts on major medical centers and
hospitals around which IDSs are forming. In addition, the Company plans to
focus additional resources on serving the information technology needs of
emerging provider organizations, such as physician practice management
companies, long-term care providers and rehabilitation service providers.
DAOU intends to further develop its regional sales and support structure
in order to monitor more closely the needs of existing and prospective
customers. For example, the Company recently has placed throughout its
regional structure customer-dedicated account managers who are responsible
for maintaining customer satisfaction and developing new business
opportunities.
- DEVELOP COMPLEMENTARY SERVICES. The Company intends to develop services
which complement its existing services and increase its recurring revenue
stream. Currently, DAOU is expanding its services in the areas of voice,
video and data integration, telemedicine, I/S outsourcing, Internet/
Intranet and cabling services. The Company intends to develop additional
service capabilities such as network outsourcing, remote network
monitoring and network traffic pattern analysis. To obtain feedback
regarding its present and future services from a customer perspective, the
Company has established an advisory board comprised of chief information
officers in the healthcare industry.
21
<PAGE>
- MAINTAIN TECHNOLOGY EXPERTISE. The Company believes that demand for
complex, emerging technologies will grow as provider organizations seek to
employ new applications that combine voice, video and data. The Company
intends to remain at the forefront of information technology solutions for
provider organizations and to continue developing its expertise in
emerging technologies. Specific development efforts include in-house
vendor presentations to educate employees on technological advances and
new products, in-house testing of new systems, products and applications,
attendance at various information technology trade shows and participation
in the ATM Forum, an industry council that provides input regarding
emerging ATM standards.
- RECRUIT, TRAIN AND RETAIN QUALIFIED PERSONNEL. The Company believes that
its competitive position is enhanced by its ability to hire, train and
retain qualified technical and management personnel. DAOU believes that a
key factor in recruiting and retaining its technical personnel is its
ability to provide them with exposure to and training in a variety of
leading edge technologies. The Company intends to continue dedicating
significant resources to train its technical employees by conducting
in-house workshops presented by senior network engineers, inviting vendors
to provide on-site presentations and sponsoring employees to attend vendor
certification programs.
- HEIGHTEN DAOU'S HEALTHCARE INDUSTRY PRESENCE. The Company intends to
leverage its history of successful customer engagements to become a
recognized leader in providing information technology solutions to
provider organizations. The Company is expanding its marketing program to
enhance the market presence and visibility of the Company and its services
among potential healthcare customers.
INFORMATION TECHNOLOGY SERVICES
DAOU designs, implements, supports and manages computer network systems that
are capable of providing access to information such as patient records, X-rays
and billing information at each site of a provider organization. The Company
provides to its customers a broad range of computer network services, which
often follow a progression from initial network design through implementation
and computer network management. DAOU believes that the delivery of a
combination of design, implementation and management services better enables the
Company's personnel to fully understand the customer's computing and operating
environments, install computer networks that meet the customer's specialized
requirements, train the customer's users and internal network management staff
prior to the full migration to a new computer network system and provide
effective, ongoing support and management of the computer network. The Company
uses the products and applications of various hardware and software vendors to
integrate the existing computing and communication devices and equipment of
legacy systems to create advanced computer network systems. The Company focuses
on the specialized requirements of each customer project and utilizes formal
planning, monitoring and communication systems and methodologies to ensure
proper project completion and customer satisfaction.
NETWORK SERVICES
DAOU provides network services ranging from network design to large-scale
network implementation. The Company generally provides network design services
prior to the delivery of its other network or management services in order to
determine the proper scope and delivery of these other services. DAOU generally
contracts with its customers on a fixed-price basis for defined services
delivered in accordance with scheduled milestones. The typical sales cycle for
these services begins with an engagement for network design followed by the
installation of enterprise-wide computer network systems.
NETWORK DESIGN. DAOU's network design services include a review and audit
of a customer's existing information technology infrastructure and an assessment
of the functional requirements of its computer network system. The Company
conducts detailed site visits and interviews key customer personnel in order to
identify the specific technologies to be used. The Company then determines how
new technologies will integrate into the customer's existing hardware and
software and how the entire computer network system will be managed on an
ongoing basis. Following its review, the Company
22
<PAGE>
prepares technical design documentation and diagrams of the physical, logical,
operational and communication infrastructures. The Company also prepares voice,
video and data network specifications, as appropriate, and details the
implementation steps necessary to meet the customer's specific computer network
requirements. As part of this process, the Company designs integration
strategies for designated applications, fault-tolerant strategies to help ensure
reliable network operation and migration strategies for customer utilization of
emerging technologies. The Company also develops detailed recommendations for
computer network systems, including the selection of appropriate network
products and the design of multi-vendor integration plans. The typical
engagement period for network design services is three to five months.
NETWORK IMPLEMENTATION. The Company's network implementation services
involve the purchase,
delivery, testing and installation of enterprise-wide computer network systems.
Networks installed by the Company provide a variety of features and services,
including switch/bridge/router configuration, PC-to-host emulation, legacy
network integration, gateway installation, universal workstation design and
installation, remote-site connectivity solutions, dial-up remote access
solutions, document management, imaging installations, video conferencing and
telemedicine installations. For each implementation project, the Company assigns
a project management team typically consisting of a project manager, an account
manager, a senior engineer and other technical personnel, as well as
subcontractors and third-party vendors if required. Each project management team
is carefully selected for its technical expertise in specific areas to meet the
requirements of a particular project. The project team is responsible for
creating an installation schedule, ensuring compliance with established
milestones, providing on-site coordination of the activities of DAOU's
personnel, subcontractors and third-party vendors, testing network performance,
including stress and data traffic diagnostics, and providing regular progress
reports to the project manager.
The Company installs a computer network by first conducting a detailed
review of the network design to determine the connectivity and product
requirements. DAOU typically purchases the various network components which have
been specified. After delivery to its facilities, the Company connects these
components prior to installation at the customer's site and then conducts
various tests of the computer network system, simulating the customer's actual
computing environment in accordance with the customer's software applications
and specifications. The Company also tests the network's configuration,
connectivity and compatibility and analyzes the load and data throughput
capacity of the network. This testing process reduces downtime risk and helps
ensure that the network installation will occur with minimal disruption to the
customer's ongoing business operations.
The Company manages the installation of the computer network equipment, as
well as software and cabling, using its own personnel or selected
subcontractors. Throughout the installation process, the Company's personnel
monitor the project's progress to ensure compliance with all network
specifications. Upon completion of the equipment installation, the Company
conducts additional connectivity testing and diagnostics. The engagement period
for these services generally ranges from three to six months, but varies
depending on the size and complexity of the implementation project.
MANAGEMENT SERVICES
As computer network systems become more complex, provider organizations are
experiencing difficulties in hiring, training and retaining information
technology professionals who can maintain the performance and functionality of
their computer network systems. Accordingly, provider organizations have begun
to outsource certain maintenance and management functions of their information
systems departments. DAOU provides support and management services that are
designed to maintain the effective performance of a customer's computer network
system, as well as I/S outsourcing services that are designed to manage a
customer's information services functions. The Company generally provides these
services in multi-year engagements on a fixed-price basis.
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<PAGE>
NETWORK SUPPORT. The Company provides a 24-hour technical support hotline
available seven days a week, as well as other network support resources such as
on-site seminars and on-line support. DAOU also informs its customers of new
technological advances and network solutions that may help increase the utility
and functionality of their computer network systems. The Company intends to
develop additional support services such as continuous network monitoring in
order to monitor remotely the performance of computer network systems on an
ongoing basis and detect and report network problems. The initial engagement
period for the Company's existing support services typically is for one year,
subject to annual renewal.
ENTERPRISE NETWORK MANAGEMENT. The Company provides a range of enterprise
network management services to manage and support a customer's computer network
system. The Company uses its technical expertise and staffing experience to
package, price and deliver combinations of these services at collective rates
which are frequently lower than if provided in-house by the customer. The
customer benefits from the Company's experience in providing enterprise network
management services in a broad range of operating environments, including
client/server networks supporting both Internet and workgroup protocols
intermingled with legacy networks. The engagement period for these services
typically ranges from one to five years. The Company's enterprise network
management services include combinations of the following services, which are
selected by the customer to meet its specific needs:
- DAOU EMPLOYEES ON-SITE. DAOU works with a customer to assess the
appropriate staffing needs to maintain and support its computer network
system. The Company places its employees on-site on a full-time basis to
provide network support services and ongoing training of the customer's
internal staff. This service allows the customer to benefit continuously
from DAOU's technical expertise and to reduce its hiring and training of
internal network management personnel.
- CONTINUOUS NETWORK PLANNING. DAOU's design personnel evaluate a customer's
computer network system and provide recommendations for new network
capabilities and capacity on an ongoing basis consistent with the evolving
needs and strategy of the customer. In addition, DAOU evaluates hardware
and software options, interprets research and development results, updates
existing network designs and researches specific products and technologies
of interest to customers. The Company provides these services subject to
predetermined schedules.
- "BURST MODE" IMPLEMENTATION. DAOU provides additional technical personnel
during periods of peak network requirements to accommodate and assist in
network upgrade implementation or to accommodate the anticipated or
unanticipated need for additional technical staff. This service enables
the customer to preplan changes in its computer network without the
problems associated with recruiting and training temporary staff or hiring
excess permanent technical personnel.
- NETWORK SUPPORT. Depending on the specific needs of each customer, the
Company also provides network support services as part of its combination
of enterprise network management services.
I/S OUTSOURCING. The Company has recently introduced comprehensive I/S
outsourcing services for provider organizations that elect to outsource all or a
portion of their information systems functions. I/S outsourcing services involve
long-term engagements with customers whereby the Company may staff up to the
entire information systems department and is responsible for the management and
support of the customer's computer network system. DAOU provides its I/S
outsourcing services in accordance with pre-determined, detailed schedules and
plans established with the customer. DAOU entered into its first I/S outsourcing
contract in April 1996 with Candler (the "Candler Contract"). Under the Candler
Contract, the Company is responsible for the management and staffing of
Candler's information systems functions with the Company's own employees and
acts on behalf of Candler with respect to ongoing enhancements and maintenance
of hardware and software products from third-party vendors. Additional I/S
outsourcing services under the Candler Contract include: (i) the implementation
of operating procedures for and management and staffing of various information
systems departments; (ii) the establishment and management of the information
systems budget, including personnel and capital expenditures; (iii) the
negotiation and management of hardware and software vendor contracts; (iv)
attendance at internal and external management meetings, user groups, convention
activity and corporate meetings;
24
<PAGE>
(v) the development and implementation of an information technology strategic
plan; and (vi) ongoing recruiting and training of Candler's employees with
respect to the computer network and its applications. The term of the Candler
Contract is for five years and the Company anticipates that the typical contract
period for additional I/S outsourcing contracts will be for three to five years.
There can be no assurance, however, that a customer will not terminate its
contract with the Company prior to the completion of the contract term. See
"Risk Factors -- Contract Cancellation Rights; Absence of Long-Term Agreements"
and "-- Consolidation and Uncertainty in the Healthcare Industry."
OTHER SERVICES
The Company is expanding its current services and developing new services
that will assist provider organizations with the management and support of their
computer network systems. DAOU is expanding its current services in the areas of
voice, video and data integration, telemedicine, I/S outsourcing,
Internet/Intranet and cabling. The Company intends to develop new service
capabilities, such as network outsourcing (whereby the Company outsources
hardware as well as personnel), remote network monitoring and network traffic
pattern analysis. The Company intends to expand or develop these services either
internally or through acquisitions.
DAOU ADVISORY BOARD
In 1994, the Company established its Advisory Board (the "Advisory Board"),
a non-governing body currently comprised of twelve chief information officers
("CIOs") of various provider organizations. The Advisory Board meets as a group
annually and the members confer separately with the Company periodically to
provide advice on issues and trends in the healthcare industry and emerging
technologies, as well as to provide strategic direction and feedback regarding
the Company's present and future services. Members of the Advisory Board are
reimbursed for travel, lodging and meal expenses incurred in connection with
attendance at the Advisory Board's sessions and may also receive options to
purchase shares of the Company's Common Stock. Larry Grandia, the CIO of
Intermountain Health Care Inc., serves as the Chairman of the Advisory Board.
RECRUITING AND TRAINING OF TECHNICAL EMPLOYEES
The Company dedicates significant time and resources to recruit, train and
retain qualified technical personnel. The technical staff of the Company
consists of senior network engineers, network engineers and network systems
technicians. The Company hires many of its technical staff as entry-level
network systems technicians and provides these individuals with the necessary
training and experience to become network engineers who are responsible for
network configuration, testing, burn-in analysis, installation and
documentation. Further training and experience is provided to enable these
engineers to become senior network engineers who are responsible for project and
resource management. The Company's technical staff undergoes extensive training
and maintains certifications from leading network technology vendors such as
Cisco Systems, Inc., Bay Networks, Inc., Microsoft Corporation and 3Com
Corporation. In addition, the Company is a member of leading technological
forums and organizations, including the ATM Forum, the CHIM Telecommunications
Committee, the HL7 Committee and the BICSI Organization.
The Company believes that its future success will depend in large part on
its ability to hire, train and retain qualified network engineers who together
have expertise in a wide array of network and computer systems and a broad
understanding of the provider organizations that the Company serves. Competition
for qualified network engineers is intense and is expected to increase. In
particular, competition is intense for the limited number of qualified senior
network engineers. Consequently, there can be no assurance that the Company will
be successful in attracting and retaining such personnel. While the Company is
currently experiencing low rates of turnover, there can be no assurance that
these rates of turnover will not increase in the future. Any inability of the
Company to hire, train and retain a sufficient number of qualified network
engineers could impair the Company's ability to adequately manage and
25
<PAGE>
complete its existing projects or to obtain new projects, which, in turn, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Each technical employee is required to enter into a confidentiality
agreement with the Company designed to protect the Company's trade secrets and
other confidential information during and subsequent to employment with the
Company. Any significant loss of employees to a competitor could have a material
adverse effect on the Company's business, financial condition and results of
operations.
SALES AND MARKETING
The Company's sales and support operations are divided into four regional
organizations located in the west, midwest, east and southeast regions of the
United States. A vice president heads each regional organization and oversees
the management of existing customers by the account managers and the development
of new customers by the account executives. In particular, account managers are
responsible for maintaining customer satisfaction and developing new business
opportunities as customer needs for computer network services evolve or
increase. The Company intends to create a fifth regional organization in the
southwest region during 1997.
The Company seeks to establish long-term relationships with its customers by
providing high levels of service and by becoming an integral part of their
computer network systems operations. The Company focuses its sales and marketing
efforts on the CIOs and other technology decision makers of IDSs, hospitals and
other provider organizations. The Company relies upon its reputation in the
marketplace, the personal contacts and networking of its professionals and the
various programs of its marketing department to develop new business
opportunities. The Company also receives sales leads directly from consultants,
VARs and product and service vendors.
The principal objectives of the Company's marketing department are to
increase the Company's market presence, provide strategic direction and to
generate sales leads. As a supplement to the direct selling efforts of the
Company, the marketing department has developed various programs that include
advertising campaigns, trade show participation, direct mail campaigns, public
relations programs, marketing research and communications and the development of
sales presentation materials. The Company's marketing efforts are enhanced by
speaking engagements and the publication of technical articles and reports
directed to the healthcare information technology industry. The Company's
marketing department is also responsible for the continued development of the
Company's presence on the Internet as a new marketing channel.
COMPETITION
The healthcare network services industry is comprised of a large number of
participants and is subject to rapid change and intense competition. The
Company's competitors include system integrators, VARs, consulting companies,
local and regional network services firms, telecommunications providers and
network equipment, computer systems and healthcare software vendors, many of
which have significantly greater financial, technical and marketing resources
and greater name recognition than does the Company. In particular, the Company
competes with (i) large information technology companies such as
Hewlett-Packard, EDS and Integrated Systems Solutions Corporation, a subsidiary
of IBM; (ii) healthcare information technology companies such as HBO & Company;
and (iii) smaller regional network systems firms. In addition, the Company has
faced, and expects to continue to face, additional competition from new entrants
into its markets. Other healthcare information technology companies not
presently offering or emphasizing network systems services and large network
services companies not currently focusing on healthcare may enter the Company's
markets. Increased competition could result in price reductions, fewer customer
projects, under-utilization of employees, reduced operating margins and loss of
market share, any of which could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors. The failure of the Company to compete successfully would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, most of the Company's customers have
internal network support and
26
<PAGE>
service capabilities and could choose to satisfy their needs through internal
resources rather than through outside service providers. As a result, the
decision by the Company's customers or potential customers to perform network
services internally could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company believes that the principal competitive factors in the markets
in which it competes include: reputation, healthcare industry expertise, network
performance and reliability, timely delivery of services, quality of service,
responsiveness to customers, product knowledge and technological expertise,
marketing, customer relationships and price. The Company believes that it is
competitive with respect to the above mentioned factors.
CUSTOMERS
Since 1987, DAOU has provided computer network services to over 350
customers ranging in size from single-site organizations to multi-state
organizations with over 80 sites. The Company's customers include CMC, New York;
Mercy, Farmington Hills, Michigan; Atlantic, Morristown, New Jersey; Lutheran
Health Systems, Fargo, North Dakota; Candler, Savannah, Georgia; and St. Mary's
Health Network, Reno, Nevada. The Company has derived, and believes that it will
continue to derive, a significant portion of its revenues from a relatively
limited number of large customer contracts. In 1996, CMC, Mercy and Candler
accounted for approximately 21%, 18% and 15% of total revenues, respectively. In
1995, Mercy and Candler accounted for approximately 48% and 11% of total
revenues, respectively. No other customer accounted for more than 10% of the
Company's revenues during such periods.
BACKLOG
The Company includes in sales backlog all unrecognized revenues attributable
to signed contracts for network and management services. At December 31, 1996
and December 31, 1995, the Company's sales backlog was approximately $15.8
million and $6.0 million, respectively. The Company estimates that approximately
46% of its backlog at December 31, 1996 will not be recognized as revenues
during the following twelve months due to the long-term nature of the Company's
contracts. Although the Candler Contract has an initial term of five years,
sales backlog at December 31, 1996 includes estimated payments to be received
under the Candler Contract only through December 31, 1997, because the Company
cannot determine with certainty the exact amounts of the payments to be received
under the Candler Contract subsequent to that date. Furthermore, the Company's
customers are generally able to reduce or cancel their use of the Company's
services before the end of the contract term. Consequently, there can be no
assurance that services included in sales backlog will generate revenues in the
amount estimated or that such revenues will be recognized during the specified
twelve-month period or at all. See "Risk Factors -- Contract Cancellation
Rights; Absence of Long-Term Contracts" and "--Consolidation and Uncertainty in
the Healthcare Industry."
EMPLOYEES
As of December 31, 1996, the Company employed 126 persons. Of these
employees, 82 were involved in providing computer network services, 13 in sales
and marketing and 31 in general administration, finance and clerical. The
Company's employees are not represented by a labor union and the Company's
management believes that its relationship with its employees is good.
FACILITIES
The Company leases approximately 32,000 square feet of office space in San
Diego, California for its principal administrative, support and training
facilities. This lease expires in September 1998. In addition, the Company has
executive offices in Chicago and Atlanta to provide regional sales and support
activities to its customers and plans to establish executive offices in Boston
and Philadelphia during the first quarter of 1997. The Company continually
evaluates the adequacy of its existing facilities and believes that its current
and planned facilities will be adequate for the next twelve months.
27
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of the
date of this Prospectus are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- -------------------------------------------------------------
<S> <C> <C>
Georges J. Daou........................ 35 Chairman of the Board and Chief Executive Officer
Daniel J. Daou......................... 31 President and Director
Robert J. McNeill...................... 58 Executive Vice President and Chief Operating Officer
Fred C. McGee.......................... 50 Senior Vice President, Chief Financial Officer and Secretary
Dan L. Porter.......................... 57 Senior Vice President, Human Resources
Ron V. Mirabile........................ 35 Vice President, Field Services
Eric S. Ringwall....................... 32 Vice President, Technology Services
David W. Jahns (1)(2).................. 31 Director
Bernard F. McDonagh (1)(2)............. 53 Director
John H. Moragne (1)(2)................. 39 Director
</TABLE>
- --------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
MR. GEORGES DAOU, a founder of the Company, has served as Chairman of the
Board and Chief Executive Officer since the Company's inception in 1987. Mr.
Daou sits on the boards of various healthcare and community organizations,
including the College of Healthcare Management Executives and the Healthcare
Information Managers Association. He holds a B.S. in Electrical Engineering and
an M.S. in Information and Communication Theory from the University of
California, San Diego.
MR. DANIEL DAOU, a founder of the Company, has served as President since
December 1994 and as a director since the Company's inception in 1987. From
November 1992 to December 1994, he was the President of Complex Network
Solutions, Inc., an engineering services company. From July 1987 to November
1992, he served as Vice President of the Company. Mr. Daou sits on the board of
a private software company. He holds a B.S. in Computer Engineering from the
University of California, San Diego.
MR. MCNEILL joined the Company as Executive Vice President and Chief
Operating Officer in November 1996. From September 1981 through November 1996,
he served in various executive capacities with Shared Medical Systems
Corporation ("SMS"), a healthcare information services company. In his most
recent position with SMS as Senior Vice President of Marketing, Mr. McNeill was
responsible for marketing and professional services and managed several business
units, including networking and imaging systems integration. He holds a B.S. in
Accounting from St. Joseph's University.
MR. MCGEE joined the Company as Senior Vice President and Chief Financial
Officer in August 1996. From October 1988 through July 1996, Mr. McGee was Vice
President of Finance and Chief Financial Officer of Infrasonics, Inc., a
publicly-traded manufacturer of medical devices used in respiratory care. Prior
thereto, Mr. McGee held various financial and management positions with Sears
Roebuck & Co. and other retail, wholesale and manufacturing companies. He holds
a B.S. in Finance from San Diego State University.
MR. PORTER has served as Senior Vice President, Human Resources, of the
Company since June 1994. From October 1993 to June 1994, he was the Director,
Human Resources of the San Diego Convention Center. From October 1979 to October
1993, Mr. Porter was the Corporate Vice President, Human Resources, of Scripps
Memorial Hospitals, where he was responsible for all human resources activities
at five acute-care facilities, two extended-care facilities and all affiliated
businesses. He holds a B.A. in Psychology from the University of Tulsa.
28
<PAGE>
MR. MIRABILE has served as Vice President, Field Services, since January
1996 and is responsible for network implementation and the Company's engineering
department. After joining the Company as a network engineer in March 1989, he
served as Director of Technical Services from July 1994 to December 1995. Mr.
Mirabile holds a B.S. in Business Information and Decision Systems from San
Diego State University.
MR. RINGWALL has served as Vice President, Technology Services, since
January 1996. From May 1993 to January 1996, he worked as an engineering
consultant to the Company designing computer networks for provider organizations
nationwide. From September 1992 to May 1993, Mr. Ringwall was a network engineer
for Citizens National Mortgage Corporation, a mortgage loan institution. Prior
thereto, he obtained a masters degree in Information Systems Management from the
Naval Postgraduate School. Mr. Ringwall holds a B.A. in Biology from Cornell
University.
MR. JAHNS has been a director of the Company since October 1995. Mr. Jahns
joined Galen Associates, a venture capital investment firm, in January 1993, and
has served as Vice President since January 1994. Prior thereto, he earned an
M.B.A. from the J.L. Kellogg Graduate School of Business. Mr. Jahns currently
serves on the board of directors of various private healthcare services and
technology companies. He holds a B.A. in Political Science and Economics from
Colgate University.
MR. MCDONAGH has been a director of the Company since March 1996. Since
February 1995, he has been Vice President, Investor Relations and Business
Research for United Healthcare Corporation, a managed care services provider,
where he is responsible for the venture investments of that company. From August
1989 to February 1995, Mr. McDonagh was a Senior Healthcare Services Analyst and
managing director for Piper Jaffray, Inc., an investment banking firm. He holds
a B.A. from Manhattan College, a Ph.D. in Statistics from The Catholic
University of America and an M.B.A. from the University of Minnesota.
MR. MORAGNE has been a director of the Company since October 1995. Mr.
Moragne has been a managing director of Trident Capital, Inc., a private
investment firm, since May 1993 and a member of Trident Capital Management, LLC,
an affiliated entity, since October 1995. From August 1989 to May 1993, Mr.
Moragne was a principal of Bain Capital, a private investment firm, as well as a
principal of Information Partners, a private equity firm associated with Dun &
Bradstreet Enterprises and Bain Capital. He currently serves on the board of
directors of various private information technology companies. He holds a B.A.
from Dartmouth College, an M.S. from the Stanford Graduate School of Applied
Engineering and an M.B.A. from the Stanford Graduate School of Business.
All directors currently hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
After this offering, the Company intends to elect two additional directors to
the Board of Directors who are not affiliated with the Company. Upon
reincorporation in Delaware, the Board of Directors will be classified into
three classes. Each class will consist of approximately the same number of
directors, who will serve for a one, two or three-year period or until their
successors are duly elected and qualified. At each annual meeting of
stockholders, the successors to the class of directors whose term then expires
will be elected to hold office for a term expiring at the annual meeting of
stockholders held subsequently in three years. The Board of Directors has a
Compensation Committee and an Audit Committee, each composed of Messrs. Jahns,
McDonagh and Moragne. The Compensation Committee makes recommendations to the
Board of Directors concerning salaries and incentive compensation for the
Company's officers and employees and administers the Company's 1996 Stock Option
Plan. The Audit Committee aids management in the establishment and supervision
of the Company's financial controls, evaluates the scope of the annual audit,
reviews audit results, consults with management and the Company's independent
auditors prior to the presentation of financial statements to the stockholders
and, if appropriate, initiates inquiries into aspects of the Company's financial
affairs. Officers are elected by and serve at the discretion of the Board of
Directors. Georges Daou and Daniel Daou are brothers and Joseph Daou, a Selling
Stockholder and a former officer and director of the Company, is their father.
29
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information for the year ended
December 31, 1996, regarding the compensation of the Company's Chief Executive
Officer and each of the four most highly compensated executive officers of the
Company whose salary and bonus for such year were in excess of $100,000 on an
annualized basis (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------------------ ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- ----------------------------------------------------------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Georges Daou
Chairman of the Board and
Chief Executive Officer.............................................. $ 201,923 $ 35,409 $ 4,774(1)
Daniel Daou
President............................................................ 201,923 41,129 8,244(2)
Joseph Daou
Former Treasurer..................................................... 105,769 -- 6,264(3)
Robert J. McNeill
Executive Vice President and
Chief Operating Officer.............................................. 16,827(4) -- 105,000(5)
Fred C. McGee
Senior Vice President,
Chief Financial Officer and Secretary................................ 44,269(6) -- --
</TABLE>
- --------------
(1) Includes $3,056 of automobile expenses and $1,718 of health insurance
benefits.
(2) Includes $2,480 of automobile expenses, $3,536 of health insurance benefits
and $2,228 of contributions made by the Company under its 401(k) plan.
(3) Includes $2,728 of automobile expenses and $3,536 of health insurance
benefits.
(4) The Company hired Mr. McNeill in November 1996 at an annual salary of
$175,000.
(5) Reflects a one-time signing bonus. See "--Employment Agreement."
(6) The Company hired Mr. McGee in August 1996 at an annual salary of $130,000.
30
<PAGE>
OPTION GRANTS. The following table sets forth certain information for the
year ended December 31, 1996, with respect to grants of stock options to Named
Executive Officers. The Company has not granted any stock appreciation rights to
Named Executive Officers.
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE
UNDERLYING GRANTED TO FAIR MARKET APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE VALUE ON OPTION TERM(3)
GRANTED FISCAL YEAR PRICE DATE OF GRANT EXPIRATION ---------------------------------
NAME (#)(1) 1996 ($/SH)(2) ($/SH) DATE 0%($) 5%($) 10%($)
- --------------------- ----------- ----------------- ----------- --------------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert J. McNeill
(4)................. 140,300 14.9% $4.28 $ 10.69 11/10/06 $ 899,323 $1,842,139 $3,290,035
Fred C. McGee (5).... 63,135 6.7% 4.28 4.28 01/01/06 -- 169,833 430,581
</TABLE>
- --------------
(1) These options were granted under the Company's 1996 Stock Option Plan.
(2) The exercise price is to be paid in cash, by surrendering shares of Common
Stock held by optionee for more than 12 months, or in any combination of
such consideration or such other consideration and method of payment
permitted under applicable law.
(3) The 0%, 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance that the actual stock price
appreciation over the ten-year option term will be at the assumed 0%, 5% or
10% levels or at any other defined level.
(4) In November 1996, the Company granted to Mr. McNeill an option to purchase
140,300 shares of Common Stock at an exercise price of $4.28 per share. This
option vests over five years on each anniversary of November 1, 1996. The
Company has agreed to pay to Mr. McNeill a cash bonus in the amount of the
difference, if any, between (i) the net value of the options at the end of
the third anniversary of their date of issuance and (ii) $1,550,000. See
"--Employment Agreement."
(5) In August 1996, the Company granted to Mr. McGee an option to purchase
63,135 shares of Common Stock at an exercise price of $4.28 per share. This
option vests over five years on each anniversary of January 2, 1996.
The following table sets forth information for the Named Executive Officers
regarding the value of unexercised options held as of December 31, 1996. No
options were exercised by the Named Executive Officers during the year ended
December 31, 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(1)
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
- ------------------------------------------------ ---------------------------------- ---------------------------
<S> <C> <C>
Robert J. McNeill (2)........................... --/140,300 $ --/$899,323
Fred C. McGee................................... --/63,135(3) --/ 404,695
</TABLE>
- --------------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 23, 1996 ($10.69 per share
as determined by the Board of Directors) and the exercise price of the
option.
(2) The Company has agreed to pay to Mr. McNeill a cash bonus in the amount of
the difference, if any, between (i) the net value of the options at the end
of the third anniversary of their date of issuance and (ii) $1,550,000. See
"--Employment Agreement."
(3) Includes options to purchase 12,627 shares which vested on January 2, 1997.
31
<PAGE>
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement effective as of November
11, 1996 with Robert McNeill, its Executive Vice President and Chief Operating
Officer. The agreement provides for (i) a base salary of $175,000 per year, (ii)
a one-time signing bonus not to exceed $105,000 and (iii) up to $120,000 in
annual bonus compensation, subject to achievement by the Company of specified
performance goals. In addition, the Company granted to Mr. McNeill non-qualified
stock options to purchase 140,300 shares of Common Stock at an exercise price of
$4.28 per share, and has agreed to pay to Mr. McNeill a cash bonus in the amount
of the difference, if any, between (i) the net value of the options at the end
of the third anniversary of their date of issuance and (ii) $1,550,000. The
agreement also contains provisions designed to ensure that the after-tax effect
of the options issued to Mr. McNeill will be equivalent to the result that would
pertain had they been issued as incentive stock options ("ISOs") rather than
non-qualified stock options. To accomplish this, the agreement provides that (i)
the Company loan to Mr. McNeill on an interest fee basis an amount of money
equal to the tax liability he incurs upon exercise of the options in excess of
the amount that would have been incurred had the options been originally issued
as ISOs, and (ii) the aforementioned loan will become due and payable at the
earlier of (a) the time of sale or disposition of the shares subject to the
options, (b) the termination date of Mr. McNeill's employment with the Company
or (c) January 17, 2002. The loan amount subject to repayment will be reduced by
the amount, if any, by which the cumulative tax liability on exercise of the
options and on disposition of the underlying shares by Mr. McNeill exceeds the
tax that would have been incurred had the options originally been issued as
ISOs. In the event that Mr. McNeill is terminated without cause, he will be
entitled to severance payments in an aggregate amount not to exceed 18 months of
his base salary. See "Certain Transactions."
DIRECTOR COMPENSATION
Directors of the Company do not receive cash for services that they provide
as directors or as committee members. The Company has granted to each
non-employee director an option to purchase 21,045 shares of Common Stock at an
exercise price of $4.28 per share. These options vest over three years. The
Company anticipates that it will compensate its independent directors in the
future. See "Management -- 1996 Stock Option Plan" and "Certain Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1996, the Compensation Committee of the Board of Directors consisted of
Messrs. Daniel Daou and Moragne and currently consists of Messrs. Jahns,
McDonagh and Moragne. Entities affiliated with Messrs. Jahns, McDonagh and
Moragne have purchased 1,052,975, 210,596 and 737,083 shares of Common Stock,
respectively. No executive officer of the Company served on the compensation
committee of another entity or on any other committee of the board of directors
of another entity performing similar functions during the last fiscal year.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") provides
for the grant of incentive stock options to employees and nonstatutory stock
options to employees, directors and consultants. A total of 1,367,925 shares of
Common Stock have been reserved for issuance under the 1996 Stock Option Plan,
under which options to purchase 941,413 shares of Common Stock have been granted
as of December 31, 1996. Options granted under the 1996 Stock Option Plan
typically vest over five years. The Compensation Committee of the Board of
Directors administers the 1996 Stock Option Plan and determines the exercise
price of options granted thereunder. The exercise price of incentive stock
options must be at least equal to the fair market value of the Common Stock on
the date of grant. In addition, the exercise price of any stock option granted
to an optionee who owns stock representing more than 10% of the voting power of
all classes of stock of the Company must equal at least 110% of the fair market
value of the Common Stock on the date of grant. The exercise price may be paid
in such consideration as determined by the Board of Directors. With respect to
any participant who owns stock representing more than 10% of the voting power of
all classes of stock of the Company, the term of the option is limited to five
years or less. The term for all other options may not exceed ten years.
The Board of Directors may amend or modify the 1996 Stock Option Plan at any
time without the consent of the optionees, so long as such action does not
adversely affect their outstanding options. The
32
<PAGE>
1996 Stock Option Plan will terminate in 2006, unless terminated earlier by the
Board of Directors. Each outstanding option provides that, in the event of a
"change in control," including the dissolution or liquidation of the Company or
a merger of the Company with or into another corporation, each optionee will be
entitled to exercise up to 70% of the shares of Common Stock underlying his
unvested options
immediately prior to the consummation of such "change in control" event.
SECTION 401(K) PLAN
In August, 1994, the Company adopted a 401(k) Salary Savings Plan (the
"401(k) Plan") covering the Company's full-time employees located in the United
States. The 401(k) Plan is intended to qualify under Section 401(k) of the
Internal Revenue Code, so that contributions to the 401(k) Plan by employees or
by the Company, and the investment earnings thereon, are not taxable to
employees until withdrawn from the 401(k) Plan, and so that contributions by the
Company, if any, will be deductible by the Company when made. Pursuant to the
401(k) Plan, employees may elect to reduce their current compensation by up to
the statutorily prescribed annual limit ($9,500 in 1996) and to have the amount
of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but
does not require, additional matching contributions to the 401(k) Plan by the
Company on behalf of all participants in the 401(k) Plan.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Company has adopted provisions in its Certificate of Incorporation that
limit the liability of directors to the maximum extent permitted by Delaware
law. Delaware law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, except liability for (i) any breach of their duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions, or
(iv) any transaction from which the director derived an improper personal
benefit. Such limitation of liability does not apply to liabilities arising
under the federal securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. The Company's Bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws permit such indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and executive officers against expenses (including attorneys' fees), judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding, including expenses incurred in connection with any action by or in
the right of the Company, arising out of such person's services as a director or
executive officer of the Company, any subsidiary of the Company or any other
company or enterprise to which the person provides services at the request of
the Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
The Company's indemnification provisions set forth in its Certificate of
Incorporation, Bylaws and agreements with directors and executive officers
provide for broad indemnification under Delaware law with no express exclusion
for liabilities arising under or in connection with the Securities Act of 1933
(the "Securities Act"). Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. At present, there is no pending
litigation or proceeding involving a director or officer of the Company in which
indemnification is required or permitted, and the Company is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
33
<PAGE>
CERTAIN TRANSACTIONS
In October 1995, the Company issued and sold an aggregate of 1,603,430
shares of Preferred Stock at a purchase price of $4.99 per share. Upon the
completion of this offering, each share of Preferred Stock will convert into one
share of Common Stock. In connection with the Company's sale of Preferred Stock,
Georges Daou, Daniel Daou and Joseph Daou sold an aggregate of 818,416 shares of
Common Stock to the same investors at $4.28 per share. The purchasers of such
shares of Common Stock and Preferred Stock included, among others, the following
entities affiliated with directors of the Company:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
NAME COMMON STOCK PREFERRED STOCK
- ------------------------------------------------------------------------------- --------------- ----------------
<S> <C> <C>
ENTITIES AFFILIATED WITH DIRECTORS
Galen Partners II, L.P. (1).................................................. 256,251 502,041
Galen Partners International, L.P. (1)....................................... 98,043 192,086
Galen Employee Fund, L.P. (1)................................................ 1,539 3,015
Information Associates, L.P. (2)............................................. 233,344 457,163
Information Associates, C.V. (2)............................................. 15,739 30,837
HLM Partners VII, L.P. (3)................................................... 71,167 139,429
</TABLE>
- --------------
(1) David Jahns, a director of the Company, is a Vice President of Galen
Associates, which is affiliated with Galen Partners II, L.P., Galen Partners
International, L.P. and Galen Employee Fund, L.P. Mr. Jahns disclaims
beneficial ownership of the shares held by these entities, except to the
extent of his interest in the shares of Galen Employee Fund, L.P. arising
from his limited partnership interest in such fund. In addition, the Company
has granted to Mr. Jahns options to purchase 21,045 shares of Common Stock
at a price of $4.28 per share.
(2) John Moragne, a director of the Company, is a member of Trident Capital
Management, LLC, the general partner of Information Associates, L.P. and
Information Associates, C.V. Mr. Moragne disclaims beneficial ownership of
the shares held by these entities, except to the extent of his interest in
such shares arising from his interest in Trident Capital Management, LLC. In
addition, the Company has granted to Mr. Moragne options to purchase 21,045
shares of Common Stock at a price of $4.28 per share.
(3) Bernard McDonagh, a director of the Company, is the Vice President, Investor
Relations and Business Research at United Healthcare Corporation, which is
affiliated with HLM Partners VII, L.P. Mr. McDonagh disclaims beneficial
ownership of the shares held by this entity. In addition, the Company has
granted to Mr. McDonagh options to purchase 21,045 shares of Common Stock at
a price of $4.28 per share.
The Company has an employment agreement with Robert McNeill, its Executive
Vice President and Chief Operating Officer. See "Management -- Employment
Agreement."
Complex Network Solutions, Inc. ("CNS"), a company founded in October 1992
by Georges Daou, Daniel Daou and Joseph Daou and of which Daniel Daou served as
President, provided certain engineering services to the Company from October
1992 to December 1994. The Company paid an aggregate of approximately $1.6
million for these services in 1994, but does not intend to enter into any future
business arrangements with CNS.
The Company has from time to time granted options and other compensation to
its directors and executive officers. See "Management -- Executive
Compensation," "-- Director Compensation," "-- 1996 Stock Option Plan" and
"Principal and Selling Stockholders."
The Company loaned to Georges Daou, Daniel Daou and Joseph Daou certain
amounts for personal use. As of December 31, 1996, the balances of these loans
to Messrs. George Daou, Daniel Daou and Joseph Daou were $79,709, $77,374 and
$70,797, respectively. These loans are unsecured, accrue interest at the rate of
6% per annum and are due and payable prior to the completion of this offering.
34
<PAGE>
All future transaction, including any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the Board of Directors, including a majority of the disinterested
members of the Board of Directors or, if required by law, a majority of
disinterested stockholders, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
35
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of December 31, 1996, and as
adjusted to reflect the sale of Common Stock offered by the Company hereby and
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock, for (i) each person who is known by the Company to own beneficially more
than five percent of the Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers and (iv) all directors and executive
officers as a group. Unless otherwise indicated in the footnotes to the table
set forth below, each person or entity named below has an address in care of the
Company's principal executive offices.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY
BEFORE OWNED AFTER
OFFERING OFFERING
------------------------- -------------------------
NAMES AND ADDRESSES(1) NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------------------------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Georges J. Daou................................................... 1,957,361 23.7% 1,757,361 15.7%
Chairman of the Board and
Chief Executive Officer
Daniel J. Daou.................................................... 1,952,361 23.6 1,752,361 15.7
President and Director
Joseph H. Daou.................................................... 1,660,661 20.1 1,376,706 12.3
Former Treasurer and Former Director
Entities Affiliated with Galen Associates (2)..................... 1,059,990 12.8 954,990 8.6
666 Third Avenue, Suite 1400
New York, New York 10017-4011
Entities Affiliated with Trident Capital (3)...................... 744,098 9.0 669,098 6.0
2480 Sand Hill Road, Suite 100
Menlo Park, California 94025
HLM Partners VII, L.P. (4)........................................ 217,611 2.6 196,566 1.8
222 Berkeley Street
Boston, Massachusetts 02116
The Eparchy of Our Lady of Lebanon of Los Angeles, on behalf of
St. John Maron Mission.......................................... 35,000 * 0 *
1546 E. La Palma Avenue
Anaheim, California 92805
The Eparchy of Our Lady of Lebanon of Los Angeles, on behalf of
St. Ephrem Maronite Mission..................................... 30,000 * 0 *
6310 Rancho Mission Road #157
San Diego, California 92108
All directors and executive officers as a group
(10 persons) (5)................................................ 5,632,115 67.6% 4,948,160 44.1%
</TABLE>
- --------------
* Less than 1%.
(1) Except as otherwise indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options or warrants exercisable within 60 days of December 31, 1996 are
deemed outstanding for computing the percentage of the person or entity
holding such options but are not deemed outstanding for computing the
percentage of any other person.
36
<PAGE>
(2) Of the total shares indicated as beneficially owned, Galen Partners II, L.P.
owned 758,292 shares (9.2% of total shares) before this offering and will
own 682,760 shares (6.1% of total shares) after this offering. Galen
Partners International, L.P. owned 290,129 shares (3.5% of total shares)
before this offering and will own 261,116 shares (2.3% of total shares)
after this offering. Galen Employee Fund, L.P. owned 4,554 shares (less than
one percent of total shares) before this offering and will own 4,099 shares
(less than one percent of total shares) after this offering. The general
partner of Galen Partners II, L.P., a Delaware limited partnership, and
Galen Partners International, L.P., a Delaware limited partnership, is GWW
Partners, L.P., a Delaware limited partnership, the general partners of
which are William R. Grant, L. John Wilkerson, Bruce F. Wesson and Rebound
Two (Delaware), L.L.C., a Delaware limited liability company. Mr. Wesson is
also the general partner of Galen Employee Fund, L.P., a Delaware limited
partnership. The total share amounts for the "Entities Affiliated with Galen
Associates" set forth in the above table include 7,015 shares issuable under
stock options held by David Jahns which are exercisable within 60 days of
December 31, 1996. Mr. Jahns is a Vice President of Galen Associates, the
investment manager of these entities, and a limited partner of Galen
Employee Fund, L.P. Mr. Jahns disclaims beneficial ownership of the shares
held by these entities, except to the extent of his interest in the shares
of Galen Employee Fund, L.P. arising from his interest in such entity.
(3) Of the total shares indicated as beneficially owned, Information Associates,
L.P. owned 690,507 shares (8.4% of total shares) before this offering and
will own 617,543 shares (5.5% of total shares) after this offering.
Information Associates, C.V. owned 46,576 shares (less than one percent of
total shares) before this offering and will own 44,540 shares (less than one
percent of total shares) after this offering. Information Associates, L.P.
is a Delaware limited partnership and Information Associates, C.V. is a
Netherlands Antilles limited partnership. The general partner of each of
these entities is Trident Capital Management, L.L.C., a Delaware limited
liability company ("Trident Capital"), the members of which include Donald
R. Dixon, Stephen M. Hall, Robert C. McCormack, Rockwell A. Schnabel and
John Moragne, a director of the Company. The total share amounts for the
"Entities Affiliated with Trident Capital" set forth in the above table
include 7,015 shares issuable under stock options held by Mr. Moragne which
are exercisable within 60 days of December 31, 1996. Mr. Moragne disclaims
beneficial ownership of the shares held by these entities, except to the
extent of his interest in such shares arising from his interest in Trident
Capital.
(4) Includes 7,015 shares issuable under stock options granted to Bernard
McDonagh which are exercisable within 60 days of December 31, 1996. HLM
Partners VII, L.P. is a Delaware limited partnership, the general partners
of which are Peter Grua, James Mahoney, Frances Hawk, Judith Lawrie and A.R.
Haberkorn, III.
(5) Includes 61,732 shares issuable under stock options held by directors and
executive officers exercisable within 60 days of December 31, 1996.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 50,000,000
shares of Common Stock, par value $0.001 per share, and 5,000,000 shares of
Preferred Stock, par value $0.001 per share, after giving effect to the
Company's reincorporation in Delaware and the completion of this offering. The
following summaries of certain provisions of the Common Stock and Preferred
Stock do not purport to be complete and are subject to, and qualified in their
entirety by, the provisions of the Company's Restated Certificate of
Incorporation, which is included as an exhibit to the Registration Statement of
which this Prospectus forms a part, and by applicable law.
COMMON STOCK
As of December 31, 1996, after giving effect to the conversion of all shares
of Preferred Stock into shares of Common Stock, there were 8,267,678 shares of
Common Stock outstanding, which were held of record by 19 stockholders. The
holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders. Subject to preferences that may be
applicable to outstanding shares of Preferred Stock, if any, holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of the Company, holders of Common Stock are entitled to share ratably
in all assets remaining after payment of the Company's liabilities and the
liquidation preference, if any, of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert their
shares of Common Stock into any other securities, and there are no redemption or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are fully paid and non-assessable, and the shares of
Common Stock to be outstanding upon the completion of this offering will be
fully paid and non-assessable. The rights, preferences and privileges of holders
of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the Common Stock. It is not possible
to state the actual effect of the issuance of any shares of Preferred Stock upon
the rights of holders of the Common Stock until the Board of Directors
determines the specific rights of the holders of such Preferred Stock. However,
the effects might include, among other things, restricting dividends on the
Common Stock, diluting the voting power of the Common Stock, impairing the
liquidation rights of the Common Stock and delaying or preventing a change in
control of the Company without further action by the stockholders. The Company
has no present plans to issue any shares of Preferred Stock.
WARRANTS
Upon the completion of this offering and the conversion of all of the issued
and outstanding shares of the Company's Preferred Stock into Common Stock, the
Company will have two warrants outstanding, exercisable into a total of 133,285
shares of Common Stock at an exercise price of $4.99 per share. The warrants
expire on October 26, 2000.
REGISTRATION RIGHTS
The holders of approximately 2,220,800 shares of Common Stock and warrants
to purchase 133,285 shares of Common Stock (collectively the "Registrable
Securities"), or their transferees, are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of the Investors' Rights Agreement between the Company
and such holders. Subject to certain limitations in such agreement, the holders
of a majority of the Registrable Securities
38
<PAGE>
have the right to require on one occasion that the Company register their shares
for public resale. In addition, if the Company registers any of its Common Stock
either for its own account or for the account of any other stockholders, the
holders of Registrable Securities are entitled to include their shares of Common
Stock in up to two registrations. A holder's right to include shares in an
underwritten registration is subject to the good faith determination by the
Company that the inclusion of such shares is compatible with the success of the
offering. All expenses incurred in connection with any registration effected
pursuant to the Investors' Rights Agreement (other than the underwriting
discounts and commissions) will be borne by the Company. The foregoing
registration rights terminate seven years following the consummation of this
offering.
CERTAIN CHANGE OF CONTROL PROVISIONS
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law, an anti-takeover law. In general, Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date that the person became an interested stockholder, unless
(with certain exceptions) the "business combination" or the transaction in which
the person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" incudes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the Board of Directors, such as discouraging takeover attempts that might
result in a premium over the market price of the Common Stock.
The Company's Certificate of Incorporation provides that the Board of
Directors will be divided into three classes of directors, with each class
serving a staggered three-year term. The classification system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company and may maintain the
incumbency of the Board of Directors, as a classified board of directors
generally increases the difficulty of replacing a majority of the directors. The
Certificate of Incorporation and Bylaws do not provide for cumulative voting in
the election of directors and allow for the removal of directors only for cause
and with a two-thirds vote of the Company's outstanding shares. In addition, the
Company's Certificate of Incorporation and Bylaws eliminate the right of
stockholders to act by written consent without a meeting and require advanced
stockholder notice to nominate directors and raise matters at the annual
stockholders meeting. Furthermore, the authorization of undesignated Preferred
Stock makes it possible for the Board of Directors to issue Preferred Stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. These and other provisions may have
the effect of deferring hostile takeovers or delaying changes in control or
management of the Company. The amendment of any of these provisions would
require approval by holders of at least two-thirds of the outstanding shares of
Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Continental Stock Transfer & Trust Company. Its telephone number is (212)
509-4000.
39
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time and the
ability of the Company to raise equity capital in the future.
Upon the completion of this offering, the Company will have 11,167,678
shares of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment, option and no exercise of outstanding warrants or outstanding
options granted under the 1996 Stock Option Plan after December 31, 1996. Of
these shares, the 3,850,000 shares of Common Stock sold in this offering will be
freely tradeable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 7,317,678 shares of Common Stock held by existing
stockholders will be "restricted securities" as that term is defined in Rule 144
of the Securities Act (the "Restricted Shares"). The Restricted Shares may be
sold in the public market only if registered under the Securities Act or if they
qualify for an exemption from registration under Rule 144 or Rule 701
promulgated under the Securities Act. Sales of the Restricted Shares in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock.
The holders of all of the Restricted Shares have entered into lock-up
agreements, under which they have agreed not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of, or agree to dispose of,
directly or indirectly, any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into Common Stock owned by them for a period of 180 days after the date of this
Prospectus, without the prior written consent of Alex. Brown & Sons
Incorporated. The Company has entered into a similar agreement, except that it
may issue, and grant options to purchase, shares of Common Stock under the 1996
Stock Option Plan and pursuant to currently outstanding warrants.
As of December 31, 1996, an aggregate of 941,413 shares were subject to
outstanding options under the 1996 Stock Option Plan and 133,285 shares were
subject to outstanding warrants. All of these shares are subject to the lock-up
agreements described above. After the date of this Prospectus, the Company
intends to file a registration statement on Form S-8 covering shares issuable
under the 1996 Stock Option Plan (including shares subject to then outstanding
options), thus permitting the resale of such shares in the public market without
restriction under the Securities Act after expiration of the lock-up agreements.
Based on the number of shares reserved for issuance and previously exercised,
approximately 1,367,925 shares will be registered. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the public
market, unless such shares are subject to vesting restrictions with the Company
or the lock-up agreements described above.
Upon expiration of the lock-up agreements, 5,019,619 shares of Common Stock
(including approximately 133,191 shares subject to outstanding vested options)
will become eligible for immediate public resale, subject in some cases to
volume limitations pursuant to Rule 144. The remaining approximately 2,431,250
shares held by existing stockholders will become eligible for public resale at
various times over a period of less than two years following the completion of
this offering, subject in some cases to vesting provisions and volume
limitations. Approximately 2,220,800 of the shares outstanding immediately
following the completion of this offering will be entitled to registration
rights with respect to such shares upon the release of lock-up agreements. The
number of shares sold in the public market could increase if such rights are
exercised.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of Common Stock then outstanding (approximately 111,677 shares
immediately after this offering) or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the required filing of
a Form 144 with respect to such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and
40
<PAGE>
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares without having to comply with the manner
of sale, public information, volume limitation or notice provisions of Rule 144.
Under Rule 701 under the Securities Act, persons who purchase shares upon
exercise of options granted prior to the effective date of this offering are
entitled to sell such shares 90 days after the effective date of this offering
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of nonaffiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144.
The Securities and Exchange Commission (the "Commission") has recently
proposed reducing the initial Rule 144 holding period to one year and the Rule
144(k) holding period to two years. There can be no assurance as to when or
whether such rule changes will be enacted. If enacted, such modification will
have a material effect on the time when shares of the Company's Common Stock
become eligible for resale.
41
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Cowen & Company and Hambrecht & Quist LLC, have
severally agreed to purchase from the Company the following respective numbers
of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Alex. Brown & Sons Incorporated......................................................................
Cowen & Company......................................................................................
Hambrecht & Quist LLC................................................................................
-----------
Total.......................................................................................... 3,850,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of
$ . The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After
the initial public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 577,500
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,850,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,850,000 shares are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Stockholders of the Company, holding in the aggregate 7,317,678 shares of Common
Stock, have agreed not to offer, sell or otherwise dispose of any of such shares
of Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of Alex. Brown & Sons Incorporated. The
Company has entered into a similar agreement, except that it may issue, and
grant options to purchase, shares of Common Stock under the 1996 Stock Option
Plan and pursuant to currently outstanding warrants. See "Shares Eligible for
Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
42
<PAGE>
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiation among the Company, the Selling
Stockholders and the Representatives of the Underwriters. Among the factors to
be considered in such negotiations will be prevailing market conditions, the
results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company,
the Selling Stockholders and the Representatives of the Underwriters believe to
be comparable to the Company, estimates of the business potential of the
Company, the present stage of the Company's development and other factors deemed
relevant.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Baker & McKenzie, San Diego, California. Certain legal matters related to this
offering will be passed upon for the Underwriters by Cooley Godward LLP, San
Diego, California.
EXPERTS
The Financial Statements of the Company at December 31, 1995 and 1996 and
for each of the three years in the period ended December 31, 1996 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result of
this offering, the Company will be required to file reports and other
information with the Commission pursuant to the informational requirements of
the Exchange Act.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act, with respect to the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus,
which is part of the Registration Statement, omits certain information,
exhibits, schedules and undertakings set forth in the Registration Statement.
For further information pertaining to the Company and the Common Stock,
reference is made to such Registration Statement and the exhibits and schedules
thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance, reference is made to the copy of the document filed as an
exhibit to the Registration Statement. The Registration Statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of the Registration Statement may be
obtained from the Commission at prescribed rates from the Public Reference
Section of the Commission at such address, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York 10048,
and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements examined by independent auditors and quarterly
reports containing interim unaudited financial information for the first three
quarters of each fiscal year.
43
<PAGE>
DAOU SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Balance Sheets at December 31, 1995 and 1996.............................. F-3
Statements of Operations for the years ended December 31, 1994, 1995 and
1996.................................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996........................................................... F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996.................................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
DAOU Systems, Inc.
We have audited the accompanying balance sheets of DAOU Systems, Inc. as of
December 31, 1995 and 1996 and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DAOU Systems, Inc. at
December 31, 1995 and 1996 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
January 14, 1997
F-2
<PAGE>
DAOU SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- --------- PRO FORMA
STOCKHOLDERS'
EQUITY AT
DECEMBER 31,
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 2,599 $ 2,284 $ --
Short-term investments........................................................ 3,686 --
Accounts receivable........................................................... 5,038 4,085
Contract work in progress..................................................... 394 3,600
Deferred income taxes......................................................... 209 176
Other current assets.......................................................... 102 572
--------- ---------
Total current assets........................................................ 12,028 10,717
Due from officers/stockholders.................................................. 211 228
Equipment, furniture and fixtures, net.......................................... 280 827
Deferred income taxes........................................................... 10 23
Other assets.................................................................... 16 115
--------- ---------
$ 12,545 $ 11,910
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................................ $ 607 $ 530
Accrued salaries and wages.................................................... 327 583
Deferred revenue.............................................................. 441 844
Other accrued liabilities..................................................... 1,306 745
Income taxes payable.......................................................... 975 99
--------- ---------
Total current liabilities................................................... 3,656 2,801
Deferred rent................................................................... 2 62
Commitments and contingencies...................................................
Redeemable preferred stock...................................................... 7,705 8,190
Stockholders' equity:
Preferred stock, $.001 par value:
Authorized shares -- 5,000
Issued and outstanding shares -- none....................................... -- -- --
Common stock, $.001 par value:
Authorized shares -- 50,000
Issued and outstanding shares -- 6,664 at December 31, 1995 and 1996 (8,268
shares pro forma)......................................................... 7 7 8
Additional paid-in capital.................................................... 3 1,246 8,863
Deferred compensation......................................................... -- (1,166) (1,166)
Accretion of redeemable preferred stock....................................... (87) (572) --
Retained earnings............................................................. 1,259 1,342 1,342
--------- --------- -------
Total stockholders' equity.................................................. 1,182 857 $ 9,047
--------- --------- -------
-------
$ 12,545 $ 11,910
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-3
<PAGE>
DAOU SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues....................................................................... $ 8,521 $ 14,330 $ 19,311
Cost of revenues............................................................... 6,185 8,475 13,556
--------- --------- ---------
Gross profit................................................................... 2,336 5,855 5,755
Operating expenses:
Sales and marketing.......................................................... 796 938 1,853
General and administrative................................................... 1,507 2,893 3,897
--------- --------- ---------
2,303 3,831 5,750
--------- --------- ---------
Income from operations......................................................... 33 2,024 5
Interest income (expense), net................................................. 12 67 197
--------- --------- ---------
Income before income taxes..................................................... 45 2,091 202
Provision (benefit) for income taxes........................................... 19 851 119
--------- --------- ---------
Net income..................................................................... 26 1,240 83
Accretion of redeemable preferred stock........................................ -- 87 485
--------- --------- ---------
Net income (loss) attributable to common stock................................. $ 26 $ 1,153 $ (402)
--------- --------- ---------
--------- --------- ---------
Pro forma net income per share................................................. $ 0.01
---------
---------
Shares used in computing pro forma net income per common share................. 8,888
---------
---------
</TABLE>
See accompanying notes.
F-4
<PAGE>
DAOU SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCRETION OF
COMMON STOCK ADDITIONAL REDEEMABLE RETAINED
-------------- PAID-IN DEFERRED PREFERRED EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION STOCK (DEFICIT) TOTAL
------ ------ ---------- ------------ ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993........................ 6,664 $ 7 $ 3 $ -- $ -- $ (7 ) $ 3
Net income.................. -- -- -- 26 26
------ ------ ---------- ------------ ------ ------- -------
Balance at December 31,
1994........................ 6,664 7 3 -- -- 19 29
Accretion of redeemable
preferred stock........... -- -- -- -- (87 ) -- (87)
Net income.................. -- -- -- -- -- 1,240 1,240
------ ------ ---------- ------------ ------ ------- -------
Balance at December 31,
1995........................ 6,664 7 3 -- (87 ) 1,259 1,182
Deferred compensation....... -- -- 1,243 (1,243 ) -- -- --
Amortization of deferred
compensation.............. -- -- -- 77 -- -- 77
Accretion of redeemable
preferred stock........... -- -- -- -- (485 ) -- (485)
Net income.................. -- -- -- -- -- 83 83
------ ------ ---------- ------------ ------ ------- -------
Balance at December 31,
1996........................ 6,664 $ 7 $ 1,246 $ (1,166 ) $ (572 ) $1,342 $ 857
------ ------ ---------- ------------ ------ ------- -------
------ ------ ---------- ------------ ------ ------- -------
</TABLE>
See accompanying notes.
F-5
<PAGE>
DAOU SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................ $ 26 $ 1,240 $ 83
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................... 101 252 280
Provision for uncollectible accounts............................................ -- -- 100
Deferred income taxes........................................................... (24) (192) 20
Changes in operating assets and liabilities:
Accounts receivable........................................................... (285) (4,642) 853
Contract work in progress..................................................... 213 179 (3,206)
Other assets.................................................................. (25) (81) (569)
Trade accounts payable........................................................ 331 96 (77)
Accrued salaries and wages.................................................... -- 167 256
Deferred revenue.............................................................. (399) (415) 403
Other accrued liabilities..................................................... 296 1,208 (561)
Income taxes payable.......................................................... -- 932 (876)
Deferred rent................................................................. 1 (29) 60
--------- --------- ---------
Net cash provided by (used in) operating activities............................... 235 (1,285) (3,234)
INVESTING ACTIVITIES
Purchases of equipment, furniture and fixtures.................................... (309) (215) (750)
Purchase of short-term investments................................................ -- (3,686) --
Maturities of short-term investments.............................................. -- -- 3,686
Advances to officers/stockholders................................................. (149) (306) (17)
Proceeds from repayment of due from officers...................................... 213 209 --
--------- --------- ---------
Net cash (used in) provided by investing activities............................... (245) (3,998) 2,919
FINANCING ACTIVITIES
Repayment of long-term debt....................................................... (4) -- --
Proceeds from issuance of redeemable preferred stock.............................. -- 7,618 --
--------- --------- ---------
Net cash (used in) provided by financial activities............................... (4) 7,618 --
--------- --------- ---------
(Decrease) increase in cash and cash equivalents.................................. (14) 2,335 (315)
Cash and cash equivalents at beginning of period.................................. 278 264 2,599
--------- --------- ---------
Cash and cash equivalents at end of period........................................ $ 264 $ 2,599 $ 2,284
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid................................................................. $ -- $ 111 $ 975
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
DAOU Systems, Inc. (the "Company") designs, implements, supports and manages
advanced computer network systems for hospitals, integrated healthcare delivery
systems and other healthcare provider organizations.
The Company's design services include an assessment of the customer's
existing computer network system and the preparation of voice, video and data
network specifications, technical design documentation and diagrams. DAOU's
implementation services include the purchase, delivery and installation of
enterprise-wide computer network systems. The Company's support and management
services are typically provided under multi-year contracts and include remote
and on-site network management services, as well as information systems
outsourcing. DAOU typically provides its services on a fixed-price, fixed-time
frame basis.
On November 12, 1996 the Company's Board of Directors approved the
reincorporation of the Company in Delaware which was accomplished through a
merger of the existing California corporation into a new Delaware corporation.
The ratio of exchange was 1.403 to one. The number of authorized shares of the
new Delaware corporation are 50,000,000 shares of common stock and 5,000,000
shares of preferred stock. All share and per share amounts and stock option data
have been restated to retroactively give effect to the reincorporation.
REVENUE RECOGNITION
Contract revenue for the development and implementation of network solutions
is recognized on the percentage-of-completion method with progress to completion
measured by labor costs incurred to date compared to total estimated labor
costs. Provisions for estimated losses on contracts, if any, are made during the
period when the loss becomes probable and can be reasonably estimated. Revenues
recognized in excess of amounts billed and project costs are classified as
contract work in progress. Revenue from technical support and network management
services is recognized over the period the services are performed. Payments
received in advance of services performed are recorded as deferred revenue.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's accounts receivable are from hospitals
and other healthcare providers. Generally, the Company obtains a significant
deposit from its customers upon signing a contract and collateral is not
required. The Company provides for losses from uncollectible accounts and such
losses have historically not exceeded management's expectations.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less when purchased. Short-term investments are
recorded at amortized cost plus accrued interest which approximates market
value. The Company generally invests its excess cash in U.S. government
securities. The Company has established guidelines relative to diversification
and maturities that are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company historically has not
experienced any losses on its cash equivalents or short-term investments.
The Company applies Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" to value its
investments. Under the statement, the Company
F-7
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
classifies its short-term investments as "Available-for-Sale" and records such
assets at estimated fair value in the balance sheet. As of December 31, 1995 and
1996, the cost of cash equivalents and short-term investments was equal to
estimated fair value.
EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are carried at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the
assets, generally three years. Leasehold improvements are amortized over the
estimated useful lives of the assets or the remaining lease term, whichever is
less.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, DAOU Systems, Inc. adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121
establishes accounting standards for recording the impairment of long-lived
assets, certain identifiable intangibles and goodwill. The adoption of SFAS 121
did not have a material impact on DAOU's financial position or the results of
its operations.
NET INCOME PER SHARE
Historical net income per share is computed using the weighted average
number of common shares and common stock equivalents outstanding during the
periods presented. Common equivalent shares result from stock options, warrants
to purchase redeemable preferred stock and redeemable preferred stock. For loss
periods, common equivalent shares are excluded from the computation as their
effect would be antidilutive, except that the Securities and Exchange Commission
requires common and common share equivalents issued during the twelve-month
period prior to the initial filing of a proposed public offering, to be included
in the calculation as if they were outstanding for all periods presented (using
the treasury stock method and the assumed initial public offering price).
Historical net income per share information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income per share............................................................... $ -- $ 0.16 $ 0.01
--------- --------- ---------
--------- --------- ---------
Shares used in computing net income per share (in thousands)....................... 7,231 7,519 8,487
--------- --------- ---------
--------- --------- ---------
</TABLE>
PRO FORMA NET INCOME PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Pro forma net income per share has been computed as described above and also
gives effect to the conversion of the redeemable preferred stock, which will
automatically convert to common stock upon completion of the Company's initial
public offering, using the as if-converted method from the original date of
issuance which was October 26, 1995.
F-8
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
If the offering contemplated by this Prospectus is consummated, all of the
convertible preferred stock outstanding as of the closing date will
automatically be converted into 1,603,430 shares of common stock. Unaudited pro
forma stockholders' equity at December 31, 1996, as adjusted for the conversion
of redeemable preferred stock, is disclosed in the accompanying balance sheet.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which is effective for the year
ending December 31, 1996. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of Accounting Principles Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES("APB 25"), but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS No. 123 had
been adopted. The Company has continued accounting for its stock-based
compensation in accordance with the provisions of APB 25.
2. SELECTED BALANCE SHEET DETAILS
Equipment, furniture and fixtures consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Equipment and furniture........................................................................ $ 691 $ 1,340
Leasehold improvements......................................................................... 6 91
--------- ---------
697 1,431
Less accumulated depreciation and amortization................................................. (417) (604)
--------- ---------
$ 280 $ 827
--------- ---------
--------- ---------
</TABLE>
Other accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Accrued job related costs.................................................................... $ 932 $ 626
Other accrued liabilities.................................................................... 374 119
--------- ---------
$ 1,306 $ 745
--------- ---------
--------- ---------
</TABLE>
3. LINE OF CREDIT
In October 1996, the Company entered into a $1.5 million line of credit. The
line bears interest at a rate equal to the Bank's reference rate plus 0.5%
(8.75% at December 31, 1996) and expires October 1, 1997. At December 31, 1996,
no amounts were outstanding under the line of credit.
4. LEASE COMMITMENTS
The Company leases its facilities and certain equipment under operating
lease agreements. The facility leases provide for abatement of rent during
certain periods and escalating rent payments during the lease term. Rent expense
for 1994, 1995 and 1996 totaled $105,000, $106,000 and $347,000, respectively.
F-9
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASE COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancellable operating leases with
initial terms of one year or more consist of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -----------------------------------------------------------
<S> <C>
1997....................................................... $ 512
1998....................................................... 283
1999....................................................... 12
2000....................................................... 12
2001....................................................... 7
-------------
$ 826
-------------
-------------
</TABLE>
In October 1995, the Company's Board of Directors approved a relocation to a
larger facility. In connection with the relocation, the Company recorded a
provision for relocation costs and expenses of $205,000 which included an
accrual for future rent commitments on the Company's former facility, losses on
non-recoverable leaseholds and other assets and other costs directly associated
with the relocation. This charge is included in general and administrative
expenses in the 1995 statement of operations. During 1996, the Company's former
facility was subleased to a related party. Aggregate future minimum rentals to
be received under the sublease are $126,000.
5. MAJOR CUSTOMERS
Sales to individual customers exceeding 10% or more of revenues in the years
ended December 31 were as follows: during 1994, one customer accounted for 30%
of revenues; during 1995, two customers accounted for 48% and 11% of revenues,
respectively; and during 1996, three customers accounted for 21%, 18% and 15% of
revenues, respectively.
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
REDEEMABLE PREFERRED STOCK
During 1995, 1,603,430 shares of redeemable preferred stock were issued at
$4.99 per share for proceeds of $7,618,000 net of issuance costs. Holders of the
redeemable preferred stock are entitled to receive cumulative dividends at the
rate of $0.03 per share per annum, when and if declared by the Board of
Directors and prior to any dividends on the common shares. The redeemable
preferred stock has a liquidation preference of $4.99 per share plus any
declared but unpaid dividends and is convertible at the option of the holder
into one share of common stock, subject to certain antidilution adjustments. The
shares of preferred stock are automatically convertible in the event of an
initial public offering of the Company's common stock. The holder of each share
of preferred stock is entitled to one vote for each share into which it would
convert.
On or after August 31, 2000, the redeemable preferred stock is redeemable
subject to a written request from the holders of a majority of the then
outstanding shares. The price of the redemption is equal to the original issue
price plus 6% of the original issue price compounded annually, less any
dividends paid. The increase in the redemption value of the redeemable preferred
stock was $87,000 in 1995 and $485,000 in 1996.
F-10
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
During 1996, the Company adopted the 1996 Stock Option Plan (the "Plan"),
under which 947,025 shares of the Company's common stock were initially reserved
for issuance upon exercise of options granted by the Company. During November
1996, the Board of Directors increased the number of shares reserved for
issuance under the plan to 1,367,925. The Plan provides for the grant of both
incentive and nonstatutory stock options to officers, directors, employees and
consultants of the Company. Options granted by the Company generally vest over a
three to five-year period and are exercisable for a period of ten years from the
date of the grant.
The Company recorded $1,243,000 of deferred compensation for options granted
during the year ended December 31, 1996, representing the difference between the
option exercise price and the deemed fair market value for financial statement
presentation purposes. The Company is amortizing the deferred compensation
ratably over the vesting period of the options.
A summary of stock option transactions is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTION PRICE PRICE PER
SHARES PER SHARE SHARE
--------- --------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1996.......................................... -- $ -- --
Granted............................................................... 962,458 4.28 - 10.69 $ 5.16
Exercised............................................................. -- -- --
Canceled.............................................................. (21,045) 4.28 4.28
--------- --------------- -----
Outstanding at December 31, 1996........................................ 941,413 4.28 - 10.69 $ 5.16
--------- --------------- -----
--------- --------------- -----
</TABLE>
At December 31, 1996, no options to purchase common shares were exercisable
and 426,512 options to purchase common shares were available for future grant.
Adjusted pro forma information regarding net income is required by SFAS 123,
and has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the "minimal value" method for
option pricing with the following weighted-average assumptions: risk-free
interest rate of 6%; dividend yield of 0%; and a weighted-average expected life
of the option of seven years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information is as follows (in thousands, except for
per share information):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
---------------------
<S> <C>
Adjusted pro forma net income (loss)......................................................... $ (40)
Adjusted pro forma net income (loss) per share............................................... $ --
</TABLE>
The weighted-average fair value of options granted during 1996 was $2.81.
F-11
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
In connection with the issuance of the redeemable preferred stock, the
Company issued two warrants to purchase an aggregate of 133,285 shares of
redeemable preferred stock at an exercise price of $4.99 per share. The warrants
are exercisable immediately and expire on October 26, 2000.
COMMON STOCK RESERVED
At December 31, 1996, a total of 3,104,640 shares of the Company's common
stock have been reserved for the conversion of redeemable preferred stock and
the exercise of stock options and warrants.
7. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................................ $ 36 $ 816 $ 62
State.............................................................................. 7 227 37
--------- --------- ---------
43 1,043 99
Deferred:
Federal............................................................................ (21) (166) 32
State.............................................................................. (3) (26) (12)
--------- --------- ---------
(24) (192) 20
--------- --------- ---------
$ 19 $ 851 $ 119
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes.
Significant components of the Company's deferred tax assets and liabilities
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities):
Reserves and allowances......................................................................... $ 209 $ 201
Tax depreciation differences.................................................................... 10 (2)
--------- ---------
Net deferred tax assets........................................................................... $ 219 $ 199
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
DAOU SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The reconciliation of income tax computed at the federal statutory rate to
the total provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Tax at federal statutory rate........................................................ 34.0% 34.0% 34.0%
Nondeductible expenses............................................................... 8.2 2.3 16.7
Other, including compensatory stock options.......................................... -- 4.4 8.2
--- --- ---
42.2% 40.7% 58.9%
--- --- ---
--- --- ---
</TABLE>
8. BENEFIT PLAN
The Company sponsors the DAOU Systems, Inc. 401(k) Salary Savings Plan which
covers employees who meet certain age and service requirements. Employees may
contribute a portion of their earnings each plan year subject to certain
Internal Revenue Service limitations. The Company made elective contributions to
the Plan of $2,000, $13,000 and $16,000 for the years ended December 31, 1994,
1995 and 1996, respectively.
F-13
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
The Company.................................... 11
Use of Proceeds................................ 11
Dividend Policy................................ 11
Capitalization................................. 12
Dilution....................................... 13
Selected Financial Data........................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 15
Business....................................... 20
Management..................................... 28
Certain Transactions........................... 34
Principal and Selling Stockholders............. 36
Description of Capital Stock................... 38
Shares Eligible for Future Sale................ 40
Underwriting................................... 42
Legal Matters.................................. 43
Experts........................................ 43
Additional Information......................... 43
Index to Financial Statements.................. F-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,850,000 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
HAMBRECHT & QUIST
February , 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify its directors, officers, employees and other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act").
The Registrant's Bylaws provide for the indemnification of directors and
executive officers to the fullest extent not prohibited by the Delaware General
Corporation Law and authorize the indemnification by the Registrant of other
officers, employees and other agents as set forth in the Delaware General
Corporation Law. The Registrant has entered into indemnification agreements with
its directors and executive officers, in addition to the indemnification
provided for in the Registrant's Bylaws.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, in connection with the sale of Common
Stock being registered. All amounts are estimated except the SEC registration
fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
SEC Registration Fee........................................... $18,784.00
NASD Filing Fee................................................ 6,698.50
Nasdaq Listing Fee............................................. 45,419.20
Printing and Engraving Expenses................................ *
Legal Fees and Expenses........................................ *
Blue Sky Fees and Expenses..................................... *
Accounting Fees and Expenses................................... *
Transfer Agent and Registrar Fees and Expenses................. *
Miscellaneous Expenses......................................... *
----------
Total...................................................... $ *
----------
----------
</TABLE>
- --------------
* To be completed by amendment
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has sold within the past three years (without payment of any
selling commission to any person) the following unregistered securities:
1. During the period January 2, 1996 to December 31, 1996, the
Registrant granted incentive and non-statutory stock options to employees,
officers and directors of and consultants to the Registrant under its 1996
Stock Option Plan (the "1996 Stock Option Plan"), covering an aggregate of
941,413 shares of the Registrant's Common Stock. These options typically
vest over a period of three to five years following their respective dates
of grant.
2. In October 1995, the Registrant issued 1,603,430 shares of its Series
A Preferred Stock to 12 investors for an aggregate purchase price of
$7,999,999. These investors consisted of (i) 11 accredited investors which
were venture capital funds and related entities and individuals and (ii) one
non-accredited investor, Galen Employee Fund, L.P., the purchaser
representative of which was a venture
II-1
<PAGE>
capital investor who had such knowledge and experience in financial and
business matters that he was capable of evaluating the merits and risk of
this investment.
3. In October 1995, the Registrant issued to Needham & Company, Inc. and
Needham Capital S.B.I.C., L.P., which entities acted as finders with respect
to the placement described in paragraph (2) above, warrants to purchase up
to 130,393 and 2,892 shares of the Registrant's Series A Preferred Stock,
respectively, at an exercise price of $4.99 per share.
The sales and issuances of the securities in the transactions described in
paragraph (1) above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
The sales and issuances of securities in the transactions described in
paragraphs (2) and (3) above were deemed to be exempt from registration under
the Securities Act by virtue of Section 4(2) and/or Rule 506 of Regulation D
promulgated thereunder.
The recipients represented their intention to acquire the securities for
investment only and not with a view to the distribution thereof. Appropriate
legends are affixed to the stock certificates issued in such transactions.
Similar legends were imposed in connection with any subsequent sales of such
securities. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ----------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
2.1 -- Agreement and Plan of Merger, dated January 9, 1997, by and between DAOU
Systems, Inc., a Delaware corporation, and DAOU Systems, Inc., a California
corporation.
3.1 -- Registrant's Amended and Restated Certificate of Incorporation.
3.2 -- Registrant's Bylaws.
4.1 -- Reference is made to Exhibits 3.1 and 3.2.
4.2* -- Specimen stock certificate.
4.3** -- Investors' Rights Agreement, dated October 26, 1995, between the Registrant
and the parties named therein.
4.4** -- Series A Preferred Stock Purchase Warrant No. 1, dated October 26, 1995,
between the Registrant and Needham & Company, Inc.
4.5** -- Series A Preferred Stock Purchase Warrant No. 2, dated October 26, 1995,
between the Registrant and Needham Capital S.B.I.C., L.P.
5.1* -- Opinion of Baker & McKenzie.
10.1** -- Form of Indemnification Agreement.
10.2 -- 1996 Stock Option Plan.
10.3 -- Form of Incentive Stock Option Agreement under the 1996 Stock Option Plan.
10.4 -- Form of Nonstatutory Stock Option Agreement under the 1996 Stock Option
Plan.
10.5** -- Sublease Agreement, dated March 1, 1996, between the Registrant and Adobe
Systems Incorporated.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ----------------------------------------------------------------------------
<C> <C> <S>
10.6+ -- Information Management Agreement, dated April 1, 1996, between the
Registrant and Candler Health System.
10.7+,** -- Principle Agreement, dated June 18, 1996, between the Registrant and
Catholic Medical Center of Brooklyn & Queens, Inc.
10.8+,** -- Principal Agreement, dated June 29, 1995, between the Registrant and Mercy
Health Services.
10.9+,** -- Master Agreement, dated June 4, 1996, between the Registrant and Atlantic
Health System.
10.10** -- Form of Master Services Agreement.
10.11 -- Employment Agreement, effective as of November 11, 1996, between Robert C.
McNeill and the Registrant.
10.12** -- Promissory Note, dated October 26, 1995, from Georges J. Daou to the
Registrant in the principal amount of $70,642.
10.13** -- Promissory Note, dated October 26, 1995, from Daniel J. Daou to the
Registrant in the principal amount of $69,897.
10.14** -- Promissory Note, dated October 26, 1995, from Joseph H. Daou to the
Registrant in the principal amount of $66,103.
10.15** -- Lease Agreement, dated October 1, 1995, between the Registrant and Daniel J.
Daou.
11.1 -- Statement of Computation of Earnings Per Share.
23.1 -- Consent of Ernst & Young LLP, independent auditors.
23.2* -- Consent of Baker & McKenzie -- Included in Exhibit 5.1.
24.1** -- Power of Attorney -- Reference is made to page II-5.
27.1 -- Financial Data Schedule.
</TABLE>
- --------------
* To be filed by amendment.
+ The Registrant has applied for confidential treatment of portions of this
exhibit.
** Previously filed.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant will provide to the Underwriters at the closing
specified in the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate
II-3
<PAGE>
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant undertakes that: (1) for the purpose of
determining any liability under the Securities Act, the information omitted from
the form of prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant
under Rule 424(b)(1), or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement for the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorizes this Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned in the
City of San Diego, State of California on the 21st of January, 1997.
<TABLE>
<CAPTION>
DAOU SYSTEMS, INC.
<S> <C> <C>
By: /s/ DANIEL J. DAOU
-----------------------------------------
Daniel J. Daou, PRESIDENT
</TABLE>
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities indicated on January 21, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S> <C>
Chief Executive Officer
* and Chairman of the
- ------------------------------ Board of Directors
Georges J. Daou (Principal Executive
Officer)
/s/ DANIEL J. DAOU
- ------------------------------ President and Director
Daniel J. Daou
Senior Vice President,
/s/ FRED C. MCGEE Chief Financial Officer
- ------------------------------ and Secretary (Principal
Fred C. McGee Financial and Accounting
Officer)
*
- ------------------------------ Director
David W. Jahns
*
- ------------------------------ Director
Bernard P. McDonagh
*
- ------------------------------ Director
John H. Moragne
</TABLE>
<TABLE>
<S> <C> <C>
/s/ DANIEL J. DAOU
--------------------------
Daniel J. Daou,
*By: ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
- --------- --------------------------------------------------------------- -----------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement.
2.1 -- Agreement and Plan of Merger, dated January 9, 1997, by and
between DAOU Systems, Inc., a Delaware corporation, and DAOU
Systems, Inc., a California corporation.
3.1 -- Registrant's Amended and Restated Certificate of Incorporation.
3.2 -- Registrant's Bylaws.
4.1 -- Reference is made to Exhibits 3.1 and 3.2.
4.2* -- Specimen stock certificate.
4.3** -- Investors' Rights Agreement, dated October 26, 1995, between
the Registrant and the parties named therein.
4.4** -- Series A Preferred Stock Purchase Warrant No. 1, dated October
26, 1995, between the Registrant and Needham & Company, Inc.
4.5** -- Series A Preferred Stock Purchase Warrant No. 2, dated October
26, 1995, between the Registrant and Needham Capital
S.B.I.C., L.P.
5.1* -- Opinion of Baker & McKenzie.
10.1** -- Form of Indemnification Agreement.
10.2 -- 1996 Stock Option Plan.
10.3 -- Form of Incentive Stock Option Agreement under the 1996 Stock
Option Plan.
10.4 -- Form of Nonstatutory Stock Option Agreement under the 1996
Stock Option Plan.
10.5** -- Sublease Agreement, dated March 1, 1996, between the Registrant
and Adobe Systems Incorporated.
10.6+ -- Information Management Agreement, dated April 1, 1996, between
the Registrant and Candler Health System.
10.7+,** -- Principle Agreement, dated June 18, 1996, between the
Registrant and Catholic Medical Center of Brooklyn & Queens,
Inc.
10.8+,** -- Principal Agreement, dated June 29, 1995, between the
Registrant and Mercy Health Services.
10.9+,** -- Master Agreement, dated June 4, 1996, between the Registrant
and Atlantic Health System.
10.10** -- Form of Master Services Agreement.
10.11 -- Employment Agreement, effective as of November 11, 1996,
between Robert C. McNeill and the Registrant.
10.12** -- Promissory Note, dated October 26, 1995, from Georges J. Daou
to the Registrant in the principal amount of $70,642.
10.13** -- Promissory Note, dated October 26, 1995, from Daniel J. Daou to
the Registrant in the principal amount of $69,897.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGES
- --------- --------------------------------------------------------------- -----------------
10.14** -- Promissory Note, dated October 26, 1995, from Joseph H. Daou to
the Registrant in the principal amount of $66,103.
<C> <C> <S> <C>
10.15** -- Lease Agreement, dated October 1, 1995, between the Registrant
and Daniel J. Daou.
11.1 -- Statement of Computation of Earnings Per Share.
23.1 -- Consent of Ernst & Young LLP, independent auditors.
23.2* -- Consent of Baker & McKenzie -- Included in Exhibit 5.1.
24.1** -- Power of Attorney -- Reference is made to page II-5 of the
Registration Statement.
27.1 -- Financial Data Schedule.
</TABLE>
- --------------
* To be filed by amendment.
+ The Registrant has applied for confidential treatment of portions of this
exhibit.
** Previously filed.
<PAGE>
3,850,000 SHARES
DAOU SYSTEMS, INC.
COMMON STOCK
($0.001 PAR VALUE)
UNDERWRITING AGREEMENT
February ___, 1997
Alex. Brown & Sons Incorporated
Cowen & Company
Hambrecht & Quist LLC
As Representative(s) of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Daou Systems, Inc., a Delaware corporation (the "Company"), and certain
stockholders of the Company (the "Selling Stockholders") propose to sell to the
several underwriters (the "Underwriters") named in Schedule I hereto for whom
you are acting as representatives (the "Representatives") an aggregate of
3,850,000 shares of the Company's Common Stock, $0.001 par value (the "Firm
Shares"), of which 2,900,000 shares will be sold by the Company and 950,000
shares will be sold by the Selling Stockholders. The respective amounts of the
Firm Shares to be so purchased by the several Underwriters are set forth
opposite their names in Schedule I hereto, and the respective amounts to be sold
by the Selling Stockholders are set forth opposite their names in Schedule II
hereto. The Company and the Selling Stockholders are sometimes referred to
herein collectively as the "Sellers." The Company also proposes to sell at the
Underwriters' option an aggregate of up to 577,500 additional shares of the
Company's Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling
Stockholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to
1.
<PAGE>
exercise the over-allotment option in whole or in part for the accounts of the
several Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
This Underwriting Agreement, as amended, supplemented or modified from time to
time is referred to herein as the "Agreement".
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) The Company represents and warrants as follows:
(i) A registration statement on Form SB-2 (File No. 333 -
18155) with respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and has been
filed with the Commission under the Act. The Company has complied with the
conditions for the use of Form SB-2. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of Rule 430A of the Rules and Regulations) contained therein and
the exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, herein referred to as the "Registration Statement,"
which shall be deemed to include all information omitted therefrom in reliance
upon Rule 430A and contained in the Prospectus referred to below, has been
declared effective by the Commission under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date of this
Agreement. The form of prospectus first filed by the Company with the
Commission pursuant to its Rule 424(b) and Rule 430A, or if no form of
prospectus is required to be filed pursuant to Rule 424(b), the form of
prospectus included in the Registration Statement at the time it became
effective, is herein referred to as the "Prospectus." Each preliminary
prospectus included in the Registration Statement prior to the time it becomes
effective is herein referred to as a "Preliminary Prospectus."
(ii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with corporate power and authority to own its properties and conduct
its business as described in the Registration Statement; the Company is duly
qualified to transact business in all jurisdictions in which the conduct of its
business requires such qualification, except where the failure, individually or
in the aggregate, to be so qualified would not have a material adverse effect
upon the condition, financial or otherwise, results of operations,
2.
<PAGE>
business affairs or business prospects of the Company (a "Material Adverse
Effect"); and the Company has no direct or indirect subsidiaries.
(iii) The outstanding shares of Common Stock of the Company,
including all shares to be sold by the Selling Stockholders, have been duly
authorized and validly issued and are fully paid and non-assessable; the portion
of the Shares to be issued and sold by the Company have been duly authorized and
when issued and paid for as contemplated herein will be validly issued,
fully-paid and non-assessable; and no preemptive rights of stockholders exist
with respect to any of the Shares or the issue and sale thereof.
(iv) The Shares conform with the statements concerning them in
the Registration Statement.
(v) The Commission has not issued an order preventing or
suspending the use of any Preliminary Prospectus relating to the proposed
offering of the Shares nor instituted proceedings for that purpose. The
Registration Statement contains and the Prospectus and any amendments or
supplements thereto will contain all statements which are required to be stated
therein by, and in all respects conform or will conform, as the case may be, to
the applicable requirements of, the Act and the Rules and Regulations. Neither
the Registration Statement nor any amendment thereto contains or will contain,
as the case may be, any untrue statement of a material fact or omits or will
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representatives,
specifically for use in the preparation thereof.
(vi) The financial statements of the Company, together with
related notes and schedules as set forth in the Registration Statement (the
"Financial Statements"), present fairly the financial position and the results
of operations of the Company, at the indicated dates and for the indicated
periods. The Financial Statements have been prepared in accordance with
generally accepted principles of accounting, consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation of
results for such periods have been made (subject in the case of financial
statements for interim periods, to normal and recurring year-end adjustments).
The summary financial and statistical data included in the Registration
Statement presents fairly the information shown therein and have been compiled
on a basis consistent with the Financial Statements presented therein.
3.
<PAGE>
(vii) There is no action or proceeding pending or, to the
knowledge of the Company, threatened against the Company before any court or
administrative agency which, if determined adversely to the Company, might
result in any material adverse change in the business or condition of the
Company, except as set forth in the Registration Statement.
(viii) Except as described in the Prospectus, the Company has
good and marketable title to all of the properties and assets reflected in the
Financial Statements (or as described in the Registration Statement), subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such Financial Statements (or as described in the Registration
Statement) or which are not material in amount. The Company occupies its leased
properties under valid and binding leases conforming to the description thereof
set forth in the Registration Statement.
(ix) The Company has filed all Federal, State and foreign
income tax returns which have been required to be filed and has paid all taxes
indicated by said returns and all assessments received by it to the extent that
such taxes have become due.
(x) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development that may result in
a prospective material adverse change in or affecting the condition, financial
or otherwise, of the Company or the earnings, business affairs, management, or
business prospects of the Company, whether or not occurring in the ordinary
course of business, and there has not been any material transaction entered into
by the Company, other than transactions in the ordinary course of business and
changes and transactions contemplated by the Registration Statement, as it may
be amended or supplemented. The Company has no material contingent obligations
which are not disclosed in the Registration Statement, as it may be amended or
supplemented.
(xi) The Company is not in default under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a party or
by which it or any of its properties is bound and which default is of material
significance in respect of the business or financial condition of the Company.
The sale of the shares by the Company hereunder will not conflict with or
result in a breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or instrument
to which the Company is a party, or of the certificate of incorporation or
by-laws of the Company or any order, rule or regulation applicable to the
Company of any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction which default would have a Material
Adverse Effect on the Company.
4.
<PAGE>
(xii) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or may be necessary to
qualify the Shares for public offering by the Underwriters under State or
foreign securities or Blue Sky laws) has been obtained or made and is in full
force and effect.
(xiii) The Company holds all material licenses, certificates and
permits from governmental authorities which are necessary to the conduct of its
business as described in the Prospectus, except for certificates, authorizations
or permits that are not material and do not interfere with the conduct of the
business of the Company; and the Company has not received notice of
infringement or of conflict with the asserted rights of others in respect of any
patents, patent rights, trade names, trademarks or copyrights, which
infringement, were it to result in an action determined adversely to the
Company, would have a Material Adverse Effect on the business of the Company.
(xiv) Ernst & Young LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(b) Each of the Selling Stockholders severally (and not jointly with
the other Selling Stockholders) represents and warrants as follows:
(i) Such Selling Stockholder has, and on the Closing Date
(as such date is hereinafter defined) will have, good and marketable title to
the Firm Shares to be sold by such Selling Stockholder, free of any liens,
encumbrances and claims, and full right, power and authority to effect the sale
and delivery of such Firm Shares; and upon the delivery of and payment for such
Firm Shares pursuant to this Agreement, good and marketable title thereto, free
of any liens, encumbrances and claims, will be transferred to the several
Underwriters.
(ii) The consummation by such Selling Stockholder of the
transactions herein contemplated and the fulfillment by such Selling Stockholder
of the terms hereof will not result in a breach of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust or other agreement or instrument to which such Selling Stockholder is a
party, or of any order, rule or regulation applicable to such Selling
Stockholder of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction.
5.
<PAGE>
(iii) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to, or which has constituted, or
which might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock of the Company.
(iv) Such Selling Stockholder is familiar with the
Registration Statement and, insofar as it relates to such Selling Stockholder,
the Registration Statement does not and will not contain an untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading. Such Selling Stockholder does not have
any actual knowledge that the Registration Statement contains any untrue
statement of material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or that the
representations and warranties contained in Section 1 of this Agreement are not
true and correct. The sale of the Firm Shares by such Selling Stockholder
pursuant hereto is not prompted by actual knowledge of any information
concerning the Company which is not set forth in the Registration Statement.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. On the basis of the
representations, warranties and covenants herein contained, and subject to the
conditions herein set forth, the Sellers agree to sell to the Underwriters and
each Underwriter agrees, severally and not jointly, to purchase, at a price of
$_________ per share, the respective number of Firm Shares set forth opposite
the name of each Underwriter in Schedule 1 hereof, subject to adjustments in
accordance with Section 9 hereof. The number of Firm Shares to be purchased by
each Underwriter from each Seller shall be as nearly as practicable in the same
proportion to the total number of Firm Shares being sold by each Seller as the
number of firm Shares being purchased by each Underwriter bears to the total
number of Firm Shares to be sold hereunder. The obligations of the Company and
of each of the Selling Stockholders shall be several and not joint.
Certificates in negotiable form for the total number of the Shares to be
sold hereunder by the Selling Stockholders have been placed in custody with
Continental Stock Transfer and Trust Company as custodian (the "Custodian")
pursuant to the Custodian Agreement executed by each Selling Stockholder for
delivery of all Firm Shares to be sold hereunder by the Selling Stockholders.
Each of the Selling Stockholders specifically agrees that the Firm Shares
represented by the certificates held in custody for the Selling Stockholders
under the Custodian Agreement are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminable by any act or deed of the Selling
Stockholders (or by any other person, firm or corporation including the Company,
6.
<PAGE>
the custodian or the Underwriters) or by operation of law (including the death
of any individual Selling Stockholder or the dissolution of a corporate Selling
Stockholder) or by the occurrence of any other event or events, except as set
forth in the Custodian Agreement. If any such event should occur prior to the
delivery to the Underwriters of the Firm Shares hereunder, certificates for the
Firm Shares shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such event has not occurred. The Custodian
is authorized to receive and acknowledge receipt of the proceeds of sale of the
Shares held by it against delivery of such Shares.
Payment for the Firm Shares to be sold hereunder is to be made in Federal
Reserve funds immediately available by wire transfer to the account of the
Company at a bank acceptable to the Underwriters for the shares to be sold by
the Company and to the account of the custodian for the shares to be sold by the
Selling Stockholders, in each case against delivery of certificates therefor to
the Representatives for the several accounts of the Underwriters. Such payment
and delivery are to be made at the offices of Alex. Brown & Sons Incorporated,
135 East Baltimore Street, Baltimore, Maryland, at 10:00 A.M., Baltimore time,
on the third (or if the Firm Shares are priced as contemplated by Rule 15c6-1(c)
of the Exchange Act, after 4:30 p.m., Baltimore time, the fourth) business day
after the date of this Agreement or at such other time and date not later than
five business days thereafter as you and the Company shall agree upon, such time
and date being herein referred to as the "Closing Date." (As used herein,
"business day" means a day on which the New York Stock Exchange is open for
trading and on which banks in New York are open for business and not permitted
by law or executive order to be closed; for purposes of Rule 15c6-1 under the
Securities Exchange Act, the Closing Date (if later than the otherwise
applicable settlement date) shall be the settlement date for payment of funds
and delivery of securities for all Firm Shares sold.) The certificates for the
Firm Shares will be delivered in such denominations and in such registrations as
the Representatives request in writing not later than the third full business
day prior to the Closing Date, and will be made available for inspection by the
Representatives at least one business day prior to the Closing Date.
In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase the Option
Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part but
only once and at any time upon written notice given within 30 days after the
date of this Agreement, by you, as Representatives of the several Underwriters,
to the Company setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in which the
Option Shares are to be registered and the time and date at which such
certificates are to be delivered. The time and date at which certificates for
Option Shares are to be delivered shall be determined by the Representatives but
shall not be earlier than three nor later
7.
<PAGE>
than 10 full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to as the
"Option Closing Date"). If the date of exercise of the option is three or more
days before the Closing Date, the notice of exercise shall set the Closing Date
as the Option Closing Date. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the total number of Option Shares
being purchased as the number of Firm Shares being purchased by such Underwriter
bears to the total number of Firm Shares, adjusted by you in such manner as to
avoid fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as Representatives of the several
Underwriters, may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on the Option Closing Date in Federal Reserve funds immediately available by
wire transfer to the account of the Company at a bank acceptable to the
Underwriters against delivery of certificates therefor at the offices of Alex.
Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
3. OFFERING BY THE UNDERWRITERS. It is understood that the several
Underwriters are to make a public offering of the Firm Shares as soon as the
Representatives deem it advisable to do so. The Firm Shares are to be initially
offered to the public at the initial public offering price set forth in the
Prospectus. The Representatives may from time to time thereafter change the
public offering price and other selling terms. To the extent, if at all, that
any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters
will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
(a) The Company covenants and agrees with the several Underwriters
that:
(i) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and Regulations,
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance
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with the Rules and Regulations and (iii) file on a timely basis all reports and
any definitive proxy or information statements required to be filed by the
Company with the Commission subsequent to the date of the Prospectus and prior
to the termination of the offering of the Shares by the Underwriters.
(ii) The Company will advise the Representatives promptly of
any request of the Commission for amendment of the Registration Statement or for
a supplement to the Prospectus or for any additional information, or of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose, and the Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in writing
and will make such applications, execute and deliver such documents, and
furnish such information as may be reasonably required for that purpose,
provided the Company shall not be required to qualify as a foreign corporation
or to consent to service of process in any jurisdiction where it is not now so
qualified or subject to service of process. The Company will, from time to
time, prepare and file such statements, reports, and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary Prospectus
as the Representatives may reasonably request. The Company will deliver to, or
upon the order of, the Representatives during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives may
reasonably request. The Company will deliver to the Representatives at or
before the Closing Date, four signed copies of the Registration Statement and
all amendments thereto including all exhibits filed therewith, and will deliver
to the Representatives such number of copies of the Registration Statement, but
without exhibits, and of all amendments thereto, as the Representatives may
reasonably request.
(v) If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event shall occur as a
result of which it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances existing
at the time the Prospectus is delivered to a purchaser, not misleading, or, if
it is necessary at any time to amend or
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supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later than
15 months after the effective date of the Registration Statement, an earnings
statement (which need not be audited) in reasonable detail, covering a period of
at least 12 consecutive months beginning after the effective date of the
Registration Statement, which earnings statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise you in writing when such statement has been so made available.
(vii) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports and copies
of all other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange or the Nasdaq National Market
pursuant to the requirements of such exchange or the Nasdaq National Market or
with the Commission pursuant to the Act or the Securities Exchange Act of 1934,
as amended. The Company will deliver to the Representatives similar reports
with respect to significant subsidiaries, as that term is defined in the Rules
and Regulations, which are not consolidated in the Company's financial
statements.
(viii) No offering, sale or other disposition of any Common
Stock of the Company will be made for a period of 180 days after the date of
this Agreement, directly or indirectly, by the Company otherwise than hereunder
or with the prior written consent of Alex. Brown & Sons Incorporated, except
that the Company may, without such consent, issue shares pursuant to the
conversion or exchange of convertible or exchangeable securities or the exercise
of warrants or options, in each case outstanding on the date hereof, grants of
employee stock options pursuant to the terms of a plan in effect on the date
hereof and issuance of securities pursuant to the exercise of such options.
(ix) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on the Nasdaq National Market.
(b) Each of the Selling Stockholders covenants and agrees severally
(and not jointly with the other Selling Stockholders) with the several
Underwriters that no offering, sale, pledge, contract to sell, grant of any
option to purchase or other disposition of any Common Stock of the Company
(including Common Stock which may be issued upon exercise of stock options or
warrants) or any securities convertible into, derivative
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of or exercisable or exchangeable for Common Stock will be made for a period of
180 days after the date of this Agreement, directly or indirectly, by such
Selling Stockholder otherwise than hereunder or with the prior written consent
of Alex. Brown & Sons, Incorporated.
(c) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with
respect to the transactions herein contemplated, each of the Selling
Stockholders agrees severally (and not jointly with the other Selling
Stockholders) to deliver to you prior to or at the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable from or statement specified by Treasury Department regulations in
lieu thereof).
5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Sellers under this
Agreement, including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements of
counsel for the Company and the Selling Stockholders (as reasonably approved by
the Company); the cost of printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Agreement Among Underwriters, the Underwriters'
Selling Memorandum, the Underwriters' Questionnaire, the Invitation Letter, the
Power of Attorney, the Listing Application, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the filing
fees and expenses incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Shares; the Listing Fee of the Nasdaq National Market; and the reasonable
expenses, including the fees and disbursements of counsel for the Underwriters,
incurred in connection with the qualification of the Shares under State
Securities or Blue Sky laws. The Selling Stockholders have agreed with the
Company to reimburse the Company for a portion of such expenses. To the extent,
if at all, that any of the Selling Stockholders engage special legal counsel to
represent them individually in connection with this offering, the fees and
expenses of such counsel shall be borne by such Selling Stockholder.
Underwriting discounts and commissions payable on the shares sold by the Selling
Stockholders and any transfer taxes imposed on the sale of the Shares to the
several Underwriters will be paid by the Sellers pro rata. The Sellers shall
not, however, be required to pay for any of the Underwriters' expenses (other
than those related to qualification under State securities or Blue Sky laws and
any required review by the NASD) except that, if this Agreement shall not be
consummated because the conditions in Section 7 hereof are not satisfied, or
because this Agreement is terminated by the Representatives pursuant to
Section 6 hereof, or by reason of any failure, refusal or inability on the part
of the Company or the Selling Stockholders to perform any undertaking or satisfy
any condition of this Agreement or to
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comply with any of the terms hereof on their part to be performed, unless such
failure to satisfy said condition or to comply with said terms be due to the
default or omission of any Underwriter, then the Company shall reimburse the
several Underwriters for reasonable out-of-pocket expenses, including fees and
disbursements of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company and the Selling Stockholders shall
not in any event be liable to any of the several Underwriters for damages on
account of loss of anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several
obligations of the Underwriters to purchase and pay for the Firm Shares on the
Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company and the
Selling Stockholders contained herein, and to the performance by the Company and
the Selling Stockholders of their covenants and obligations hereunder and to the
following additional conditions:
(a) No stop order suspending the effectiveness of the Registration
Statement, as amended from time to time, shall have been issued and no
proceedings for that purpose shall have been taken or, to the knowledge of the
Company or the Selling Stockholders, shall be contemplated by the Commission.
(b) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, the opinion of Baker & McKenzie,
counsel for the Company and the Selling Stockholders, dated the Closing Date or
the Option Closing Date, as the case may be, addressed to the Underwriters to
the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties and conduct
its business as described in the Prospectus; the Company is duly qualified to
transact business in each jurisdiction in which it is known to such counsel to
own or lease property or conduct business and the conduct of its business
requires such qualification, or in which the failure to qualify would have a
materially adverse effect upon the business of the Company; and the Company has
no direct or indirect subsidiaries.
(ii) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus; the
authorized shares of its Common Stock have been duly authorized; the outstanding
shares of its Common Stock, including the Shares to be sold by the Selling
Stockholders, have been duly authorized and validly issued and are fully paid
and non-assessable; all of the Shares conform to the
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description thereof contained in the Prospectus; the certificates evidencing
the Shares are in due and proper form; the shares of Common Stock, including the
Option Shares, if any, to be sold by the Company pursuant to this Agreement have
been duly authorized and will be validly issued, fully paid and non-assessable
when sold as contemplated by this Agreement; and to the best knowledge of such
counsel no preemptive rights of stockholders exist with respect to any of the
Shares or the issue and sale thereof.
(iii) The Registration Statement was declared effective under
the Act and, to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings with respect thereto have been instituted or are pending or
threatened under the Act.
(iv) The Registration Statement, all Preliminary Prospectuses,
the Prospectus and each amendment or supplement thereto comply as to form in all
material respects with the requirements of the Act and the applicable rules and
regulations thereunder (except that such counsel need express no opinion as to
the financial statements, schedules and other financial information included
therein).
(v) The statements under the captions "Description of Capital
Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as they
are descriptions of laws, regulations and rules, of legal and governmental
proceedings or of contracts, agreements, leases and other legal documents known
to such counsel, or refer to statements of law or legal conclusions are complete
and accurate in all material respects and fairly and correctly present the
information called for with respect to such documents and matters.
(vi) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or described in
the Registration Statement or the Prospectus which are not so filed or described
as required, and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized in all material
respects.
(vii) Except as set forth in the Prospectus, to the best
knowledge of such counsel, there are no pending or threatened proceedings
against the Company that, if determined adversely to the Company would,
individually or in the aggregate, have a Material Adverse Effect on the Company.
(viii) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the certificate of incorporation or bylaws of the
Company, or any agreement or instrument known to such counsel to which the
Company is a party or by which the Company may
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be bound which breach, default or violation would have a Material Adverse Effect
on the Company;
(ix) This Agreement has been duly authorized, executed and
delivered by the Company.
(x) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the National Association of Securities
Dealers, Inc. or as required by State or foreign securities and Blue Sky laws as
to which such counsel need express no opinion) except such as have been obtained
or made, specifying the same.
In rendering such opinion Baker & McKenzie may rely as to matters governed
by the laws of states other than California, the General Corporation Laws of the
State of Delaware or Federal laws on local counsel in such jurisdictions,
provided that Baker & McKenzie shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to the
matters set forth above, Baker & McKenzie shall state that it has participated
in conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company and the
Representatives and counsel to the Underwriters at which the contents of the
Registration Statement and Prospectus and related matters were discussed and,
although such counsel has not undertaken to investigate or verify independently
and does not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus (except as otherwise expressly set forth herein), on the basis of the
foregoing, no facts have come to such counsel's attention that caused such
counsel to believe that any part of the Registration Statement (other than the
financial statements and notes thereto and other financial, statistical and
accounting data or schedules included therein, or omitted therefrom, as to which
no opinion need be expressed), as amended or supplemented, at the time such part
of the Registration Statement became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (other than
information omitted therefrom in reliance on Rule 430A under the Act), or the
Prospectus (other than the financial statements and notes thereto and other
financial, statistical and accounting data or schedules included therein, or
omitted therefrom, as to which no opinion need be expressed), as amended or
supplemented, on the date of filing thereof with the Commission and on the date
hereof, contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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(c) The Representatives shall have received the opinion contemplated
in the Power of Attorney, executed and delivered by each Selling Stockholder and
an opinion, dated such Closing Date of Reid & Priest, LLP, counsel for the
Selling Stockholders, to the effect that:
(i) This Agreement has been duly authorized, executed and
delivered on behalf of the Selling Stockholders.
(ii) Each Selling Stockholder has full legal right, power and
authority, and has duly obtained any approval required by law (other than as
required by State securities and Blue Sky laws as to which such counsel need
express no opinion), to sell, assign, transfer and deliver the portion of the
Shares to be sold by such Selling Stockholder pursuant to this Agreement.
(iii) The Custodian Agreement executed and delivered by each
Selling Stockholder is a valid, irrevocable instrument legally sufficient for
the purposes intended.
(iv) The Underwriters (assuming that they are bona fide
purchasers within the meaning of the Uniform Commercial Code) have acquired good
and marketable title to the Shares being sold by each Selling Stockholder on the
Closing Date, free and clear of all claims, liens, encumbrances and security
interests whatsoever.
(d) The Representatives shall have received from Cooley Godward LLP,
counsel for the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, substantially to the effect specified in
subparagraphs (ii), (iii), (iv), (ix) and (xi) of Paragraph (b) of this Section
6, and that the Company is a validly incorporated and existing corporation
under the laws of the State of Delaware. In rendering such opinion Cooley
Godward LLP may rely as to all matters governed other than by the laws of the
State of California, the General Corporation Laws of the State of Delaware or
Federal laws on the opinion of the local counsel referred to in paragraph (b) of
this Section 6. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that the Registration Statement, as of
the time it became effective under the Act, and the Prospectus or any amendment
or supplement thereto, on the date it was filed pursuant to Rule 424(b) and the
Registration Statement and the Prospectus, or any amendment or supplement
thereto, as of the Closing Date or the Option Closing Date, as the case may be,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading (except that such counsel need express no view as to
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financial statements, the notes thereto, schedules and other financial or
statistical information included therein). With respect to such statement,
Cooley Godward LLP may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
(e) The Representatives shall have received at or prior to the
Closing Date from Cooley Godward LLP a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the State
securities or Blue Sky laws of such jurisdictions as the Representatives may
reasonably have designated to the Company.
(f) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a signed letter from Ernst & Young
LLP, dated the Closing Date or the Option Closing Date, as the case may be,
which shall confirm, on the basis of a review in accordance with the procedures
set forth in the letter singed by such firm and dated and delivered to the
Representatives on the date hereof that nothing has come to their attention
during the period from the date five days prior to the date hereof, to a date
not more than five days prior to the Closing Date or the Option Closing Date, as
the case may be, which would require any change in their letter dated the date
hereof if it were required to be dated and delivered on the Closing Date or the
Option Closing Date, as the case may be. All such letters shall be in form and
substance satisfactory to the Representatives.
(g) The Representatives shall have received on the Closing Date or
the Option Closing Date, as the case may be, a certificate or certificates of
the President and the Chief Financial Officer of the Company to the effect that,
as of the Closing Date or the Option Closing Date, as the case may be, each of
them severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
has been issued, and no proceedings for such purpose have been taken or are, to
his knowledge, contemplated by the Commission.
(ii) He does not know of any litigation instituted or
threatened against the Company of a character required to be disclosed in the
Registration Statement which is not so disclosed; he does not know of any
material contract required to be filed as an exhibit to the Registration
Statement which is not so filed; and the representations and warranties of the
Company contained in Section 1 hereof are true and correct as of the Closing
Date or the Option Closing Date, as the case may be.
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(iii) He has carefully examined the Registration Statement and
the Prospectus and, in his opinion, as of the effective date of the Registration
Statement, the statements contained in the Registration Statement were true and
correct, and such Registration Statement and Prospectus did not omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading and, in his opinion, since the effective date
of the Registration Statement, no event has occurred which should have been set
forth in a supplement to or an amendment of the Prospectus which has not been so
set forth in such supplement or amendment.
(h) The Company and the Selling Stockholders shall have furnished to
the Representatives such further certificates and documents confirming the
representations and warranties contained herein and related matters as the
Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq National Market.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Cooley Godward LLP, counsel
for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Stockholders of such
termination in writing or by telegram at or prior to the Closing Date or the
Option Closing Date, as the case may be.
In such event, the Selling Stockholders, the Company and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS. The obligations of the
Sellers to sell and deliver the portion of the Shares required to be delivered
as and when specified in this Agreement are subject to the conditions that at
the Closing Date or the Option Closing Date, as the case may be, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and in effect or proceedings therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of
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the Act against any losses, claims, damages or liabilities to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse each Underwriter and
each such controlling person for any legal or other expenses reasonably incurred
by such Underwriter or such controlling person in connection with investigating
or defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof and provided,
further, that such indemnity with respect to any untrue statement or
misstatement of a material fact contained in any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased the shares that are
subject thereof if such person did not receive a copy of the Prospectus (or the
Prospectus as supplemented) at or prior to the confirmation of the sale of such
shares to such person in any case where delivery is required under the Act and
such untrue statement or omission of a material fact contained in any
preliminary prospectus was corrected in the Prospectus (or the Prospectus as
supplemented). This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
(b) Each Selling Stockholder severally (and not jointly with the
other Selling Stockholders) agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act to the same extent as the indemnity from the Company to each
Underwriter set forth in Section 8(a) hereof, but only with respect to
information relating to such Selling Stockholder furnished by or on behalf of
such Selling Stockholder to the Company expressly for use in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto. In no event, however, shall the liability of any Selling
Stockholder for indemnification under this Section 8(b) exceed the net proceeds
received by such Selling Stockholder from the Underwriters in the offering.
This indemnity agreement will be in addition to any liability which the Selling
Stockholders may otherwise have.
(c) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed the
Registration
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Statement, the Selling Stockholders, and each person, if any, who controls the
Company or the Selling Stockholders within the meaning of the Act, against any
losses, claims, damages or liabilities to which the Company or any such
director, officer, Selling Stockholder or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, Selling Stockholder or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that each Underwriter will
be liable in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission has been
made in the Registration Statement, any Preliminary Prospectus, the Prospectus
or such amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a), (b) or (c) shall be available to any party who shall fail to give notice
as provided in this Section 8(d) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
prejudiced by the failure to give such notice, but the failure to give such
notice shall not relieve the indemnifying party or parties from any liability
which it or they may have to the indemnified party for contribution or otherwise
than on account of the provisions of Section 8(a), (b) or (c). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel reasonably satisfactory to such indemnified
party and shall pay as incurred the fees and disbursements of such counsel
related to such proceeding. In any such proceeding, any indemnified party shall
have the right to retain its own counsel at its own expense. Notwithstanding
the foregoing, the indemnifying party shall pay as incurred the fees and
expenses of the counsel retained by
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the indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel or
(ii) the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would, in the reasonable judgment of the
indemnified party, be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall not,
in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm for all such indemnified parties. Such firm shall be designated
in writing by you in the case of parties indemnified pursuant to Sections 8(a)
and (b) and by the Company and the Selling Stockholders in the case of parties
indemnified pursuant to Section 8(c). The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action in
respect to which any indemnified party is or could have been a party and
indemnity could have been sought hereunder by such indemnified party unless such
settlement includes an unconditional release of such indemnified party from all
liability on such claims that are the subject matter of such action. An
indemnifying party will not be liable for any settlement of any action or claim
effected without its written consent.
(e) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company and
each Selling Stockholder on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under Section 8(d) above,
then each indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and each
Selling Stockholder on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by the Company and each Selling Stockholder on the one hand and the
Underwriters on the other shall be deemed to be in
20.
<PAGE>
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and such Selling Stockholder bear
to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Stockholders on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section 8(e)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(e). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(e) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, (ii) no
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation, and (iii) no Selling
Stockholder shall be required to contribute any amount in excess of the net
proceeds received by such Selling Stockholder from the Underwriters in the
offering. The Underwriters' obligations in this Section 8(e) to contribute are
several in proportion to their respective underwriting obligations and not
joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing
Date, as the case may be, any Underwriter shall fail to purchase and pay for the
portion of the Shares which such Underwriter has agreed to purchase and pay for
on such date (otherwise than by reason of any default on the part of the Company
or a Selling
21.
<PAGE>
Stockholder), you, as Representatives of the Underwriters, shall use your best
efforts to procure within 24 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company and the Selling
Stockholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such
24 hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the remaining Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Stockholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 24-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Stockholders
except to the extent provided in Sections 5 and 8 hereof. In the event of a
default by any Underwriter or Underwriters, as set forth in this Section 9, the
Closing Date or Option Closing date, as the case may be, may be postponed for
such period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
10. NOTICES. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202,
Attention: ______________________; if to the Company or the Selling
Stockholders, to Daou Systems, Inc., 5120 Shoreham Place, San Diego, California
92122, Attention: President, with a copy to Baker & McKenzie, The Wells Fargo
Plaza, 12th Floor, 101 West Broadway, San Diego, California 92101-9890, Attn:
John J. Hentrich, Esq., or if sent to the Selling Stockholders or any of them,
will be mailed, delivered or telegraphed and confirmed to the Selling
Stockholders at the addresses set forth on Schedule B below each Selling
Stockholder's name, with a copy to
22.
<PAGE>
Reid & Priest LLP, 40 West 57th Street, New York, New York 10019, Attn: Peter K.
Anglum, Esq.
11. TERMINATION. This Agreement may be terminated by you by notice to the
Sellers as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 A.M. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change or
any development involving a prospective material adverse change in or affecting
the condition, financial or otherwise, of the Company or the earnings, business
affairs, management or business prospects of the Company, whether or not arising
in the ordinary course of business, (ii) any outbreak of hostilities or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment, make
the offering or delivery of the Shares impracticable, (iii) suspension of
trading in securities on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities on any such
Exchange or Market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your reasonable opinion
materially and adversely affects or will materially or adversely affect the
business or operations of the Company, (v) declaration of a banking moratorium
by either federal or New York State authorities, or (vi) the taking of any
action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Sellers, as
to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (b) above or as provided in Sections 6 and 9 of this
Agreement.
12. SUCCESSORS. This Agreement has been and is made solely for the
benefit of the Underwriters, the Company and the Selling Stockholders and their
respective successors, executors, administrators, heirs and assigns, and the
officers, directors and
23.
<PAGE>
controlling persons referred to herein, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Shares merely because of such purchase.
13. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or its directors or officers and (c) delivery of and payment for the
Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York, without regard to principles of conflicts of
laws.
24.
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon this Agreement will become a binding agreement among the Selling
Stockholders, the Company and the several Underwriters in accordance with its
terms.
Very truly yours,
DAOU SYSTEMS, INC.
By
-----------------------------
Daniel J. Daou, President
Selling Stockholders listed on Schedule II
By
-----------------------------------
, Attorney-in-Fact
------------
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
ALEX. BROWN & SONS INCORPORATED
COWEN & COMPANY
HAMBRECHT & QUIST LLC
As Representatives of the several Underwriters listed on Schedule I
By ALEX. BROWN & SONS INCORPORATED
By
, Authorized Officer
--------------------
25.
<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
NUMBER OF FIRM
SHARES TO BE
UNDERWRITER PURCHASED
Alex. Brown & Sons Incorporated
Cowen & Company
Hambrecht & Quist LLC
-----------------
Total
-----------------
-----------------
<PAGE>
SCHEDULE II
SCHEDULE OF SELLING STOCKHOLDERS
SELLING STOCKHOLDER NUMBER OF FIRM
SHARES TO BE SOLD
Georges J. Daou
Daniel J. Daou
Joseph H. Daou
-----------------
Total
-----------------
-----------------
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of this 9th day of January, 1997, by and between DAOU Systems, Inc.,
a California corporation ("DAOU California"), and DAOU Systems, Inc., a
Delaware corporation ("DAOU Delaware").
RECITALS
A. DAOU California is a corporation duly organized and existing under the
laws of the State of California.
B. DAOU Delaware is a corporation duly organized and existing under the
laws of the State of Delaware.
C. On the date of this Agreement, DAOU Delaware has authority to issue
56,603,430 shares, 50,000,000 of which are Common Stock with a par value of
$0.001 per share (the "DAOU Delaware Common Stock"), and 6,603,430 of which
are Preferred Stock with a par value of $0.001 per share (the "DAOU Delaware
Preferred Stock"), of which one hundred (100) shares of Common Stock are
issued and outstanding and owned by DAOU California.
D. On the date of this Agreement, DAOU California has authority to
issue 25,000,000 shares, 15,000,000 of which are of Common Stock (the "DAOU
California Common Stock"), and 10,000,000 of which are of Preferred Stock,
including 1,821,191 shares of Series A Preferred Stock (the "DAOU California
Preferred Stock"), of which 4,750,000 shares of Common Stock and 1,142,857
shares of Series A Preferred Stock are issued and outstanding.
E. Each of the respective Boards of Directors of DAOU Delaware and DAOU
California has determined that, for the purpose of effecting the reincorporation
of DAOU California in the State of Delaware, it is advisable and to the
advantage of said two corporations and their shareholders that DAOU California
merge with and into DAOU Delaware upon the terms and conditions herein provided.
F. The respective Boards of Directors of DAOU Delaware and DAOU
California, the shareholders of DAOU California and the sole stockholder of DAOU
Delaware have adopted and approved this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, DAOU California and DAOU Delaware hereby agree to merge as
follows:
<PAGE>
ARTICLE I. MERGER
1.1 THE MERGER. In accordance with the provisions of this Agreement, the
General Corporation Law of the State of Delaware (the "Delaware Law") and the
Corporations Code of the State of California (the "California Code"), DAOU
California shall be merged with and into DAOU Delaware (the "Merger"), the
separate existence of DAOU California shall cease, and DAOU Delaware shall be,
and is herein sometimes referred to as, the "Surviving Corporation."
1.2 EFFECTIVE TIME OF THE MERGER. Subject to the provisions herein, this
Agreement, together with required related certificates, if any, shall be duly
executed and filed in accordance with the Delaware Law and the California Code.
The Merger shall become effective at the time of the filing of an executed
counterpart of this Agreement and any other required certificates with the
Delaware Secretary of State (the "Effective Time of the Merger").
1.3 EFFECTS OF THE MERGER. At the Effective Time of the Merger, the
separate existence of DAOU California shall cease and DAOU Delaware, as the
Surviving Corporation, shall:
(a) continue its corporate existence under the name of DAOU Systems,
Inc.;
(b) succeed, without other transfer, to all rights, titles, assets,
powers and properties of DAOU California in the manner more fully set forth in
Section 259 of the Delaware Law;
(c) continue to be subject to all of the debts, liabilities and
obligations of DAOU Delaware as constituted immediately prior to the Effective
Time of the Merger; and
(d) succeed, without other transfer, to all of the debts, liabilities
and obligations of DAOU California, including any obligations of DAOU California
under employee benefit plans in effect as of said date or with respect to which
employee rights or accrued benefits are outstanding as of said date, in the same
manner as if DAOU Delaware had itself incurred them, all as more fully provided
under the applicable provisions of the Delaware Law and the California Code.
ARTICLE II. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1 CERTIFICATE OF INCORPORATION. At the Effective Time of the Merger,
the Certificate of Incorporation of DAOU Delaware shall continue in full force
and effect as the Certificate of Incorporation of the Surviving Corporation
without change or amendment until further amended in accordance with the
provisions thereof and applicable laws.
2.2 BYLAWS. The Bylaws of DAOU Delaware as in effect immediately prior to
the Effective Time of the Merger shall continue in full force and effect as the
Bylaws of the Surviving Corporation without change or amendment until further
amended in accordance with the provisions thereof and applicable laws.
-2-
<PAGE>
2.3 DIRECTORS AND OFFICERS. At the Effective Time of the Merger, the
directors and officers of DAOU California shall become the directors and
officers of DAOU Delaware and the members of each committee of the Board of
Directors of DAOU California shall become the members of such committees of
DAOU Delaware.
ARTICLE III. EFFECT ON CAPITAL STOCK
3.1 CONVERSION OF DAOU CALIFORNIA CAPITAL STOCK. At the Effective Time of
the Merger, by virtue of the Merger and without any action on the part of the
holder thereof:
(a) each share of DAOU California Common Stock outstanding
immediately prior thereto shall be changed and converted into 1.403 fully paid
and nonassessable shares of DAOU Delaware Common Stock; and
(b) each share of DAOU California's Series A Preferred Stock shall be
changed and converted into 1.403 fully paid and nonassessable shares of DAOU
Delaware Preferred Stock.
3.2 CONVERSION OF DAOU CALIFORNIA STOCK OPTIONS. At the Effective Time of
the Merger, by virtue of the Merger and without any action on the part of the
holder thereof, each outstanding option, warrant or other right to purchase
shares of DAOU California Common Stock, including, but not limited to those
options granted under the 1996 Stock Option Plan (the "Option Plan"), shall be
converted into and become an option, warrant or right to purchase 1.403 shares
of DAOU Delaware Common Stock at the exercise price of the DAOU California
option, warrant or right divided by 1.403. A number of shares of DAOU Delaware
Common Stock shall be reserved for purposes of such options, warrants and
rights that is equal to the number of shares of DAOU California Common Stock
so reserved immediately prior to the Effective Time of the Merger and
multiplied by 1.403, and DAOU Delaware shall assume all obligations of DAOU
California under agreements pertaining to such options, warrants and rights,
including the Option Plan.
3.3 CONVERSION OF DAOU DELAWARE COMMON STOCK. Forthwith upon the
Effective Time of the Merger, the one hundred (100) shares of DAOU Delaware
Common Stock presently issued and outstanding in the name of DAOU California
shall be canceled and retired and shall resume the status of authorized and
unissued shares of DAOU Delaware Common Stock, and no shares of DAOU Delaware
Common Stock or other securities of DAOU Delaware shall be issued in respect
thereof.
3.4 FRACTIONAL SHARES. No fractional share which a DAOU Delaware
stockholder would otherwise be entitled to receive by reason of the exchange
of DAOU California stock for DAOU Delaware stock shall be issued. In the
event of any fractional share to which a holder otherwise is entitled
(determined on a certificate by certificate basis), DAOU Delaware shall round
such fractional share to the closest whole integer and deliver to such holder
one (1) whole share of DAOU Delaware Common Stock or DAOU Delaware Series A
Preferred Stock, as the case may be. No cash shall be paid in lieu of any
fractional share.
3.5 STOCK CERTIFICATES. On and after the Effective Time of the Merger,
all of the outstanding certificates which prior to that time represented shares
of DAOU California stock shall
-3-
<PAGE>
be deemed for all purposes to evidence ownership of and to represent the shares
of DAOU Delaware stock into which the shares of DAOU California stock have been
converted as herein provided. In addition, on or after the Effective Time of
the Merger, the records and books of DAOU California shall be deemed for all
purposes to be the records and books of DAOU Delaware. The registered owner on
the books and records of DAOU Delaware or its transfer agent of any such
outstanding stock certificate shall, until such certificate shall have been
surrendered for transfer or otherwise accounted for to DAOU Delaware or its
transfer agent, have and be entitled to exercise any voting and other rights
with respect to and to receive any dividend and other distributions upon the
shares of DAOU Delaware stock evidenced by such outstanding certificate as above
provided.
ARTICLE IV. ADDITIONAL COVENANTS
4.1 COVENANTS OF DAOU DELAWARE. DAOU Delaware covenants and agrees that
it shall, on or before the Effective Time of the Merger:
(a) qualify to do business as a foreign corporation in the State of
California and in all other states in which DAOU California is so qualified and
in which the failure to so qualify would have a material adverse impact on the
business or financial condition of the Surviving Corporation;
(b) irrevocably appoint an agent for service of process as required
under the provisions of Section 2105 of the California Corporations Code and
under applicable provisions of state law in other states in which qualification
is required hereunder; and
(c) file any and all documents with the California Franchise Tax
Board necessary to the assumption by DAOU Delaware of all of the franchise tax
liabilities of DAOU California.
4.2 FURTHER ASSURANCES. From time to time, as and when required by DAOU
Delaware or by its successors and assigns, there shall be executed and delivered
on behalf of DAOU California such deeds and other instruments, and there shall
be taken or caused to be taken by it such further and other action, as shall be
appropriate or necessary in order to vest, perfect or confirm, of record or
otherwise, in DAOU Delaware the title to and possession of all the property,
interests, assets, rights, privileges, immunities, powers, franchises and
authority of DAOU California, and otherwise to carry out the purposes of this
Agreement and the officers and directors of DAOU Delaware are fully authorized
in the name and on behalf of DAOU California or otherwise to take any and all
such action and to execute and deliver any and all such deeds and other
instruments.
-4-
<PAGE>
ARTICLE V. MISCELLANEOUS PROVISIONS
5.1 AMENDMENT. Except for the terms of Article III of this Agreement, at
any time before or after approval and adoption by the shareholders of DAOU
California, this Agreement may be amended in any manner as may be determined in
the judgment of the respective Boards of Directors of DAOU Delaware and DAOU
California to be necessary, desirable or expedient in order to clarify the
intention of the parties hereto or to effect or facilitate the purposes and
intent of this Agreement.
5.2 ABANDONMENT. At any time before the Effective Time of the Merger,
this Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either DAOU California or DAOU Delaware or both, notwithstanding
the prior approval of this Agreement by the sole stockholder of DAOU Delaware
and by the shareholders of DAOU California.
5.3 GOVERNING LAW. This Agreement shall in all respects be construed,
interpreted and enforced in accordance with Delaware Law, so far as applicable,
the merger provisions of the California Code.
5.4 COUNTERPARTS. In order to facilitate the filing and recording of this
Agreement, the same may be executed in any number of counterparts, each of which
shall be deemed to be an original.
IN WITNESS WHEREOF, this Agreement, having first been duly approved by
resolution of the Boards of Directors of DAOU California and DAOU Delaware, is
hereby executed on behalf of each of said corporations by their respective
officers thereunto duly authorized.
DAOU Systems, Inc., DAOU Systems, Inc.,
a California Corporation a Delaware Corporation
By: /s/ Daniel J. Daou By: /s/ Daniel J. Daou
------------------------------- -------------------------------
Daniel J. Daou, President Daniel J. Daou, President
-5-
<PAGE>
CERTIFICATE OF SECRETARY
OF
DAOU SYSTEMS, INC.,
A DELAWARE CORPORATION
The undersigned, Fred McGee, the Secretary of DAOU Systems, Inc., a
Delaware corporation (the "Corporation"), hereby certifies that the Agreement
and Plan of Merger to which this Certificate is attached was duly signed on
behalf of the Corporation by its President under the corporate seal of the
Corporation and was duly approved and adopted by written consent of the sole
stockholder of the Corporation dated January 9, 1997.
Dated: January 9, 1997.
/s/ Fred McGee
--------------------------------------------
Fred McGee, Secretary
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
DAOU SYSTEMS, INC.
I, Lynn M. Morris, the incorporator of DAOU Systems, Inc., a corporation
duly organized under the laws of the State of Delaware (the "CORPORATION"), do
hereby certify as follows:
1. The name of the Corporation is DAOU Systems, Inc. and the original
Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on November 15, 1996 (the
"ORIGINAL CERTIFICATE OF INCORPORATION").
2. The Corporation has not received any payment for any of its stock.
3. No directors were named in the Original Certificate of Incorporation
and none have been elected.
4. Pursuant to Sections 241 and 245 of the General Corporation Law of the
State of Delaware, the following resolution restating, integrating and
further amending the Certificate of Incorporation of the Corporation
was approved by Written Consent by the Sole Incorporator dated as of
November 21, 1996:
NOW, THEREFORE, BE IT RESOLVED, that the Certificate of
Incorporation of the Corporation be, and hereby is,
restated and further amended to read in its entirety as
follows:
ARTICLE I
The name of the corporation is DAOU Systems, Inc., (hereinafter referred to
as (the "CORPORATION").
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware. The
name of its registered agent at such address is Corporation Services Company.
<PAGE>
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
A. The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is 56,603,430
shares, 50,000,000 shares of which shall be Common Stock with a par value of
$0.001 each, and 6,603,430 shares of which shall be Preferred Stock with a par
value of $0.001.
B. The Preferred Stock of the Corporation may be issued as a class,
without series or, if so determined from time to time by the Board of Directors
of the Corporation, in one or more series, each series to be expressly
designated by a distinguishing number, letter or title. The Preferred Stock,
and each series thereof, shall have such voting powers and other rights,
privileges, preferences and restrictions as shall be set forth in the
resolutions of the Board of Directors providing for the issuance of such
preferred stock. There is hereby expressly granted to the Board of Directors of
the Corporation the authority to determine, fix, alter or revoke any and all of
the rights, preferences, privileges and restrictions and other terms of the
Preferred Stock and any series thereof, and the number of shares constituting
any series and the designation thereof, and to increase or decrease the number
of shares of any series subsequent to the issuance of shares of that series, but
not below the number of shares of such series then outstanding, or to eliminate
entirely any series if there no longer are any outstanding shares of such series
(and, thereupon, the shares previously designated for such series shall become
authorized but undesignated shares). In case the number of shares of any series
shall be so decreased, the shares constituting such shall resume the status they
had prior to the adoption of the resolution originally setting forth the number
of shares of such series.
1,603,430 of the authorized shares of Preferred Stock are hereby
designated the "Series A Preferred Stock."
C. The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred Stock are as follows:
1. DIVIDEND PROVISIONS. Subject to the rights of series of
Preferred Stock which may from time to time come into existence in compliance
with the provisions of SECTION 7, the holders of shares of the Series A
Preferred Stock shall be entitled to receive dividends out of any assets legally
available therefor, prior and in preference to any declaration or payment of any
dividend (other than a dividend payable solely in Common Stock or other
securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock) on the
Common Stock, at the rate of six percent (6%) per annum based on the
2
<PAGE>
Series A Issue Price (as hereinafter defined in SUBSECTION 2(a)) per share of
the Series A Preferred Stock (appropriately adjusted for any stock split,
dividend, combination or other recapitalization) when, as and if declared by
the Board of Directors. Such dividends shall not be cumulative and, subject
to the rights of series of Preferred Stock which may from time to time come
into existence in compliance with the provisions of SECTION 7, shall be paid
to the extent assets are legally available therefor and any amounts for which
assets are not legally available shall be paid promptly as assets become
legally available therefor; any partial payment will be made pro rata among
the holders of such shares. Unless full dividends on the Series A Preferred
Stock for the then current dividend period shall have been paid or declared
and a sum sufficient for the payment thereof set apart, no dividend
whatsoever (other than a dividend payable solely in Common Stock or other
securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock) shall be
paid or declared, and no distribution shall be made, on any Common Stock.
After full dividends on the Series A Preferred Stock for the then current
dividend period have been paid, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock shall participate in any
further dividends on a pro rata basis determined by the number of shares of
Common Stock held by each (assuming conversion of all such Series A Preferred
Stock).
2. LIQUIDATION PREFERENCE.
a. In the event of any liquidation, dissolution or winding
up of the Corporation, either voluntary or involuntary, subject to the rights
of series of Preferred Stock which may from time to time come into existence
in compliance with the provisions of SECTION 7, the holders of Series A
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of any of the assets of the Corporation to the holders of Common
Stock by reason of their ownership thereof, an amount per share equal to the
sum of (i) Four Dollars and Ninety-Nine Cents ($4.99) for each outstanding
share of Series A Preferred Stock (the "SERIES A ISSUE PRICE") and (ii) an
amount equal to six percent (6%) of the Series A Issue Price (compounded
annually and computed on the basis of a 360-day year of 30-day months and,
for any period less than a month, the actual number of days elapsed in such
month for the period of time that has passed since the original issuance of
the Series A Preferred Stock) less any dividends actually paid on the Series
A Preferred Stock (such amount being referred to herein as the "PREMIUM").
If upon the occurrence of such event, the assets and funds thus distributed
among the holders of the Series A Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amounts, then, subject to the rights of series of Preferred Stock which may
from time to time come into existence in compliance with the provisions of
SECTION 7, the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the holders of the Series
A Preferred Stock in proportion to the amount of such stock owned by each
such holder.
b. Upon the completion of the distribution required by
SUBSECTION (a) of this SECTION 2 and any other distribution which may be
required with respect to series of Preferred Stock which may from time to time
come into existence in compliance with the provision of SECTION 7, if assets
remain in the Corporation, the holders of the Common Stock of the Corporation
shall
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receive an aggregate amount equal to the total amount received by the holders
of the Series A Preferred Stock pursuant to SUBSECTION (a).
c. After the distributions described in SUBSECTION (a) and (b)
above have been paid, subject to the rights of series of Preferred Stock which
may from time to time come into existence in compliance with the provisions of
SECTION 7, the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among the holders of Series A Preferred Stock
and Common Stock pro rata based on the number of shares of Common Stock held by
each (assuming conversion of all such Series A Preferred Stock).
d. A consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale, conveyance or disposition of
all or substantially all of the assets of the Corporation or the effectuation by
the Corporation of a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Corporation is disposed of,
shall not be deemed to be a liquidation, dissolution or winding up within the
meaning of this SECTION 2, but shall instead be treated pursuant to SECTION 5.
e. The liquidation preference of the Series A Preferred Stock
set forth in this SECTION 2 shall not be applicable to any transaction in which
the holders of Series A Preferred Stock receive not less than two times the
Series A Issue Price (appropriately adjusted for any stock split, dividend,
combination or other recapitalization) before August 31, 1997 and not less than
three times the Series A Issue Price (appropriately adjusted for any stock
split, dividend, combination or other recapitalization) thereafter; provided,
however, that in any such transaction the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock will share in the
consideration received on a pro rata basis determined by the number of shares of
Common Stock held by each (assuming conversion of all such Series A Preferred
Stock).
3. REDEMPTION.
a. On or after August 31, 2000, subject to the rights of series
of Preferred Stock which may from time to time come into existence in compliance
with the provisions of SECTION 7, within thirty (30) days after the receipt by
the Corporation of a written request from the holders of a majority of the then
outstanding Series A Preferred Stock, but not less then one third of the
originally issued shares of Series A Preferred Stock (the "ORIGINAL SERIES A
PREFERRED STOCK"), that all or some of such holders' shares be redeemed, and
concurrently with surrender by such holders of the certificates representing
such shares, the Corporation shall, to the extent it may lawfully do so, redeem
the shares specified in such request by paying in cash therefor a sum per share
equal to the Series A Issue Price plus an amount equal to six percent (6%) of
the Series A Issue Price compounded annually and computed for the period of time
that has passed since the original issuance of the Series A Preferred Stock on
the basis of a 360-day year of 30-day months and, for any period less than a
month, the actual number of days elapsed in such month, less any dividends
actually paid on the Series A Preferred Stock (the "SERIES A REDEMPTION PRICE").
The Corporation shall give each holder of Series A Preferred Stock at least ten
(10) days written notice of the date (the "REDEMPTION DATE") and place of
redemption and the dollar amount of the Series A
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Redemption Price, which notice shall be effective upon delivery or deposit in
the United States mail, postage prepaid and addressed to each holder of
record at his address appearing on the books of the Corporation. Payment of
the Series A Redemption Price shall be made as follows: (A) one-third of such
price shall be paid in cash on the Redemption Date; and (B) one-third of such
price (plus interest on unpaid balance of six percent (6%) compounded
annually) shall be paid in cash on each of the first and second anniversary
dates of such Redemption Date, respectively. If the certificate surrendered
represents a greater number of shares than the number redeemed, the
Corporation shall issue to such holder a new certificate representing the
shares which remain outstanding.
b. From and after the Redemption Date, unless there shall have
been a default in payment of the Series A Redemption Price, all dividends on the
Series A Preferred Stock designated for redemption in the Redemption Notice
shall cease to accrue, all rights of the holders of such shares as holders of
Series A Preferred Stock (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. Subject to the rights of series of Preferred Stock
which may from time to time come into existence in compliance with the
provisions of SECTION 7, if the funds of the Corporation legally available for
redemption of shares of Series A Preferred Stock on any Redemption Date, or any
subsequent date as provided in SUBSECTION 3(a), are insufficient to redeem the
total number of shares of Series A Preferred Stock to be redeemed on such date,
those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed. The shares of Series A Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein.
Subject to the rights of series of Preferred Stock which may from time to time
come into existence in compliance with the provisions of SECTION 7, at any time
thereafter when additional funds of the Company are legally available for the
redemption of shares of Series A Preferred Stock, such funds will immediately be
used to redeem the balance of the shares which the Company has become obligated
to redeem on any Redemption Date but which it has not redeemed.
c. If at any time less than twenty-five percent (25%) of the
Series A Preferred Stock remains outstanding, the Corporation may, upon a vote
of its Board of Directors, redeem the remaining outstanding Series A Preferred
Stock by payment in cash of the Series A Redemption Price in accordance with the
notice and other terms and conditions set forth above in this SECTION 3.
4. CONVERSION. The holders of the Series A Preferred Stock shall
have conversion rights as follows (the "CONVERSION RIGHTS"):
a. RIGHT TO CONVERT.
i. Subject to SUBSECTION (c), each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share and prior to the close of
business on any Redemption Date as may have been fixed in any Redemption Notice
with respect to such share, at the office of the Corporation or any transfer
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agent for the Series A Preferred Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the Series A
Issue Price by the Conversion Price at the time in effect for such share. The
initial "CONVERSION PRICE" per share for shares of Series A Preferred Stock
shall be the Series A Issue Price; provided, however, that the Conversion Price
for the Series A Preferred Stock shall be subject to adjustment as set forth in
SUBSECTION 4(c).
ii. In the event of a call for redemption of any shares of
Series A Preferred Stock pursuant to SECTION 3, unless there shall have been a
default in payment of the Series A Redemption Price, the Conversion Rights shall
terminate as to the shares designated for redemption at the close of business on
the Redemption Date.
iii. Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at the time in effect for such Series A Preferred Stock immediately upon the
consummation of the Corporation's sale of its Common Stock in a public offering
pursuant to a registration statement under the Securities Act of 1933, as
amended, the public offering price of which was not less than two (2) times the
Series A Issue Price (appropriately adjusted for any stock split, dividend,
combination or other recapitalization) prior to August 31, 1997 and not less
than three (3) times such amount thereafter and $15,000,000 in the aggregate.
b. MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice by mail, postage
prepaid, to the Corporation at its principal corporate office, of the election
to convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred Stock, or to the nominee or nominees
of such holder, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offer of securities registered
pursuant to the Securities Act of 1933, the conversion may, at the option of any
holder tendering Series A Preferred Stock for conversion, be conditioned upon
the closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Series A Preferred Stock shall not be
deemed to have converted such Series A Preferred Stock until immediately prior
to the closing of such sale of securities.
c. CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The
Conversion Price of the Series A Preferred Stock shall be subject to adjustment
from time to time as follows:
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i. A. Upon each issuance by the Corporation of any
Additional Stock (as defined below), after the date upon which any shares of the
Series A Preferred Stock were first issued (the "PURCHASE DATE" with respect to
such series), without consideration or for a consideration per share less than
the Conversion Price for such series in effect immediately prior to the issuance
of such Additional Stock, the Conversion Price for such series in effect
immediately prior to each such issuance shall forthwith (except as otherwise
provided in this CLAUSE (i)) be adjusted to a price determined by multiplying
such Conversion Price by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issuance (not
including shares excluded from the definition of Additional Stock by
SUBSECTION 4(c)(ii)(B)) plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for such issuance of
Additional Stock would purchase at such Conversion Price; and the denominator
of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (not including shares excluded from the
definition of Additional Stock by SUBSECTION 4(c)(ii)(B)) plus the number of
shares of such Additional Stock.
However, the foregoing calculation shall not take
into account shares deemed issued pursuant to SUBSECTION 4(c)(i)(E) on account
of options, rights or convertible or exchangeable securities (or the actual or
deemed consideration therefor), except to the extent (i) such options, rights or
convertible or exchangeable securities have been exercised, converted or
exchanged or (ii) the consideration to be paid upon such exercise, conversion or
exchange per share of underlying Common Stock is less than or equal to the per
share consideration for the Additional Stock which has given rise to the
Conversion Price adjustment being calculated.
B. Except to the limited extent provided for in
SUBSECTIONS (E)(3) and (E)(4), no adjustment of such Conversion Price pursuant
to this SUBSECTION 4(c)(i) shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment,
and (for purposes of clarification only) in no event will such adjustment have
the effect of increasing the Conversion Price above the Series A Issue Price.
C. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by the Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before, on or
after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase
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or rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this SUBSECTION 4(c)(i)
and SUBSECTION 4(c)(ii):
1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
SUBSECTIONS 4(c)(i)(C) and (c)(i)(D)), if any, received by the Corporation upon
the issuance of such options or rights plus the exercise price provided in such
options or rights for the Common Stock covered thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by the Corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the additional consideration, if
any, to be received by the Corporation upon the conversion or exchange of such
securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in SUBSECTIONS 4(c)(i)(C)
and (c)(i)(D)).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A Preferred Stock, to the extent
in any way affected by or computed using such options, rights or securities or
options or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which
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remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the
exercise of the options or rights related to such securities.
5. The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to
SUBSECTIONS 4(c)(i)(E)(1) and (2) shall be appropriately adjusted to reflect any
change, termination or expiration of the type described in either
SUBSECTION 4(c)(i)(E)(3) or (4).
ii. "ADDITIONAL STOCK" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to SUBSECTION 4(c)(i)(E))
by the Corporation after the Purchase Date other than:
A. Common Stock issued pursuant to a transaction
described in SUBSECTION 4(c)(iii),
B. shares of Common Stock issuable or issued to
employees consultants or directors of the Corporation directly or pursuant to a
stock option plan or restricted stock plan approved by the Board of Directors of
the Corporation, or in connection with lease lines, bank financings or other
similar transactions or
C. shares of Common Stock issued or issuable (I) in a
public offering in connection with which all outstanding shares of Series A
Preferred Stock will be converted to Common Stock pursuant to
SUBSECTION 4(a)(iii) or (II) upon exercise of warrants or rights granted to
underwriters in connection with such a public offering.
iii. In the event the Corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of each share of
such series shall be increased in proportion to such increase of the aggregate
of shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents with the number of shares issuable with respect to
Common Stock Equivalents determined from time to time in the manner provided for
deemed issuances in SUBSECTION 4(c)(i)(E).
iv. If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common
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Stock, then, following the record date of such combination, the Conversion
Price for the Series A Preferred Stock shall be appropriately increased so
that the number of shares of Common Stock issuable on conversion of each
share of such series shall be decreased in proportion to such decrease in
outstanding shares.
d. OTHER DISTRIBUTIONS. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in SUBSECTION 4(c)(iii), then,
in each such case for the purpose of this SUBSECTION 4(d), the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
e. RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this SECTION 4 or SECTION 5), provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series A Preferred Stock the number of shares of stock or other
securities or property of the Company or otherwise, to which a holder of Common
Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this SECTION 4 with respect to the rights of
the holders of the Series A Preferred Stock after the recapitalization to the
end that the provisions of this SECTION 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
f. NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this SECTION 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
g. NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
i. No fractional shares shall be issued upon conversion of
the Series A Preferred Stock, and the number of shares of Common Stock to be
issued shall be rounded up to the nearest whole share.
ii. Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A Preferred Stock pursuant to this SECTION 4,
the Corporation, at its
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expense, shall promptly compute such adjustment or readjustment in accordance
with the terms hereof and prepare and furnish to each holder of Series A
Preferred Stock a certificate setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based. The Corporation shall, upon the written request at any time of any
holder of Series A Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such adjustment and readjustment,
(B) the Conversion Price at the time in effect, and (C) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of a share of Series A Preferred Stock.
h. NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series A Preferred Stock, at least twenty (20) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
i. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
j. NOTICES. Any notice required by the provisions of this
SECTION 4 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
5. MERGER, CONSOLIDATION.
a. At any time, in the event of:
i. any transaction or series of related transactions
(including, without limitation, any reorganization,
merger or consolidation) which will result in the
Corporation's stockholders immediately prior to such
transaction not holding (by virtue of such shares or
securities issued solely
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with respect thereto) at least fifty percent (50%)
of the voting power of the surviving or continuing
entity,
ii. a sale of all or substantially all of the assets of the
Corporation, unless the Corporation's stockholders
immediately prior to such sale will, as a result of
such sale, hold (by virtue of securities issued as
consideration for the Corporation's sale) at least
fifty percent (50%) of the voting power of the
purchasing entity,
then, subject to the rights of series of Preferred Stock which may from time to
time come into existence in compliance with the provisions of SECTION 7, holders
of the Series A Preferred Stock shall receive for each share of such stock in
cash or in securities received from the acquiring corporation, or in a
combination thereof, at the closing of any such transaction, an amount equal to
the greater of (A) the Series A Issue Price, plus an amount equal to the Premium
as of the date of closing of such transaction or (B) that share of the total
consideration to be paid by the acquiring entity in such transaction as equals
the proportion that the number of shares of Common Stock and Common Stock
issuable upon conversion of the outstanding Series A Preferred Stock then held
by each of them bears to the total number of shares of outstanding Common Stock
and shares of Common Stock issuable upon conversion of the outstanding Series A
Preferred Stock. Such payments shall be made with respect to the Series A
Preferred Stock (A) by redemption of such shares in one installment pursuant to
SUBSECTION 3(b) (provided that in such event the moment immediately prior to the
closing of such transaction shall, for purposes of this subparagraph, be deemed
to be the "REDEMPTION DATE", only twenty (20) days' prior notice of the date
fixed for redemption need be given and the consent of the holders of the
Series A Preferred Stock shall be deemed to have been given) or (B) by purchase
of such shares of Series A Preferred Stock by the surviving corporation, entity
or person or by the Corporation. In the event the proceeds of the transaction
are not sufficient to make full payment of the aforesaid preferential amounts to
the holders of the Series A Preferred Stock in accordance herewith, then,
subject to the rights of series of Preferred Stock which may from time to time
come into existence in compliance with the provisions of SECTION 7, the entire
amount payable in respect of the proposed transaction shall be distributed among
the holders of the Series A Preferred Stock in proportion to the amount of such
stock owned by each such holder.
b. Any securities to be delivered to the holders of the Series
A Preferred Stock pursuant to SUBSECTION 5(a) above shall be valued as follows:
i. Securities not subject to investment letter or other
similar restrictions on free marketability (covered by (ii) below):
A. If traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 15-day period ending three (3) days prior to the closing;
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B. If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
are applicable) over the 15-day period ending three (3) days prior to the
closing; and
C. If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of Preferred Stock which would be entitled to
receive such securities or the same type of securities and which Preferred Stock
represents at least a majority of the voting power of all then outstanding
shares of such Preferred Stock.
ii. The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in (i) (A),
(B) or (C) to reflect the approximate fair market value thereof, as mutually
determined by the Corporation and the holders of Preferred Stock which would be
entitled to receive such securities or the same type of securities and which
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock.
c. In the event the requirements of SUBSECTION 5(a) are not
complied with, the Corporation shall forthwith either:
i. cause such closing to be postponed until such time as
the requirements of this SECTION 5 have been complied with, or
ii. cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series A Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in SECTION 5.
d. The Corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than
twenty (20) days prior to the stockholders' meeting called to approve such
transaction, or twenty (20) days prior to the closing of such transaction,
whichever is earlier, and shall also notify such holders in writing of the final
approval of such transaction. The first of such notices shall describe the
material terms and conditions of the impending transaction and the provisions of
this SECTION 5, and the Corporation shall thereafter give such holders prompt
notice of any material changes. The transaction shall in no event take place
sooner than twenty (20) days after the Corporation has given the first notice
provided for herein or sooner than ten (10) days after the Corporation has given
notice of any material changes provided for herein; provided, however, that such
periods may be shortened upon the written consent of the holders of Preferred
Stock which is entitled to such notice rights or similar notice rights and which
represents at least a majority of the voting power of all then outstanding
shares of such Preferred Stock.
e. The provisions of this SECTION 5 are in addition to the
protective provisions of SECTION 7.
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6. VOTING RIGHTS. The holder of each share of Series A Preferred
Stock shall have the right to one vote for each share of Common Stock into which
such Series A Preferred Stock could then be converted (with any fractional share
determined on an aggregate conversion basis being rounded up to the nearest
whole share), and with respect to such vote, such holder shall have full voting
rights and powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled, notwithstanding any provision hereof, to notice of
any stockholders' meeting in accordance with the Bylaws of the Corporation, and
shall be entitled to vote, together with holders of Common Stock, with respect
to any question upon which holders of Common Stock have the right to vote.
7. PROTECTIVE PROVISIONS. So long as a majority of the Series A
Preferred Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, voting as a separate class:
a. sell, convey, or otherwise dispose of or encumber all or
substantially all of its property or business or merge into or consolidate with
any other corporation (other than a wholly owned subsidiary corporation) or
effect any transaction or series of related transactions in which more than
fifty percent (50%) of the voting power of the Corporation is disposed of
(provided, however that the holders of Series A Preferred Stock will not be
entitled to vote as a class on mergers, consolidations, sale of assets, business
combinations or similar transactions in which the holders of Series A Preferred
Stock receive per share not less than two (2) times the Series A Issue Price
(appropriately adjusted for any stock split, dividend, combination or other
recapitalization) prior to August 31, 1997 and not less than three (3) times
such amount thereafter; or
b. alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock so as to affect adversely such shares; or
c. increase the authorized number of shares of Series A
Preferred Stock; or
d. create any new class or reclassify any series of stock or
any other securities convertible into equity securities of the Corporation
having a preference over, or being on a parity with, the Series A Preferred
Stock with respect to voting, redemption, dividends or upon liquidation; or
e. repurchase or redeem any shares of the Corporation's capital
stock other than shares repurchased at cost from employees or officers.
8. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares
of Series A Preferred Stock shall be redeemed or converted pursuant to SECTION 3
or SECTION 4, the shares so converted or redeemed shall be canceled and shall
not be issuable by the Corporation. The
14
<PAGE>
Certificate of Incorporation of the Corporation shall be appropriately
amended to effect the corresponding reduction in the Corporation's authorized
capital stock.
ARTICLE V
The Board of Directors shall have the power to adopt, amend and repeal the
Bylaws of the Corporation (except so far as the Bylaws of the Corporation
adopted by the stockholders shall otherwise provide). Any bylaws adopted by the
directors under the powers conferred hereby may be amended or repealed by the
directors or by the stockholders. Notwithstanding the foregoing and anything
contained in this Certificate of Incorporation to the contrary, Article II,
Sections 1(c), 5 and 7; Article III, Section 2; and Article VII of the Bylaws of
the Corporation as originally adopted by the sole incorporator shall not be
amended or repealed and no provision inconsistent therewith shall be adopted
without the affirmative vote of the holders of at least sixty-six and two-thirds
percent (66-2/3%) of the voting power of all the shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class.
ARTICLE VI
A. The Corporation shall indemnify to the fullest extent permitted by the
General Corporation Law of Delaware any person who has been made, or is
threatened to be made, a party to an action, suit or proceeding, whether civil,
criminal, administrative, investigative, or otherwise (including an action, suit
or proceeding by or in the right of the Corporation), by reason of the fact that
the person is or was a director or officer of the Corporation, or a fiduciary
within the meaning of the Employee Retirement Income Security Act of 1974 with
respect to an employee benefit plan of the Corporation, or serves or served at
the request of the Corporation as a director, or as an officer, or as a
fiduciary of an employee benefit plan, of another corporation, partnership,
joint venture, trust or other enterprise. In addition, the Corporation shall
pay for or reimburse any expenses incurred by such persons who are parties to
such proceedings, in advance of the final disposition of such proceedings, to
the full extent permitted by the General Corporation Law of Delaware.
B. Neither any amendment nor repeal of this ARTICLE VI, nor the adoption
of any provisions of this Certificate of Incorporation inconsistent with this
ARTICLE VI, shall eliminate or reduce the effect of this ARTICLE VI in respect
of any matter occurring or arising or that, but for this ARTICLE VI, would
accrue or arise, prior to such amendment, repeal or adoption of an inconsistent
provision.
ARTICLE VII
A. The business and affairs of the Corporation shall be managed by the
Board of Directors of the Corporation.
15
<PAGE>
B. Except as otherwise provided for or fixed by or pursuant to the
provisions of ARTICLE IV hereof relating to the rights of the holders of
Preferred Stock to elect directors under specified circumstances, the number of
the directors of Corporation shall be fixed from time to time by or pursuant to
the Bylaws of the Corporation. From and after the annual meeting of
stockholders held in 1997, the directors, other than those who may be elected by
the holders of Preferred Stock, shall be classified, with respect to the time
for which they severally hold office, into three classes, as nearly equal in
number as possible, as shall be provided in the manner specified in the Bylaws
of the Corporation, one class to be originally elected for a term expiring at
the annual meeting of stockholders to be held in 1998, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1999, and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 2000, with each class to
hold office until its successor is elected and qualified. At each annual
meeting of the stockholders, the successors of the class of directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their elections.
C. Advance notice of stockholder nominations for the election of
directors shall be given in the manner provided in the Bylaws of the
Corporation. Election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
D. Except as otherwise provided for or fixed by or pursuant to the
provisions of ARTICLE IV hereof in relation to the rights of the holders of
Preferred Stock to elect directors under specified circumstances, newly-created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
E. Subject to the rights of any Preferred Stock to elect directors under
specified circumstances, any director may be removed from office only with cause
and only by the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66-2/3%) of the voting power of all shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class.
F. To the fullest extent permitted by the General Corporation Law of the
State of Delaware, a director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director. Any repeal or modification of this paragraph
shall be prospective only and shall not adversely affect any limitation on the
personal liability of a director of the Corporation with respect to any act or
omission occurring prior to the time of such repeal or modification.
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<PAGE>
G. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all
outstanding shares of the Corporation entitled to vote generally in the election
of directors, voting together as a single class, shall be required to alter,
amend, adopt any provision inconsistent with or repeal this ARTICLE VII.
ARTICLE VIII
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of such
holders and may not be effected by any consent in writing of such holders.
Except as otherwise required by law and subject to the rights of the holders of
the Preferred Stock, special meetings of stockholders of the Corporation may be
called only by the Chairman of the Board, the President or the Board of
Directors pursuant to a resolution approved by a majority of the entire Board of
Directors. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all shares of
the Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to alter, amend, or adopt any
provision inconsistent with or repeal this ARTICLE VIII.
ARTICLE IX
Subject to the other terms of this Certificate of Incorporation, the
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute and this Certificate of Incorporation, and all rights
conferred on stockholders herein are granted subject to this reservation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
17
<PAGE>
ARTICLE X
The undersigned Incorporator hereby acknowledges that the foregoing
Amended and Restated Certificate of Incorporation is her act and deed and
that the facts stated therein are true.
Dated: January 3, 1997
/s/ Lynn M. Morris
----------------------------------
Lynn M. Morris, Incorporator
[SIGNATURE PAGE TO DAOU SYSTEMS, INC. RESTATED
CERTIFICATE OF INCORPORATION]
18
<PAGE>
BYLAWS
OF
DAOU SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1. Meetings . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Notice of Meetings . . . . . . . . . . . . . . . . . . . 2
Section 3. Manner of Giving Notice; Affidavit of Notice . . . . . . 2
Section 4. Stockholder List . . . . . . . . . . . . . . . . . . . . 2
Section 5. Stockholder Action . . . . . . . . . . . . . . . . . . . 3
Section 6. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 7. Notice of Agenda Matters . . . . . . . . . . . . . . . . 3
Section 8. Proxies. . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. Voting . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 10. Voting of Certain Shares. . . . . . . . . . . . . . . . 4
Section 11. Treasury Stock. . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 1. Powers . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2. Election of Directors. . . . . . . . . . . . . . . . . . 5
Section 3. Dividends and Reserves . . . . . . . . . . . . . . . . . 6
Section 4. Regular Meetings . . . . . . . . . . . . . . . . . . . . 6
Section 5. Special Meetings . . . . . . . . . . . . . . . . . . . . 7
Section 6. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 7. Written Action . . . . . . . . . . . . . . . . . . . . . 7
Section 8. Waiver of Notice . . . . . . . . . . . . . . . . . . . . 7
Section 9. Participation in Meetings by Conference Telephone. . . . 7
Section 10. Committees. . . . . . . . . . . . . . . . . . . . . . . 7
Section 11. Fees and Compensation of Directors. . . . . . . . . . . 8
Section 12. Rules . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 13. Interested Directors. . . . . . . . . . . . . . . . . . 8
ARTICLE IV OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 1. Offices and Official Positions . . . . . . . . . . . . . 9
Section 2. Compensation . . . . . . . . . . . . . . . . . . . . . . 9
Section 3. Succession . . . . . . . . . . . . . . . . . . . . . . . 9
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
Section 4. Resignations . . . . . . . . . . . . . . . . . . . . . . 9
Section 5. Authority and Duties . . . . . . . . . . . . . . . . . . 9
Section 6. Approval of Loans to Officers. . . . . . . . . . . . . . 9
ARTICLE V CONTRACTS, LOANS, CHECKS AND DEPOSITS . . . . . . . . . . . . . .10
Section 1. Contracts and Other Instruments. . . . . . . . . . . . .10
Section 2. Loans. . . . . . . . . . . . . . . . . . . . . . . . . .10
Section 3. Checks, Drafts, etc. . . . . . . . . . . . . . . . . . .10
Section 4. Deposits . . . . . . . . . . . . . . . . . . . . . . . .10
ARTICLE VI STOCKS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Section 1. Certificates . . . . . . . . . . . . . . . . . . . . . .10
Section 2. Transfer . . . . . . . . . . . . . . . . . . . . . . . .11
Section 3. Lost, Stolen or Destroyed Certificates . . . . . . . . .11
Section 4. Record Date. . . . . . . . . . . . . . . . . . . . . . .11
Section 5. Registered Owners. . . . . . . . . . . . . . . . . . . .12
ARTICLE VII INDEMNIFICATION AND INSURANCE . . . . . . . . . . . . . . . . . .12
Section 1. Indemnification. . . . . . . . . . . . . . . . . . . . .12
Section 2. Contract . . . . . . . . . . . . . . . . . . . . . . . .13
Section 3. Non-exclusivity. . . . . . . . . . . . . . . . . . . . .13
Section 4. Indemnification of Employees and Agents. . . . . . . . .13
Section 5. Insurance. . . . . . . . . . . . . . . . . . . . . . . .14
ARTICLE VIII GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . .14
Section 1. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . .14
Section 2. Corporate Seal . . . . . . . . . . . . . . . . . . . . .14
Section 3. Reliance upon Books, Reports and Records . . . . . . . .14
Section 4. Time Periods . . . . . . . . . . . . . . . . . . . . . .14
Section 5. Dividends. . . . . . . . . . . . . . . . . . . . . . . .14
Section 6. Construction and Definitions . . . . . . . . . . . . . .15
ARTICLE IX AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Section 1. Amendments . . . . . . . . . . . . . . . . . . . . . . .15
ii
<PAGE>
BYLAWS
OF
DAOU SYSTEMS, INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of DAOU Systems,
Inc., a Delaware corporation (the "Corporation"), in the State of Delaware shall
be located in the City of Wilmington, County of New Castle, State of Delaware,
and the name of its registered agent is Corporation Services Company.
Section 2. OTHER OFFICES. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
STOCKHOLDERS
Section 1. MEETINGS.
(a) TIME AND PLACE OF MEETINGS. All meetings of the
stockholders for the election of directors or for any other purpose shall be
held at any place within or without the State of Delaware, as may be authorized
by the Board of Directors and stated in the notice of the meeting or in a duly
executed waiver of notice thereof.
(b) ANNUAL MEETING. Annual meetings of stockholders shall be
held on a date and time as shall be designated from time to time by the Board of
Directors, at which meeting the stockholders shall elect by plurality vote the
directors to succeed those whose terms expire and shall transact such other
business as may properly be brought before the meeting.
(c) SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute or by
Certificate of Incorporation, may be called by the Chairman of the Board of
Directors, the President or the Board of Directors pursuant to a resolution
approved by a majority of the entire Board of Directors. Business transacted at
any special meeting of the stockholders shall be limited to the purposes stated
in the notice of such meeting.
<PAGE>
Section 2. NOTICE OF MEETINGS. Written notice of every meeting of
the stockholders, stating the place, date and hour of the meeting and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called, shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each stockholder entitled to vote at such
meeting, except as otherwise provided herein or by law. When a meeting is
adjourned to another place, date or time, written notice need not be given of
the adjourned meeting if the place, date and time thereof are announced at the
meeting at which the adjournment is taken; provided, however, that if the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting. Notice of the time, place and purpose of
any meeting of the stockholders may be waived in writing either before or after
such meeting and will be waived by any stockholder by such stockholder's
attendance at the meeting in person or by proxy. Any stockholder so waiving
notice of such a meeting shall be bound by the proceedings of any such meeting
in all respects as if due notice thereof had been given.
At a special meeting, notice of which has been given in accordance
with this Section 2, action may not be taken with respect to business, the
general nature of which has not been stated in such notice. At an annual
meeting, action may be taken with respect to business stated in the notice of
such meeting, given in accordance with this Section 2 and with respect to any
other business as may properly come before the meeting.
Section 3. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Written
notice of any meeting of stockholders, if mailed, is given when deposited in the
United States mail, postage prepaid, directed to the stockholder at his address
as it appears on the records of the Corporation. An affidavit of the Secretary
or an assistant secretary or of the transfer agent of the Corporation that the
notice has been given shall, in the absence of fraud, be prima facie evidence of
the facts stated therein.
Section 4. STOCKHOLDER LIST. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at such meeting, arranged in alphabetical order, and showing the address of
each such stockholder and the number of shares registered in the name of each
such stockholder. Such list shall be open to examination of any stockholder of
the Corporation during ordinary business hours, for any purpose germane to the
meeting, for a period of at least ten (10) days prior to the meeting, either at
a place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of meeting during the entire time thereof, and subject to the
inspection for any purpose germane to the meeting of any stockholder who may be
present.
2
<PAGE>
Section 5. STOCKHOLDER ACTION. After the Corporation first has a
class of securities registered pursuant to Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended, any action required or permitted to
be taken by the stockholders of the Corporation must be effected at a duly
called annual or special meeting of such holders and may not be effected by any
consent in writing by such holders.
Section 6. QUORUM. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by law or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented.
At such adjourned meeting at which a quorum is present or represented,
any business may be transacted that might have been transacted at the meeting as
originally noticed.
The affirmative vote of the majority of shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the stockholders. Where a separate vote by class is
required, the affirmative vote of the majority of shares of such class present
in person or represented by proxy at the meeting shall be the act of such class.
Section 7. NOTICE OF AGENDA MATTERS. At any annual or special
meeting of stockholders, only such business shall be conducted as shall have
been brought before the meeting by or at the direction of the Board of Directors
or by any stockholder who complies with the procedures set forth in this
Section 7. For business properly to be brought before the annual meeting by a
stockholder, the stockholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received by the Secretary of the
Corporation not less than ninety (90) days prior to the anniversary date of the
Corporation's notice of annual meeting provided with respect to the previous
year's annual meeting; provided, however, that in the event that less than forty
(40) days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be received
not later than the close of business on the 10th day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. To be in properly written form, a stockholder's notice to
the Secretary shall set forth in writing as to each matter the stockholder
proposes to bring before the annual meeting: (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting; (ii) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder; and (iv) any material interest of the
stockholder in such business. Notwithstanding anything in the Bylaws to the
contrary, no
3
<PAGE>
business shall be conducted at an annual meeting except in accordance with
the procedures set forth in this Section 7.
The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 7, and if
he should so determine, he shall so declare to the meeting, and any such
business not properly brought before the meeting shall not be transacted.
Section 8. PROXIES. At every meeting of the stockholders, each
stockholder having the right to vote thereat shall be entitled to vote in person
or by proxy. Such proxy shall be appointed by an instrument in writing
subscribed by such stockholder and bearing a date not more than three (3) years
prior to such meeting, unless such proxy provides for a longer period; and it
shall be filed with the Secretary of the Corporation before, or at the time of,
the meeting.
Section 9. VOTING. The stockholders entitled to vote at any meeting
of stockholders shall be determined in accordance with the provisions of
Article V, Section 4 of these Bylaws, subject to the provisions of Sections 217
and 218 of the General Corporation Law of Delaware (relating to voting rights of
fiduciaries, pledgors and joint owners of stock and to voting trusts and other
voting agreements).
Except as otherwise provided by statute or by the Certificate of
Incorporation, each stockholder shall be entitled at every meeting of the
stockholders to one vote for each share of stock having voting power standing in
the name of such stockholder on the books of the Corporation on the record date
for the meeting and such votes may be cast either in person or by written proxy.
Every proxy must be executed in writing by the stockholder or his or her duly
authorized attorney. Such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. All elections of directors
shall be by written ballot, unless otherwise provided in the Certificate of
Incorporation. When a quorum is present at any meeting, the vote of the holders
of a majority of the stock which has voting power present in person or
represented by proxy and which has actually voted shall decide any question
properly brought before such meeting, unless the question is one upon which by
express provision of law, the Certificate of Incorporation or these Bylaws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
Section 10. VOTING OF CERTAIN SHARES. Shares standing in the name of
another corporation, domestic or foreign, and entitled to vote may be voted by
such officer, agent, or proxy as the bylaws of such corporation may prescribe
or, in the absence of such provision, as the Board of Directors of such
corporation may determine. Shares standing in the name of a deceased person, a
minor or an incompetent and entitled to vote may be voted by his administrator,
executor, guardian or conservator, as the case may be, either in person or by
proxy. Shares standing in the name of a trustee, receiver or pledgee and
entitled to vote maybe voted by such trustee, receiver or pledgee either in
person or by proxy as provided by Delaware law.
4
<PAGE>
Section 11. TREASURY STOCK. Shares of its own stock belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held by the
Corporation, shall not be voted at any meeting and shall not be counted in
determining the total number of outstanding shares for the purpose of
determining whether a quorum is present. Nothing in this section shall be
construed to limit the right of the Corporation to vote shares of its own stock
held by it in a fiduciary capacity.
ARTICLE III
DIRECTORS
Section 1. POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of its Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
Bylaws directed or required to be exercised or done by the stockholders.
Section 2. ELECTION OF DIRECTORS.
(a) NUMBER AND TERM OF OFFICE. The Board of Directors shall
consist of at least one (1) and not more than eleven (11) directors. The
authorized number of directors of the Corporation shall be set initially at five
(5), and shall be subject to change as set from time to time pursuant to a
resolution approved by a majority of the Board of Directors then in office. The
directors shall be classified, with respect to the time for which they severally
hold office, into three (3) classes, as nearly equal in number as possible: the
term of office of those of the first class to expire at the annual meeting next
ensuing; of the second class, one (1) year thereafter; of the third class, two
(2) years thereafter; and at each annual election held after such classification
and election, directors shall be chosen for a full term to succeed those whose
terms expire. Any decrease in the authorized number of directors shall not be
effective until the expiration of the term of the directors then in office,
unless, at the time of such decrease there shall be vacancies on the Board of
Directors which are being eliminated by such decrease.
(b) RESIGNATIONS AND VACANCIES. Any director may resign at
any time by giving written notice to the Chairman of the Board of Directors, the
Chief Executive Officer, the President or the Board of Directors. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. If,
at any other time than the annual meeting of the stockholders, any vacancy
occurs in the Board of Directors caused by resignation, death, retirement,
disqualification or removal from office of any director or otherwise, or any new
directorship is created by an increase in the authorized number of directors by
amendment of Section 2 of Article III of these Bylaws, a majority of the
directors then in office, although less than a quorum, may choose a successor,
or fill the newly created directorship, and the
5
<PAGE>
director so chosen shall hold office until the next annual election of
directors by the stockholders and until his successor shall be duly elected
and qualified, unless sooner displaced.
(c) NOTIFICATION OF NOMINATIONS. Subject to the rights of
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, nominations for the election of
directors may be made by the Board of Directors or a proxy committee appointed
by the Board of Directors or by any stockholder entitled to vote in the election
of directors generally. However, any such stockholder may nominate one or more
persons for election as directors at a meeting only if such stockholder has
given timely notice in proper written form of his intent to make such nomination
or nominations. To be timely, a stockholder's notice must be delivered to or
mailed and received by the Secretary of the Corporation not later than ninety
(90) days prior to such meeting; provided, however, that in the event that less
than forty (40) days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be received not later than the close of business on the 10th day following
the date on which such notice of the date of such meeting was mailed or such
public disclosure was made. To be in proper written form, a stockholder's
notice to the Secretary shall set forth: (i) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (ii) a representation that the stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (iii) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (iv) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, by the Board of Directors; and (v) the consent of each nominee
to serve as a director of the Corporation if so elected. The chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
Section 3. DIVIDENDS AND RESERVES. Dividends upon stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, in shares
of stock or otherwise in the form, and to the extent, permitted by law. The
Board of Directors may set apart, out of any funds of the Corporation available
for dividends, a reserve or reserves for working capital or for any other lawful
purpose, and also may abolish any such reserve in the manner in which it was
created.
Section 4. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice immediately after the annual meeting of the
stockholders and at such other time and place as shall from time to time be
determined by the Board of Directors.
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Section 5. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board of Directors, the Chief
Executive Officer, the President, the Secretary of the Corporation, or any two
(2) directors.
Section 6. QUORUM. At all meetings of the Board of Directors, a
majority of the total number of directors then in office shall constitute a
quorum for the transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time to another place, time or date,
without notice other than announcement at the meeting, until a quorum shall be
present.
Section 7. WRITTEN ACTION. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes or proceedings of the Board of Directors or
Committee.
Section 8. WAIVER OF NOTICE. The transactions of any meeting of the
Board of Directors or any committee, however called and noticed or wherever
held, shall be valid as though had at a meeting duly held after regular call and
notice, if a quorum be present and if, either before or after the meeting, each
of the directors not present signs a written waiver of notice, or a consent to
hold such meeting, or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the Corporate records or made a part
of the minutes of the meeting.
Section 9. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors, or any committee designated by the Board of
Directors, may participate in a meeting of the Board of Directors, or any such
committee, by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation in a meeting shall constitute presence in person at the
meeting.
Section 10. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation and each to have such lawfully delegable powers and duties as the
Board of Directors may confer. Each such committee shall serve at the pleasure
of the Board of Directors. The Board of Directors may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Except as otherwise
provided by law, any such committee, to the extent provided in the resolution of
the Board of Directors, shall have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but
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no such committee shall have the power or authority in reference to
approving, adopting or recommending to the stockholders any action or matter
expressly required by law to be submitted to stockholders for approval, or
adopting, amending or repealing the Bylaws of the Corporation. Any committee
or committees so designated by the Board of Directors shall have such name or
names as may be determined from time to time by resolution adopted by the
Board of Directors. Unless otherwise prescribed by the Board of Directors, a
majority of the members of the committee shall constitute a quorum for the
transaction of business, and the act of a majority of the members present at
a meeting at which there is a quorum shall be the act of such committee.
Each committee shall prescribe its own rules for calling and holding
meetings and its method of procedure, subject to any rules prescribed by the
Board of Directors, and shall keep a written record of all actions taken by it.
Section 11. FEES AND COMPENSATION OF DIRECTORS. Each director may
receive such fees and other compensation, along with reimbursement of expenses
incurred on behalf of the Corporation or in connection with attendance at
meetings, as the Board of Directors may from time to time determine. No such
payment of fees or other compensation shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving fees
and compensation for such services.
Section 12. RULES. The Board of Directors may adopt such special
rules and regulations for the conduct of their meetings and the management of
the affairs of the Corporation as they may deem proper, not inconsistent with
law or these Bylaws.
Section 13. INTERESTED DIRECTORS. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the directors or officers are present at or
participate in the meeting of the Board of Directors or the committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose if: (i) the material facts as to his or
their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative vote of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or (ii) the material
facts as to his or their relationship or interest and as to the contract or
transaction is specifically approved in good faith by vote of the shareholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified by the Board of Directors, a
committee thereof, or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
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ARTICLE IV
OFFICERS
Section 1. OFFICES AND OFFICIAL POSITIONS. The officers of the
Corporation shall be chosen by the Board of Directors and may include a Chairman
of the Board of Directors (who must be a director as chosen by the Board of
Directors) and shall include a Chief Executive Officer, a President, one or more
Vice Presidents (if so elected by the Board of Directors), a Secretary and a
Chief Financial Officer. The Board of Directors also may appoint a Treasurer
and such Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers,
and other officers as the Board of Directors shall determine. Any two or more
offices may be held by the same person. With the exception of the Chairman of
the Board of Directors, none of the officers need be a director, a stockholder
of the Corporation or a resident of the State of Delaware.
Section 2. COMPENSATION. The compensation of all officers and agents
of the Corporation who are also directors of the Corporation shall be fixed by
the Board of Directors. The Board of Directors may delegate the power to fix
the compensation of other officers and agents of the Corporation to an officer
of the Corporation.
Section 3. SUCCESSION. The officers of the Corporation shall hold
office until their successors are elected and qualified. Any officer elected
or appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. Any vacancy occurring
in any office of the Corporation may be filled by the Board of Directors.
Section 4. RESIGNATIONS. Any officer may resign at any time by
giving written notice to the Board of Directors (or to a principal officer if
the Board of Directors has delegated to such principal officer the power to
appoint and to remove such officer). The resignation of any officer shall take
effect upon receipt of notice thereof or at such later time as shall be
specified in such notice; unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 5. AUTHORITY AND DUTIES. Each of the officers of the
Corporation shall have such authority and shall perform such duties incident to
each of their respective offices and such other duties as may be specified from
time to time by the Board of Directors in a resolution which is not inconsistent
with these Bylaws.
Section 6. APPROVAL OF LOANS TO OFFICERS. The Corporation may lend
money to, or guarantee any obligation of, or otherwise assist any officer or any
other employee of the Corporation or of its subsidiary, including any officer or
employee who is a director of the Corporation or its subsidiary, whenever, in
the judgment of the directors, such loan, guaranty or assistance may
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reasonably be expected to benefit the Corporation. The loan, guaranty or
other assistance may be with or without interest and may be unsecured, or
secured in such manner as the Board of Directors shall approve, including,
without limitation, a pledge of shares of stock of the Corporation. Nothing
contained in this section shall be deemed to deny, limit or restrict the
powers of guaranty or warranty of the Corporation at common law or under any
statute.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS AND OTHER INSTRUMENTS. The Board of Directors
may authorize any officer or officers, agent or agents, to enter into any
contract or execute and deliver any instrument in the name of and on behalf of
the Corporation, or of any division thereof, and such authority may be general
or confirmed to specific instances.
Section 2. LOANS. No loans shall be contracted on behalf of the
Corporation, or any division thereof, and no evidence of indebtedness shall be
issued in the name of the Corporation or any division thereof, unless authorized
by a resolution of the Board of Directors. Such authority may be general or
confined to specific instances.
Section 3. CHECKS, DRAFTS, ETC. All checks, demands, drafts or other
orders for the payment of money, notes or other evidences of indebtedness issued
in the name of the Corporation, or any division thereof, shall be signed by such
officer or officers, agent or agents of the Corporation, and in such manner, as
shall from time to time be authorized by the Board of Directors.
Section 4. DEPOSITS. All funds of the Corporation, or any division
thereof, not otherwise employed shall be deposited from time to time to the
credit of the Corporation in such banks, trust companies or other depositories
as the Board of Directors may select.
ARTICLE VI
STOCKS
Section 1. CERTIFICATES. Certificates representing shares of stock
of the Corporation shall be in such form as shall be determined by the Board of
Directors, subject to applicable legal requirements. Such certificates shall be
numbered and their issuance recorded in the books of the Corporation, and such
certificate shall exhibit the holder's name and the number of shares and shall
be signed by, or in the name of the Corporation by, the Chairman of the Board of
Directors or the President and the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer of the Corporation and shall bear the
corporate seal. Where any such certificate is countersigned by
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a transfer agent or a registrar other than the Corporation or its employee,
the signatures of any such officers of the Corporation and the seal of the
Corporation, if any, upon such certificates may be facsimiles, engraved or
printed.
Section 2. TRANSFER. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue, or to cause its
transfer agent to issue, a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
Section 3. LOST, STOLEN OR DESTROYED CERTIFICATES. The President or
the Board of Directors may direct a new certificate or certificates to be issued
in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact, satisfactory to the President, by the person claiming
the certificate of stock to be lost, stolen or destroyed. As a condition
precedent to the issuance of a new certificate or certificates the President
requires the owner of such lost, stolen or destroyed certificate or certificates
to give the Corporation a bond in such sum and with such surety or sureties as
the President may direct as indemnity against any claims that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed or the issuance of the new certificate.
Section 4. RECORD DATE. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten (10) days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by this chapter, shall be the first date on which a signed written
consent setting
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forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in Delaware, its principal
place of business, or an officer or agent of the Corporation having custody
of the book in which proceedings of meetings of stockholders are recorded.
Delivery made to a Corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record date
has been fixed by the Board of Directors and prior action by the Board of
Directors is required by law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the Board of Directors adopts
the resolution taking such prior action.
In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty (60) days prior to
such action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
Section 5. REGISTERED OWNERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise required by
law.
ARTICLE VII
INDEMNIFICATION AND INSURANCE
Section 1. INDEMNIFICATION. The Corporation, to the maximum extent
permitted by the General Corporation Law of the State of Delaware, including,
without limitation, to the fullest extent permitted by Section 145 of the
General Corporation Law of the State of Delaware (as that Section may be amended
and supplemented from time to time), indemnify any director, officer or trustee
which it shall have power to indemnify under Section 145 against any expenses,
liabilities or other matters referred to in or covered by that Section. The
indemnification provided for in this Article (i) shall not be deemed exclusive
of any other rights to which those indemnified may be entitled under any Bylaw,
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in their official capacities and as to action in another capacity
while holding such office, (ii) shall continue as to a person who has ceased to
be a director, officer or trustee and (iii) shall inure to the benefit of the
heirs, executors and administrators of such a person. The
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Corporation's obligation to provide indemnification under this Article shall
be offset to the extent of any other source of indemnification or any
otherwise applicable insurance coverage under a policy maintained by the
Corporation or any other person.
Expenses incurred by a director of the Corporation in defending a
civil or criminal action, suit or proceeding by reason of the fact that he is or
was a director of the Corporation (or was serving at the Corporation's request
as a director or officer of another corporation) shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the Corporation as authorized by relevant sections of the
General Corporation Law of the State of Delaware.
To assure indemnification under this Article of all such persons who
are determined by the Corporation or otherwise to be or to have been
"fiduciaries" of any employee benefit plan of the Corporation which may exist
from time to time, such Section 145 shall, for the purposes of this Article, be
interpreted as follows: an "other enterprise" shall be deemed to include such
an employee benefit plan, including, without limitation, any plan of the
Corporation which is governed by the Act of Congress entitled "Employee
Retirement Income Security Act of 1974," as amended from time to time; the
Corporation shall be deemed to have requested a person to serve an employee
benefit plan where the performance by such person of his duties to the
Corporation also imposes duties on, or otherwise involves services by, such
person to the plan or participants or beneficiaries of the plan; excise taxes
assessed on a person with respect to an employee benefit plan pursuant to such
Act of Congress shall be deemed "fines"; and action taken or omitted by a person
with respect to an employee benefit plan in the performance of such person's
duties for a purpose reasonably believed by such person to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Corporation.
Section 2. CONTRACT. The provisions of Section 1 of this Article VII
shall be deemed to be a contract between the Corporation and each director and
officer who serves in such capacity at any time while such Bylaw is in effect,
and any repeal or modification thereof shall not affect any rights or
obligations then existing with respect to any state of facts then or theretofore
existing or any action, suit or proceeding theretofore or thereafter based in
whole or in part upon any such state of facts.
Section 3. NON-EXCLUSIVITY. The rights of indemnification provided
by this Article VII shall not be deemed exclusive of any other rights to which
any director or officer of the Corporation may be entitled apart from the
provisions of this Article VII.
Section 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Board of
Directors in its discretion shall have the power on behalf of the Corporation to
indemnify any person, other than a director or officer, made a party to any
action, suit or proceeding by reason of the fact that such person or such
person's testator or intestate, is or was an employee or agent of the
Corporation.
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Section 5. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed from time to time by resolution of the Board of Directors.
Section 2. CORPORATE SEAL. The Board of Directors may adopt a
corporate seal and use the same by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
Section 3. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director,
each member of a committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his or her duties, be
fully protected in relying in good faith upon the records of the Corporation and
upon such information, opinions, reports or statements presented to the
Corporation by any of the Corporation's officers or employees, or committees of
the Board of Directors, or by any other person as to matters the director,
committee member or officer believes are within such other person's professional
or expert competence and who has been selected with reasonable care by or on
behalf of the Corporation.
Section 4. TIME PERIODS. In applying any provision of these Bylaws
which requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded and the day of the event shall be included.
Section 5. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to statute. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Certificate of
Incorporation.
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Before payment of any dividend, there may be set aside out of any
funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purposes as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 6. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
General Corporation Law of the State of Delaware shall govern the construction
of these Bylaws.
ARTICLE IX
AMENDMENTS
Section 1. AMENDMENTS. Subject to the provisions of the Certificate
of Incorporation, these Bylaws may be altered, amended or repealed or new Bylaws
may be adopted by the stockholders or by the Board of Directors, when such power
is conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting thereof duly called for that purpose if notice of such
alteration, amendment, repeal or adoption of new Bylaws be contained in the
notice of such special meeting. Subject to the laws of the State of Delaware,
the Certificate of Incorporation and these Bylaws, the Board of Directors may,
by majority vote of those present at any meeting at which a quorum is present
amend the Bylaws, or enact such other bylaws as in their judgment may be
advisable for the regulation of the conduct of the affairs of the Corporation.
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CERTIFICATE OF SECRETARY
I, Fred McGee, Secretary of DAOU Systems, Inc., a Delaware
corporation, do hereby certify that the foregoing Bylaws of DAOU Systems, Inc.
are the duly adopted Bylaws of said Corporation as they are in effect on the
date hereof.
Executed at San Diego, California effective as of December 3, 1996.
/s/ Fred McGee
-----------------------------
Fred McGee, Secretary
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AMENDMENT NO. 1
TO
DAOU SYSTEMS, INC.
1996 STOCK OPTION PLAN
1. PURPOSE. The DAOU SYSTEMS, INC. STOCK OPTION PLAN (the "PLAN") is
intended to provide to officers, directors, key employees, and consultants of
the corporation an opportunity to acquire a proprietary interest in the
corporation, to encourage such key individuals to remain in the employ of or to
contract with the corporation, and to attract and retain new employees,
consultants, and directors with outstanding qualifications. Pursuant to the
Plan, the Corporation may grant to officers, directors, consultants, and key
employees of the Corporation options to purchase shares of common stock of the
Corporation upon such terms and conditions as provided herein.
2. DEFINITIONS.
(a) "AFFILIATE" means any corporation (other than the Corporation) in
an unbroken chain of corporations that includes the Corporation if each of such
corporations, other than the last corporation in the chain, owns at least 50% of
the total voting power of one of the other corporations.
(b) "BOARD" means the Board of Directors of the Corporation.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means the committee appointed by the Board to
administer the Plan, or if no such committee is appointed, the Board.
(e) "COMMON STOCK" means the voting common stock of the Corporation.
(f) "CONSULTANT" means any person who, or any employee of any firm
which, is engaged by the Company or any Affiliate to render consulting services
and is compensated for such consulting services, and any non-employee director
of the Company whether compensated for such services or not.
(g) "CORPORATION" means DAOU Systems, Inc., a California corporation.
(h) "EFFECTIVE DATE" means January 1, 1996.
(i) "EMPLOYEE" means any individual who is employed, within the
meaning of Section 3401 of the Code and the regulations thereunder, by the
Corporation or by any Affiliate. For purposes of the Plan and only for purposes
of the Plan, and in regard to Nonstatutory Stock Options but not for Incentive
Stock Options, a Consultant or director of the Corporation or any Affiliate will
be deemed to be an Employee, and service as a Consultant or director with the
Corporation or any Affiliate will be deemed to be employment, but no Incentive
Stock Option
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will be granted to a Consultant or director who is not an employee of the
Corporation or any Affiliate within the meaning of Section 3401 of the Code and
the regulations thereunder. In the case of a non-employee director or
Consultant, the provisions governing when a termination of employment has
occurred for purposes of the Plan will be set forth in the written Stock Option
Agreement between the Optionee and the Corporation, or, if not so set forth, the
Committee will have the discretion to determine when a termination of
"employment" has occurred for purposes of the Plan.
(j) "ESCROW AGENT" means the person selected by the Corporation, if
any, to hold the stock certificates representing Shares issued in the name of an
Optionee pursuant to such Optionee's exercise of an Option.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "EXERCISE PRICE" means the price per Share at which an Option may
be exercised, as determined by the Committee and as specified in the Optionee's
stock option agreement.
(m) "FAIR MARKET VALUE" means the value of each Share as determined
by the Board, subject to the limitations of Section 260.140.50 of Title 10 of
the California Code of Regulations.
(n) "INCENTIVE STOCK OPTION" means an Option of the type described in
Section 422(b) of the Code.
(o) "JOINT ESCROW INSTRUCTIONS" means joint escrow instructions
entered into between Optionee and the Corporation in such form as may be
approved by the Committee from time to time.
(p) "NONSTATUTORY STOCK OPTION" means an Option of the type not
described in Section 422(b) or 423(b) of the Code.
(q) "OPTION" means an option to purchase Common Stock granted
pursuant to the Plan.
(r) "OPTIONEE" means any person who holds an Option pursuant to the
Plan.
(s) "PLAN" means this stock option plan as it may be amended from
time to time.
(t) "PURCHASE PRICE" means at any particular time the Exercise Price
times the number of Shares for which an Option is being exercised.
(u) "SHARE" means one share of authorized Common Stock.
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3. ADMINISTRATION.
(a) THE COMMITTEE.
(i) The Board may administer the Plan or appoint a Committee to
administer the Plan. The Committee will consist of not less than two members
who may also be members of the Board. Members of the Board or the Committee who
are either eligible for Options or have been granted Options may vote on any
matters affecting the administration of the Plan or the grant of any Options
pursuant to the Plan, except that no such member will act upon the granting of
an Option to himself or herself, but any such member may be counted in
determining the existence of a quorum at any meeting of the Committee and will
be excluded in determining unanimity of an act in writing, for any action which
is taken with respect to the granting of an Option to such member.
(ii) If the Corporation registers any class of any equity
security pursuant to Section 12 of the Exchange Act, from the effective date of
such registration until six months after the termination of such registration,
the Plan will be administered by a Committee of directors which will consist of
not less than two members, who during the one year prior to service as an
administrator of the Plan, will not have been granted or awarded equity
securities pursuant to the Plan or any other plan of the Corporation or any of
its Affiliates except as permitted under Rule 16b-3 under the Exchange Act which
provides that participation in a formula plan meeting the conditions of Rule
16(b)(3)(c)(2)(ii) or in an ongoing securities acquisition plan meeting the
conditions in Rule 16(b)(3)(d)(2)(i) will not disqualify a member of the
Committee from serving as an administrator of the Plan. In addition, an
election to receive an annual retainer fee in either cash or an equivalent
amount of securities, or partly in cash and partly in securities, will not
disqualify a member of the Committee from serving as an administrator of the
Plan.
The Board may from time to time designate individuals as ineligible to
participate in the Plan for a specified period in order to become eligible to be
a member of the Committee.
(b) POWERS OF THE COMMITTEE. Subject to the provisions of the Plan,
the Committee will have the authority, in its discretion and on behalf of the
Corporation:
(i) to grant Options;
(ii) to determine the Exercise Price per Share of Options to be
granted;
(iii) to determine the Employees to whom, and the time or
times at which, Options will be granted and the number of Shares for which an
Option will be exercisable;
(iv) to interpret the Plan;
(v) to prescribe, amend, and rescind rules and regulations
relating to the Plan;
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(vi) to determine the terms and provisions of each Option granted
and, with the consent of the holder thereof, modify or amend each Option;
(vii) to accelerate or defer, with the consent of the
Optionee, the exercise date of any Option;
(viii) to authorize any person to execute on behalf of the
Corporation any instrument required to effectuate the grant of an Option
previously granted by the Committee;
(ix) with the consent of the Optionee, to reprice, cancel, and
regrant, or otherwise adjust the Exercise Price of an Option previously granted
by the Committee; and
(x) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
(c) BOARD'S DETERMINATION OF FAIR MARKET VALUE. The Board will have
the authority to determine, upon review of relevant information, the Fair Market
Value of the Common Stock, subject to the provisions of the Plan and
irrespective of whether the Board has appointed a Committee to administer the
Plan. The Board may delegate this authority to the Committee.
(d) COMMITTEE'S INTERPRETATION OF THE PLAN. The interpretation and
construction by the Committee of any provision of the Plan or of any Option
granted hereunder will be final and binding on all parties claiming an interest
in an Option granted under the Plan. No member of the Committee will be liable
for any action or determination made in good faith with respect to the Plan or
any Option.
(e) ALL COMMITTEE ACTIONS TO BE IN WRITING. Any and all actions of
the Committee taken in exercise of the powers granted to it in this SECTION 3
will be in writing.
4. PARTICIPATION.
(a) ELIGIBILITY. The Optionees will be such persons as the Committee
may select from among the Employees, provided that Consultants are not eligible
to receive Incentive Stock Options.
(b) TEN PERCENT SHAREHOLDERS. Any Employee who owns Stock possessing
more than 10% of the total combined voting power of all classes of outstanding
stock of the Corporation or any Affiliate will not be eligible to receive an
Option unless:
(i) the Exercise Price of the Shares subject to such Option when
granted is at least 110% of the Fair Market Value of such Shares, and
(ii) such Option by its terms is not exercisable after the
expiration of five years from the date of grant.
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(c) STOCK OWNERSHIP. For purposes of SECTION 4(b), in determining
stock ownership, an Employee will be considered as owning the stock owned,
directly or indirectly, by or for his or her brothers and sisters, spouse,
ancestors, and lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate, or trust will be considered as being
owned proportionately by or for its shareholders, partners, or beneficiaries,
respectively. Stock with respect to which such Employee or any other person
holds an Option will be disregarded.
(d) OUTSTANDING STOCK. For purposes of SECTION 4(b), the term
"outstanding stock" will include all stock actually issued and outstanding
immediately after the grant of the Option to the Optionee but will not include
any share for which an Option is exercisable by any person.
5. SHARES.
(a) SHARES SUBJECT TO THIS PLAN. The aggregate number of Shares
which may be issued upon exercise of Options under the Plan will not exceed Nine
Hundred and Seventy Five Thousand (975,000) shares of Common Stock, subject to
adjustment pursuant to SECTION 9 .
(b) OPTIONS NOT TO EXCEED SHARES AVAILABLE. The number of Shares for
which an Option is exercisable at any time will not exceed the number of Shares
remaining available for issuance under the Plan. If any Option expires or is
terminated, the number of Shares for which such Option was exercisable may be
made exercisable pursuant to other Options under the Plan. If the Corporation
reacquires any Shares pursuant to SECTIONS 11 or 12, such Shares may again be
made exercisable pursuant to an Option. The limitations established by this
SECTION 5(b) will be subject to adjustment in the manner provided in SECTION 9
upon the occurrence of an event specified therein.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENTS. Options will be evidenced by written
stock option agreements between the Optionee and the Corporation in such form as
the Committee will from time to time determine. No Option or purported Option
will be a valid and binding obligation of the Corporation unless so evidenced in
writing.
(b) NUMBER OF SHARES. Each stock option agreement will state the
number of Shares for which the Option is exercisable and will provide for the
adjustment thereof in accordance with SECTION 9 .
(c) VESTING. An Optionee may not exercise his or her Option for any
Shares until the Option, in regard to such Shares, has vested. Each stock
option agreement will include a vesting schedule which will show when the Option
becomes exercisable, provided each Option will vest at a rate of at least 20%
per year over a period of five years with the first 20% becoming exercisable on
the first anniversary of the date the Options were granted. The vesting
schedule will not impose upon the Corporation or any Affiliate any obligation to
retain the Optionee in its
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employ or under contract for any period or otherwise change the employment-at-
will status of an Optionee who is an employee of the Corporation or any
Affiliate.
(d) LAPSE OF OPTIONS. Each stock option agreement will state the
time or times when the Option covered thereby lapses and becomes unexercisable
in part or in full. An Option will lapse on the earliest of the following
events (unless otherwise determined by the Committee and reflected in an option
agreement):
(i) The tenth anniversary of the date of granting the Option;
(ii) The first anniversary of the Optionee's death;
(iii) The first anniversary of the date the Optionee ceases
to be an Employee due to total and permanent disability;
(iv) On the date provided in SECTION 6(h)(i), unless with respect
to a Nonstatutory Stock Option, the Committee otherwise extends such period
before the applicable expiration date;
(v) On the date provided in SECTION 9 for a transaction
described in such Section;
(vi) The date the Optionee files or has filed against him or her
a petition in bankruptcy; or
(vii) The expiration date specified in an Optionee's stock
option agreement.
(e) EXERCISE PRICE. Each stock option agreement will state the
Exercise Price for the Shares for which the Option is exercisable. Subject to
SECTION 4(B), the Exercise Price of an Incentive Stock Option and a Nonstatutory
Stock Option will, when granted, be not less than 100% and 85% of the Fair
Market Value of the Shares for which the Option is exercisable, respectively,
and not less than the par value of the Shares.
(f) MEDIUM AND TIME OF PAYMENT. The Purchase Price will be payable
in full in cash upon the exercise of an Option but the Committee may allow the
Optionee to pay the Purchase Price:
(i) by surrendering Shares in good form for transfer, owned by
the Optionee for more than 12 months and having a Fair Market Value on the date
of exercise equal to the Purchase Price; or
(ii) in any combination of such consideration or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable law as long as the sum of the cash so paid, the Fair
Market Value of the Shares so
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surrendered.
(iii) The Committee or a stock option agreement may prescribe
requirements with respect to the exercise of Options, including the submission
by the Optionee of such forms and documents as the Committee may require and,
the delivery by the Optionee of cash sufficient to satisfy applicable
withholding requirements. The Committee may vary the exercise requirements and
procedures from time to time to facilitate, for example, the broker-assisted
exercise of Options.
(g) NONTRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, the Option will be exercisable only by the Optionee or the Optionee's
conservator or legal representative and will not be assignable or transferable
except pursuant to a qualified domestic relations order as defined by the Code.
In the event of the Optionee's death, the Option will not be transferable by the
Optionee other than by will or the laws of descent and distribution.
(h) TERMINATION OF EMPLOYMENT OTHER THAN BY DEATH OR DISABILITY.
(i) If an Optionee ceases to be an Employee for any reason other
than his or her death or disability, the Optionee will have the right, subject
to the provisions of this SECTION 6, to exercise any Option held by the Optionee
for 30 days after his or her termination of employment, but not beyond the
otherwise applicable term of the Option and only to the extent that on such date
of termination of employment the Optionee's right to exercise such Option had
vested.
(ii) For purposes of this SECTION 6(h), the employment
relationship will be treated as continuing intact while the Optionee is an
active employee of the Corporation or any Affiliate, or is on military leave,
sick leave, or other bona fide leave of absence to be determined in the sole
discretion of the Committee. The preceding sentence notwithstanding, in the
case of an Incentive Stock Option, employment will be deemed to terminate on the
date the Optionee ceases active employment with the Corporation or any
Affiliate, unless the Optionee's reemployment rights are guaranteed by statute
or contract.
(i) DEATH OF OPTIONEE. If an Optionee dies while an Employee, or
after ceasing to be an Employee but during the period while he or she could have
exercised an Option under SECTION 6(h), any Option granted to the Optionee may
be exercised, to the extent it had vested at the time of death and subject to
the Plan, at any time within 12 months after the Optionee's death, by the
executors or administrators of his or her estate or by any person or persons who
acquire the Option by will or the laws of descent and distribution, but not
beyond the otherwise applicable term of the Option.
(j) DISABILITY OF OPTIONEE. If an Optionee ceases to be an Employee
due to becoming totally and permanently disabled within the meaning of
Section 22(e)(3) of the Code, any Option granted to the Optionee may be
exercised to the extent it had vested at the time of cessation and, subject to
the Plan, at any time within 12 months after the Optionee's termination of
employment, but not beyond the otherwise applicable term of the Option.
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(k) RIGHTS AS A SHAREHOLDER. An Optionee, or a transferee of an
Optionee, will have no rights as a shareholder of the Corporation with respect
to any Shares for which his or her Option is exercisable until the date of the
issuance of a stock certificate for such Shares. No adjustment will be made for
dividends, ordinary or extraordinary or whether in currency, securities, or
other property, distributions, or other rights for which the record date is
prior to the date such stock certificate is issued, except as provided in
SECTION 9.
(l) MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS. Within the
limitations of the Plan, the Committee may modify, extend or renew outstanding
Options or accept the cancellation of outstanding Options for the granting of
new Options in substitution therefor. Notwithstanding the preceding sentence,
no modification of an Option will, without the consent of the Optionee, alter or
impair any rights or obligations under any Option previously granted.
(m) OTHER PROVISIONS. The stock option agreements authorized under
the Plan may contain such other provisions which are not inconsistent with the
terms of the Plan, including, without limitation, restrictions upon the exercise
of the Option, as the Committee will deem advisable.
7. $100,000 PER YEAR LIMITATION ON VESTING OF ISOS. To the extent that
the Fair Market Value of Shares (determined for each Share as of the date of
grant of the Option covering such Share) subject to Options granted under this
Plan (or any other plan of the Corporation or any Affiliate) which are
designated as Incentive Stock Options and which become exercisable by an
Optionee for the first time during a single calendar year exceeds $100,000, the
Option(s) (or portion thereof) covering such Shares will be recharacterized (to
the extent of such excess over $100,000) as a Nonstatutory Stock Option. In
determining which Option(s) will be treated as Nonstatutory Stock Options under
the preceding sentence, the Options will be taken into account in the order
granted, with the result that a later granted Option will be recharacterized as
a Nonstatutory Stock Option prior to such recharacterization of a previously
granted Option.
8. TERM OF PLAN. Options may be granted pursuant to the Plan until a
date no more than 10 years from the date the Plan is adopted or the date the
Plan is approved by the shareholders of the Corporation, whichever is earlier,
and all Options which are outstanding on such date will remain in effect until
they are exercised or expire by their terms.
9. RECAPITALIZATION, TAKEOVERS, AND LIQUIDATIONS.
(a) REORGANIZATIONS. The number of Shares covered by the Plan, as
provided in SECTION 5, and the number of Shares for which each Option is
exercisable will be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from the payment of a stock split, a reverse
stock split, a stock dividend, recapitalization, combination or reclassification
of the Corporation's stock or any other event which results in an increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Corporation, and the Exercise Price will be proportionately
increased in the event the number of Shares subject to such Option are decreased
and will be proportionately decreased in the event
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the number of Shares subject to such Option are increased. For the purposes of
this SUBSECTION 9(a), conversion of any convertible securities of the
Corporation will not be deemed to have been "effected without receipt of
consideration." Adjustments will be made by the Board, whose determination in
that respect will be final, binding and conclusive. Except as expressly
provided in this Plan, no issuance by the Corporation of shares of stock of any
class, or securities convertible into shares of stock of any class, will affect,
and no adjustment by reason thereof will be made with respect to, the number or
price of Shares subject to an Option.
(b) LIQUIDATION. In the event of the dissolution or liquidation of
the Corporation, each Option will terminate immediately prior to the
consummation of such action. The Committee will notify the Optionee not less
than 15 days prior to the proposed consummation of a pending dissolution or
liquidation, and the Option will be exercisable as to all Shares which are
vested prior to expiration until immediately prior to the consummation of such
action.
(c) MERGER. In the event of (i) a proposed merger of the Corporation
with or into another corporation, as a result of which the Corporation is not
the surviving corporation and (ii) the Option is not assumed or an equivalent
option substituted by the successor corporation or a parent or subsidiary of the
successor corporation, then in such case each Option will terminate immediately
prior to the consummation of such transaction. The Committee will notify the
Optionee not less than 15 days prior to the proposed consummation of such
transaction, and the Option will be exercisable as to all Shares which are
vested prior to expiration and until immediately prior to the consummation of
such transaction.
(d) DETERMINATION BY COMMITTEE. All adjustments described in this
SECTION 9 will be made by the Committee, whose determination will be conclusive
and binding on all persons.
(e) LIMITATION ON RIGHTS OF OPTIONEE. Except as expressly provided
in this SECTION 9, no Optionee will have any rights by reason of any payment of
any stock dividend, stock split or reverse stock split or any other increase or
decrease in the number of shares of stock of any class, or by reason of any
reorganization, consolidation, dissolution, liquidation, merger, exchange,
split-up or reverse split-up, or spin-off of assets or stock of another
corporation. Any issuance by the Corporation of Shares, Options or securities
convertible into Shares or Options will not affect, and no adjustment by reason
thereof will be made with respect to, the number or Exercise Price of the Shares
for which an Option is exercisable. Notwithstanding the foregoing, if the
Corporation will enter into a transaction affecting the Corporation's capital
stock or distributions to the holders of its capital stock for which a revision
in the terms of each Option is not required pursuant to this SECTION 9, the
Committee will have the right, but not the obligation, to revise the terms of
each Option in a manner the Committee, in its sole discretion, deems fair and
reasonable given the transaction involved. If necessary or appropriate in
connection with such transaction, the Committee may declare that any Option will
terminate as of a date fixed by the Committee and give each Optionee the right
to exercise his or her Option in whole or in part, including exercise as to
Shares to which the Option would not otherwise be exercisable.
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(f) NO RESTRICTION ON RIGHTS OF CORPORATION. The grant of an Option
will not affect or restrict in any way the right or power of the Corporation to
make adjustments, reclassifications, reorganizations, or changes of its capital
or business structure, or to merge or consolidate, or to dissolve, liquidate,
sell, or transfer all or any part of its business or assets.
10. SECURITIES LAW REQUIREMENTS.
(a) LEGALITY OF ISSUANCE. No Share will be issued upon the exercise
of any Option unless and until the Corporation has determined that:
(i) The Corporation and the Optionee have taken all actions
required to exempt the issuance of the Shares from the registration requirements
under the Securities Act of 1933, as amended (the "ACT"), or the Corporation and
the Optionee will determine that the registration requirements of the Act do not
apply to such exercise;
(ii) Any applicable listing requirement of any stock exchange on
which the Common Stock is listed has been satisfied; and
(iii) Any other applicable provision of state or Federal law
has been satisfied.
(b) RESTRICTIONS ON TRANSFER; REPRESENTATIONS OF OPTIONEE; LEGENDS.
Regardless of whether the offering and sale of Shares has been registered under
the Act or has been registered or qualified under the securities laws of any
state, the Corporation may impose restrictions upon the sale, pledge, or other
transfer of such Shares, including the placement of appropriate legends on stock
certificates, if, in the judgment of the Corporation and its counsel, such
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the Act, the securities laws of any state, or any other law. If
the sale of Shares is not registered under the Act and the Corporation will
determine that the registration requirements of the Act apply to such sale, but
an exemption is available which requires an investment representation or other
representation, the Optionee will be required, as a condition to purchasing
Shares by exercise of his or her Option, to represent that such Shares are being
acquired for investment, and not with a view to the sale or distribution
thereof, except in compliance with the Act, and to make such other
representations as are deemed necessary or appropriate by the Corporation and
its counsel. Stock certificates evidencing Shares acquired pursuant to an
unregistered transaction to which the Act applies will bear a restrictive legend
substantially in the following form and such other restrictive legends as are
required or deemed advisable under the Plan or the provisions of any applicable
law:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE.
THESE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH
A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION
THEREOF, AND MAY NOT BE SOLD, MORTGAGED,
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PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION UNDER THE ACT AND/OR QUALIFICATION
UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR WITHOUT AN
OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION OR QUALIFICATION IS NOT
REQUIRED."
The Corporation will also place legends on stock certificates representing its
right of repurchase under SECTION 11 and the right of first refusal under
SECTION 12 . Any determination by the Corporation and its counsel in connection
with any of the matters set forth in this SECTION 10 will be conclusive and
binding on all persons.
(c) REGISTRATION OR QUALIFICATION OF SECURITIES. The Corporation
may, but will not be obligated to, register or qualify the sale of Shares under
the Act or any other applicable law. In connection with any such registration
or qualification, the Corporation will provide each Optionee with such
information required pursuant to all applicable laws and regulations.
(d) EXCHANGE OF CERTIFICATES. If, in the opinion of the Corporation
and its counsel, any legend placed on a stock certificate representing Shares
sold hereunder is no longer required, the Optionee or the holder of such
certificate will be entitled to exchange such certificate for a certificate
representing the same number of Shares but lacking such legend.
11. RIGHT OF REPURCHASE.
(a) REPURCHASE RIGHT. At the Committee's discretion, Shares issued
pursuant to the exercise of an Option may be subject to a right, but not an
obligation, of repurchase by the Corporation (the "RIGHT OF REPURCHASE"), at the
price specified in SECTION 11(b), if the Optionee ceases to be an Employee for
any reason ("EMPLOYMENT TERMINATION") at any time after the grant of the Option
pursuant to which such Shares were issued. Shares issued by the Corporation
will only be transferable by the Optionee subject to the Right of Repurchase,
and the Corporation will legend the Right of Repurchase on the stock
certificates evidencing such Shares and will take such other steps as it deems
necessary to ensure compliance with this restriction. The Corporation's rights
under this SECTION 11(a) will be freely assignable, in whole or in part.
(b) REPURCHASE PRICE. The price per Share at which the Corporation
may exercise the Right of Repurchase under SECTION 11(a) (the "REPURCHASE
PRICE") will be the higher of the Exercise Price of each Share as paid by the
Optionee, or Fair Market Value of the Shares on the date the Corporation sends
the notice to the Optionee of its exercise of its Right of Repurchase pursuant
to SECTION 11(a).
(c) REPURCHASE PROCEDURE. The Corporation may exercise its Right of
Repurchase by sending a written notice to the Optionee and to the Escrow Agent,
if any, of its taking such action and specifying the number of Shares being
repurchased. The Corporation's Right of Repurchase will terminate if not
exercised by written notice from the Corporation to the
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Optionee within 90 days of the date on which the Corporation learns of the
Employment Termination or the last date any Option granted to such Optionee is
exercised, which ever is later. If the Corporation exercises its Right of
Repurchase, the Optionee, or if applicable, the Escrow Agent, will deliver to
the Corporation every stock certificate representing the Shares being
repurchased, together with appropriate Assignments Separate from Certificates,
and the Corporation will then promptly pay the total Repurchase Price in cash
(or cancellation of purchase money indebtedness for the Shares, if applicable)
to the Optionee, or if applicable, to the Escrow Agent, for delivery to the
Optionee.
(d) ELECTION TO DEFER PURCHASE OF INCENTIVE STOCK OPTION SHARES.
(i) Notwithstanding the preceding provisions of this SECTION 11,
an Optionee whose Shares were issued pursuant to an Incentive Stock Option may
elect to defer the Corporation's repurchase of such Shares pursuant to this
SECTION 11 until the holding period requirements of Section 422(a) of the Code
are met. Such election will be in writing in such form as the Committee may
require and will be delivered to the Corporation and to the Escrow Agent by
certified mail no later than seven days after the date on which the Optionee
receives notice that the Corporation elects to exercise its Right of Repurchase.
Such election will pertain to all such Shares issued to the Optionee and will be
irrevocable.
(ii) With respect to an Optionee who makes the election described
in SUBSECTION 11(d)(i), the Corporation will repurchase such Shares on or before
the date which is 90 days following the earlier of the date on which the
Optionee dies or the date on which the holding period requirements of Section
422(a) of the Code are met. The Repurchase Price of each such Share determined
under SECTION 11(b) will be calculated by substituting for the Optionee's
Employment Termination date the earlier of the date on which the Optionee dies
or the date on which such holding period requirements are met.
(e) ESCROW. To facilitate the consummation of the Corporation's
Right of Repurchase under this SECTION 11, at the request of the Committee, the
Optionee and the Corporation will execute Joint Escrow Instructions and the
Optionee will deliver and deposit with the Escrow Agent named in the Joint
Escrow Instructions two "Assignments Separate from Certificate," together with
all certificates evidencing the Shares of Common Stock issued to the Optionee
pursuant to the Plan, duly endorsed in blank. The Escrow Agent will hold such
documents and deliver the same to the Corporation pursuant to the Joint Escrow
Instructions and in accordance with the terms of this SECTION 11, as applicable.
(f) BINDING EFFECT. The Corporation's Right of Repurchase will inure
to the benefit of its successors and assigns and will be binding upon any
representative, executor, administrator, heir, or legatee of the Optionee.
(g) PAYMENT OF NET AMOUNT OWING. Notwithstanding anything to the
contrary contained herein, if the Corporation determines to exercise its Rights
of Repurchase pursuant to this Section before any Shares have been issued as a
result of an exercise of an Option, in lieu of issuing any Shares, the
Corporation will have the right, but not the obligation,
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to pay to the Optionee the net amount owing to the Optionee.
(h) TERMINATION OR RIGHT OF REPURCHASE. Notwithstanding any other
provision of this SECTION 11, in the event that the Common Stock is listed on
any United States securities exchange or traded on any formal over-the-counter
market in general use in the United States at the time the Optionee would
otherwise be required to transfer his or her Shares, the Corporation will no
longer have the Right of Repurchase, and the Optionee will have no obligation to
comply with this SECTION 11.
12. RIGHT OF FIRST REFUSAL.
(a) RIGHT OF FIRST REFUSAL. At the Committee's discretion, shares
issued pursuant to the exercise of an Option may be subject to a requirement
that if an Optionee proposes to sell, pledge, or otherwise transfer any Shares
acquired pursuant to exercise of an Option, or any interest in such Shares, to
any person or entity, the Corporation will have a right of first refusal (the
"RIGHT OF FIRST REFUSAL") with respect to such Shares. Any Optionee desiring to
transfer Shares subject to the Right of First Refusal will give a written notice
(the "TRANSFER NOTICE") to the Corporation describing fully the proposed
transfer, including the number of Shares proposed to be transferred, the
proposed transfer price, and the name and address of the proposed transferee.
The Transfer Notice will be signed both by the Optionee and by the proposed
transferee and must constitute a binding commitment of both parties to the
transfer of the Shares. The Corporation will have the right to purchase the
Shares subject to the Transfer Notice on the terms of the proposal referred to
in the Transfer Notice, subject to any change in such terms permitted under
SECTION 12(b), by delivery of a notice of exercise of the Right of First Refusal
within 30 days after the date the Transfer Notice is received by the
Corporation. The Corporation's rights under this SECTION 12(a) will be freely
assignable, in whole or in part.
(b) TRANSFER OF SHARES. If the Corporation fails to exercise the
Right of First Refusal within 30 days after the date on which it receives the
Transfer Notice, the Optionee may, not later than six months following receipt
of the Transfer Notice by the Corporation, consummate a transfer of the Shares
subject to the Transfer Notice on the terms and conditions described in the
Transfer Notice. Any proposed transfer on terms and conditions different from
those described in the Transfer Notice, as well as any subsequent proposed
transfer by the Optionee, will again be subject to the Right of First Refusal
and will again require compliance with the procedure described in SECTION 12(a).
If the Corporation exercises its Right of First Refusal, the Optionee will
immediately endorse and deliver to the Corporation every stock certificate
representing the Shares being purchased, and the Corporation will then promptly
pay the purchase price in accordance with the terms set forth in the Transfer
Notice.
(c) REPURCHASE PAYMENT. The amount payable to an Optionee pursuant
to the Corporation's exercise of the Right of First Refusal will be paid to the
Optionee in accordance with the terms and conditions of the Transfer Notice or
may, at the election of the Corporation, be paid in full in cash.
(d) BINDING EFFECT. The Corporation's Right of First Refusal will
inure to the
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benefit of its successors and assigns and will be binding upon any transferee of
the Shares, other than a transferee acquiring Shares in a transaction with
respect to which the Corporation failed to exercise its Right of First Refusal
(a "FREE TRANSFEREE") or a transferee of a Free Transferee.
(e) TERMINATION OF RIGHT OF FIRST REFUSAL. Notwithstanding any other
provision of this SECTION 12, if the Common Stock is listed on any United States
securities exchange or traded on any formal over-the-counter market in general
use in the United States at the time the Optionee desires to transfer his or her
Shares, the Corporation will no longer have the Right of First Refusal, and the
Optionee will have no obligation to comply with this SECTION 12.
13. EXERCISE OF UNVESTED OPTIONS. The Committee may grant any Optionee
the right to exercise any Option prior to the complete vesting of such Option.
Without limiting the generality of the foregoing, the Committee may provide that
if an Option is exercised prior to having completely vested, the Shares issued
upon such exercise will remain subject to vesting at the same rate as under the
Option so exercised and will be subject to a right, but not an obligation, of
repurchase by the Corporation with respect to all unvested Shares if the
Optionee ceases to be an Employee for any reason. For the purposes of
facilitating the enforcement of any such right of repurchase, at the request of
the Committee, the Optionee will enter into the Joint Escrow Instructions with
the Corporation and deliver every certificate for his or her unvested Shares
with a stock power executed in blank by the Optionee and by the Optionee's
spouse, if required for transfer.
14. AMENDMENT OF THE PLAN. The Board or the Committee may, from time to
time, terminate, suspend or discontinue the Plan, in whole or in part, or revise
or amend it in any respect whatsoever including, but not limited to, the
adoption of any amendment(s) deemed necessary or advisable to qualify the
Options under rules and regulations promulgated by the Securities and Exchange
Commission with respect to Employees who are subject to the provisions of
Section 16 of the Exchange Act or to correct any defect or supply any omission
or reconcile any inconsistency in the Plan or in any Option granted thereunder,
without approval of the shareholders of the Corporation, but without the
approval of the Corporation's shareholders, no such revision or amendment will:
(i) Increase the number of Shares subject to the Plan, other
than any increase pursuant to SECTION 9;
(ii) Materially modify the requirements as to eligibility for
participation in the Plan;
(iii) Materially increase the benefits accruing to Optionees
under the Plan;
(iv) Extend the term of the Plan; or
(v) Amend this SECTION 14 to defeat its purpose.
14
<PAGE>
No amendment, termination or modification of the Plan will affect any Option
theretofore granted in any material adverse way without the consent of the
Optionee.
15. APPLICATION OF FUNDS. The proceeds received by the Corporation from
the sale of Common Stock pursuant to the exercise of an Option will be used for
general corporate purposes.
16. APPROVAL OF SHAREHOLDERS. The Plan will be subject to approval by the
affirmative vote of the holders of a majority of all classes of the outstanding
shares present and entitled to vote at the first meeting of shareholders of the
Corporation following the adoption of the Plan or by written consent, and in no
event later than one year following the Effective Date. Prior to such approval,
Options may be granted but will not be exercisable. Any amendment described in
SECTION 14 (i) to (iv) will also be subject to approval by the Corporation's
shareholders.
17. WITHHOLDING OF TAXES. In the event the Corporation or an Affiliate
determines that it is required to withhold federal, state, or local taxes in
connection with the exercise of an Option or the disposition of Shares issued
pursuant to the exercise of an Option, the Optionee or any person succeeding to
the rights of the Optionee, as a condition to such exercise or disposition, may
be required to make arrangements satisfactory to the Corporation or the
Affiliate to enable it to satisfy such withholding requirements. Alternatively
the Corporation may issue or transfer Shares net of the number of Shares
sufficient to satisfy withholding tax requirements. For withholding tax
purposes, the Shares will be valued on the date the withholding obligation is
incurred.
18. RIGHTS AS AN EMPLOYEE. Neither the Plan nor any Option granted
pursuant thereto will be construed to give any person the right to remain in the
employ of the Corporation or any Affiliate, or to affect the right of the
Corporation or any Affiliate to terminate such individual's employment at any
time with or without cause. The grant of an Option will not entitle the
Optionee to, or disqualify the Optionee from, participation in the grant of any
other Option under the Plan or participation in any other benefit plan
maintained by the Corporation or any Affiliate.
19. DISAVOWAL OF REPRESENTATIONS, UNDERTAKINGS, OR CREATION OF IMPLIED
RIGHTS. In adopting and maintaining this Plan and granting options hereunder,
neither the Corporation nor any Affiliate makes any representations or
undertakings with respect to the initial qualification or treatment of Options
under federal or state tax or securities laws. The Corporation and each
Affiliate expressly disavows the creation of any rights in Employees, Optionees,
or beneficiaries of any obligations on the part of the Corporation, any
Affiliate or the Committee, except as expressly provided herein.
20. INSPECTION OF RECORDS. Copies of the Plan, records reflecting each
Optionee's Option, and any other documents and records which an Optionee is
entitled by law to inspect will be open to inspection by the Optionee and his or
her duly authorized representative at the office of the Committee at any
reasonable business hour.
15
<PAGE>
21. INFORMATION TO OPTIONEES. Each Optionee will be provided with such
information regarding the Corporation as the Committee from time to time deems
necessary or appropriate; provided however, that each Optionee will at all times
be provided with such information as is required to be provided from time to
time pursuant to applicable regulatory requirements, including, but not limited
to, the requirement in Section 260.140.46 of Title 10 of the California Code of
Regulations of annual financial statements and any other applicable requirements
of the Securities and Exchange Commission, the California Department of
Corporations, and other state securities agencies.
16
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
FORM OF
INCENTIVE STOCK OPTION AGREEMENT
This Stock Option Agreement is made and entered into this day of,
______, pursuant to the DAOU SYSTEMS, INC. 1996 Stock Option Plan (the "PLAN").
Any terms not defined in this Agreement will have the meanings ascribed to such
terms in the Plan. The Committee administering the Plan has selected
_________________________________________________________ (the "OPTIONEE") to
receive the following grant of an incentive stock option ("STOCK OPTION") to
purchase shares of the common stock of DAOU SYSTEMS, INC., a California
corporation (the "CORPORATION"), on the terms and conditions set forth below to
which Optionee accepts and agrees:
1. Stock Options Granted:
Number of Shares Subject to Option _______________
Date of Grant _______________
Vesting Commencement Date _______________
Exercise Price Per Share _______________
Expiration Date _______________
2. The Stock Option is granted pursuant to the Plan to purchase the
number of shares of authorized but unissued common stock of the
Corporation specified in SECTION 1 (the "SHARES"). The Stock Option
will expire, and all rights to exercise it will terminate on the
earliest of: (a) the date provided below in SECTIONS 5 AND 6, (b) the
Expiration Date, and (c) such earlier date as provided in the Plan.
The number of shares subject to the Stock Option granted pursuant to
this Agreement will be adjusted as provided in the Plan.
3. The Stock Option will be exercisable in all respects in
accordance with the terms of the Plan which are incorporated herein by
this reference. Optionee acknowledges having received and read a copy
of the Plan. All shares of the Corporation's common stock issued
pursuant to the exercise of this Stock Option will be subject to the
Corporation's Right of Repurchase and Right of First Refusal as set
forth in Sections 11 and 12 of the Plan.
4. Optionee will have the right to exercise the Stock Option in
accordance with the following schedule:
1
<PAGE>
i. The Stock Option may not be exercised in whole or in part at any
time prior to the end of the first full year following the Vesting
Commencement Date.
ii. Optionee may exercise the Stock Option as to 20% the Shares at
the end of the first full year following the Vesting Commencement
Date.
iii. Optionee may exercise the Stock Option as to an additional 20% of
the Shares at the end of each full year thereafter following the
Vesting Commencement Date.
iv. If at any time after the end of the first full year following the
Vesting Commencement Date a change in control (as defined in the
following sentence) occurs, then Optionee may exercise the Stock
Option as to 70% of the Shares which are not otherwise vested on
the date of the change in control. For purposes of this SECTION 4,
"change in control" means any person becoming the beneficial owner
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of more than 50% of the Common Stock of the Corporation
outstanding at such time, without the prior approval of the Board, but
does not include any changes in ownership upon any firm commitment
underwritten offering of its securities to the general public.
v. The right to exercise the Stock Option will be cumulative.
Optionee may buy all, or from time to time any part, of the maximum
number of shares which are exercisable under the Stock Option, but in
no case may Optionee exercise the Stock Option with regard to a
fraction of a share, or for any share for which the Stock Option is
not exercisable.
c. The Stock Option will lapse and becomes unexercisable in full on the
earliest of the following events:
i. the first anniversary of the Optionee's death, as provided below
in SECTION 6;
ii. the first anniversary of the date the Optionee ceases to be an
Employee due to total and permanent disability, as provided below in
SECTION 6;
iii. the date otherwise provided below in SECTION 6, unless the
Committee otherwise extends such period before the applicable
expiration date (if permissible pursuant to applicable tax
regulation);
iv. the date provided in Section 9 of the Plan for a transaction
2
<PAGE>
described in such Section; or
v. the date the Optionee files or has filed against him or her
a petition in bankruptcy.
f. If Optionee ceases to be an Employee for any reason other than
his or her death or disability, the Optionee will have the right,
subject to the other provisions of this Agreement, to exercise the
Stock Option for 30 days after his or her termination of employment,
but not beyond the otherwise applicable term of the Option and only to
the extent that on such date of termination of employment the
Optionee's right to exercise such Option had vested, and at the end of
such 30-day period the Stock Option will expire, and all rights to
exercise it will terminate.
i. For purposes of this SECTION 6, employment will be deemed to
terminate on the date the Optionee ceases active employment with
the Corporation or any Affiliate, unless the Optionee's
reemployment rights are guaranteed by statute or contract.
ii. If Optionee dies while an Employee, or after ceasing to be
an Employee but during the period while he or she could have
exercised an Option under the preceeding sub-Sections (a) or (b),
the Option granted to the Optionee may be exercised, to the
extent it has vested at the time of death and subject to the
Plan, at any time within 12 months after the Optionee's death, by
the executors or administrators of his or her estate or by any
person or persons who acquire the Option by will or the laws of
descent and distribution, but not beyond the otherwise applicable
term of the Option.
iii. If Optionee ceases to be an Employee due to becoming totally
and permanently disabled within the meaning of Section 22(e)(3)
of the Code, the Stock Option may be exercised to the extent it
has vested at the time of cessation and, subject to the Plan, at
any time within 12 months after the Optionee's termination of
employment, but not beyond the otherwise applicable term of the
Stock Option.
g. The Optionee agrees to comply with all laws, rules, and
regulations applicable to the grant and exercise of the Stock Option
and the sale or other disposition of the common stock of the
Corporation received pursuant to the exercise of such Stock Option.
h. The Stock Option will not become exercisable unless and
until the shares exercisable under the Stock Option have been qualified
under the California Corporate Securities Law of 1968 pursuant to a
permit application filed with the California Department of Corporations
or unless the exercise is otherwise exempt
3
<PAGE>
from the qualification requirements of such law. The Stock Option is
conditioned upon the Optionee's representation, which Optionee hereby
confirms as of the date of this Agreement and which Optionee must
confirm as of the date of any exercise of all or any part of the Stock
Option, that:
i Optionee understands that both this Stock Option and any shares
purchased upon its exercise are securities, the issuance of which
require compliance with state and federal securities laws;
ii. Optionee understands that neither the Options nor the Shares have
been registered under the Securities Act of 1933 (the "ACT") in
reliance upon a specific exemption contained in the Act which depends
upon Optionee's bona fide investment intention in acquiring these
securities; that Optionee's intention is to hold these securities for
Optionee's own benefit for an indefinite period; that Optionee has no
present intention of selling or transferring any part thereof
(recognizing that the Stock Option is not transferable) and that
certain restrictions may exist on transfer of the shares issued upon
exercise of the Stock Option;
iii. Optionee understands that the Shares issued upon exercise of this
Stock Option, in addition to other restrictions on transfer, must be
held indefinitely unless subsequently registered under the Act, or
unless an exemption from registration is available; that Rule 701 and
Rule 144, two exemptions from registration which may be available, are
only available after the satisfaction of certain conditions and
require the presence of a U.S. public market for such Shares; that no
certainty exists that a U.S. public market for the shares will exist,
and that otherwise Optionee may have to sell the Shares pursuant to
another exemption from registration which exemption may be difficult
to satisfy; and
iv. The Corporation will not be under any obligation to issue any
Shares upon the exercise of this Stock Option unless and until the
Corporation has determined that:
(i) it and Optionee have taken all actions required to register
such Shares under the Securities Act, or to perfect an exemption from the
registration requirements thereof;
(ii) any applicable listing requirement of any stock exchange on
which such Shares are listed has been satisfied; and
(iii) all other applicable provisions of state and federal
law have been satisfied.
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Stock
Option Agreement, in the case of the Corporation by its duly authorized officer,
as of the date and year written above.
OPTIONEE DAOU SYSTEMS, INC.,
a California corporation
- ----------------------------- By:________________________________
(signature) (signature)
- ----------------------------- Its: ______________________________
(Type or Print Name)
Address: ____________________________________
____________________________________
____________________________________
[SIGNATURE PAGE TO DAOU SYSTEMS, INC.
INCENTIVE STOCK OPTION AGREEMENT]
5
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER
SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION AND
ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
FORM OF
NONSTATUTORY STOCK OPTION AGREEMENT
-EMPLOYEE-
-DIRECTOR-
This Stock Option Agreement is made and entered into this ____ day of,___,
______, pursuant to the DAOU SYSTEMS, INC. 1996 Stock Option Plan (the "PLAN").
Any terms not defined in this Agreement will have the meanings ascribed to such
terms in the Plan. The Committee administering the Plan has selected ________
____________________________________________________________ (the "OPTIONEE") to
receive the following grant of a nonstatutory stock option ("STOCK OPTION") to
purchase shares of the common stock of DAOU SYSTEMS, INC., a California
corporation (the "CORPORATION"), on the terms and conditions set forth below to
which Optionee accepts and agrees:
1. Stock Options Granted:
Number of Shares Subject to Option_______________
Date of Grant_______________
Vesting Commencement Date_______________
Exercise Price Per Share_______________
Expiration Date_______________
2. The Stock Option is granted pursuant to the Plan to purchase the
number of shares of authorized but unissued common stock of the
Corporation specified in SECTION 1 (the "SHARES"). The Stock Option
will expire, and all rights to exercise it will terminate on the
earliest of: (a) the date provided below in SECTIONS 5 AND 6, (b) the
Expiration Date, and (c) such earlier date as provided in the Plan.
The number of shares subject to the Stock Option granted pursuant to
this Agreement will be adjusted as provided in the Plan. This Stock
Option is intended by the Corporation and the Optionee to be a
Nonstatutory Stock Option and does not qualify for any special tax
benefits to the Optionee and is not subject to Section 7 of the Plan.
3. The Stock Option will be exercisable in all respects in
accordance with the terms of the Plan which are incorporated herein by
this reference. Optionee acknowledges having received and read a copy
of the Plan. All shares of the Corporation's common stock issued
pursuant to the exercise of this Stock Option
1
<PAGE>
will be subject to the Corporation's Right of Repurchase and Right of
First Refusal as set forth in Sections 11 and 12 of the Plan.
4. Optionee will have the right to exercise the Stock Option in
accordance with the following schedule:
1. The Stock Option may not be exercised in whole or in part at
any time prior to the end of the first full year following the
Vesting Commencement Date.
2. Optionee may exercise the Stock Option as to 20% of the
Shares at the end of the first full year following the Vesting
Commencement Date.
3. Optionee may exercise the Stock Option as to an additional
20% of the Shares at the end of each full year thereafter
following the Vesting Commencement Date.
4. If at any time after the end of the first full year
following the Vesting Commencement Date a change in control (as
defined in the following sentence) occurs, then Optionee may
exercise the Stock Option as to 70% of the Shares which are not
otherwise vested on the date of the change in control. For
purposes of this SECTION 4, "change in control" means any person
becoming the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of more than 50% of the
Common Stock of the Corporation outstanding at such time, without
the prior approval of the Board, but does not include any changes
in ownership upon any firm commitment underwritten offering of
its securities to the general public.
5. The right to exercise the Stock Option will be cumulative.
Optionee may buy all, or from time to time any part, of the
maximum number of shares which are exercisable under the Stock
Option, but in no case may Optionee exercise the Stock Option
with regard to a fraction of a share, or for any share for which
the Stock Option is not exercisable.
5. The Stock Option will lapse and becomes unexercisable in full on
the earliest of the following events:
1. the first anniversary of the Optionee's death, as provided
below in SECTION 6;
2. the first anniversary of the date the Optionee ceases to be
an Employee due to total and permanent disability, as provided
below in SECTION 6;
2
<PAGE>
3. the date otherwise provided below in SECTION 6, unless the
Committee otherwise extends such period before the applicable
expiration date;
4. the date provided in Section 9 of the Plan for a transaction
described in such Section; or
5. the date the Optionee files or has filed against him or her
a petition in bankruptcy.
6. If Optionee ceases to be an Employee for any reason other than
his or her death or disability, the Optionee will have the right,
subject to the other provisions of this Agreement, to exercise the
Stock Option for 30 days after his or her termination of employment,
but not beyond the otherwise applicable term of the Option and only to
the extent that on such date of termination of employment the
Optionee's right to exercise such Option had vested, and at the end of
such 30-day period the Stock Option will expire, and all rights to
exercise it will terminate.
1. For purposes of this SECTION 6, the employment relationship
will be treated as continuing intact while the Optionee is an
active employee of the Corporation or any Affiliate, or is on
military leave, sick leave, or other bona fide leave of absence
to be determined in the sole discretion of the Committee.
2. If Optionee dies while an Employee, or after ceasing to be
an Employee but during the period while he or she could have
exercised an Option under the preceeding sub-Sections (a) or (b),
the Option granted to the Optionee may be exercised, to the
extent it has vested at the time of death and subject to the
Plan, at any time within 12 months after the Optionee's death, by
the executors or administrators of his or her estate or by any
person or persons who acquire the Option by will or the laws of
descent and distribution, but not beyond the otherwise applicable
term of the Option.
3. If Optionee ceases to be an Employee due to becoming totally
and permanently disabled within the meaning of Section 22(e)(3)
of the Code, the Stock Option may be exercised to the extent it
has vested at the time of cessation and, subject to the Plan, at
any time within 12 months after the Optionee's termination of
employment, but not beyond the otherwise applicable term of the
Stock Option.
7. The Optionee agrees to comply with all laws, rules, and
regulations applicable to the grant and exercise of the Stock Option
and the sale or other disposition of the common stock of the
Corporation received pursuant to the
3
<PAGE>
exercise of such Stock Option.
8. The Stock Option will not become exercisable unless and until the
shares exercisable under the Stock Option have been qualified under
the California Corporate Securities Law of 1968 pursuant to a permit
application filed with the California Department of Corporations or
unless the exercise is otherwise exempt from the qualification
requirements of such law. The Stock Option is conditioned upon the
Optionee's representation, which Optionee hereby confirms as of the
date of this Agreement and which Optionee must confirm as of the date
of any exercise of all or any part of the Stock Option, that:
1. Optionee understands that both this Stock Option and any
shares purchased upon its exercise are securities, the issuance
of which require compliance with state and Federal securities
laws;
2. Optionee understands that neither the Options nor the Shares
have been registered under the Securities Act of 1933 (the "ACT")
in reliance upon a specific exemption contained in the Act which
depends upon Optionee's bona fide investment intention in
acquiring these securities; that Optionee's intention is to hold
these securities for Optionee's own benefit for an indefinite
period; that Optionee has no present intention of selling or
transferring any part thereof (recognizing that the Stock Option
is not transferable) and that certain restrictions may exist on
transfer of the shares issued upon exercise of the Stock Option;
3. Optionee understands that the Shares issued upon exercise of
this Stock Option, in addition to other restrictions on transfer,
must be held indefinitely unless subsequently registered under
the Act, or unless an exemption from registration is available;
that Rule 701 and Rule 144, two exemptions from registration
which may be available, are only available after the satisfaction
of certain conditions and require the presence of a U.S. public
market for such Shares; that no certainty exists that a U.S.
public market for the shares will exist, and that otherwise
Optionee may have to sell the Shares pursuant to another
exemption from registration which exemption may be difficult to
satisfy; and
4. The Corporation will not be under any obligation to issue
any Shares upon the exercise of this Stock Option unless and
until the Corporation has determined that:
(i) it and Optionee have taken all actions required to register
such Shares under the Securities Act, or to perfect an exemption from the
registration requirements thereof;
(ii) any applicable listing requirement of any stock exchange on
which
4
<PAGE>
such Shares are listed has been satisfied; and
(iii) all other applicable provisions of state and federal
law have been satisfied.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
5
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this Stock
Option Agreement, in the case of the Corporation by its duly authorized officer,
as of the date and year written above.
OPTIONEE DAOU SYSTEMS, INC.,
a California corporation
By:
- ------------------------------------ -----------------------------------
(signature) (signature)
Its:
- ------------------------------------- ---------------------------------
(Type or Print Name)
Address:
---------------------------
---------------------------
---------------------------
[SIGNATURE PAGE TO DAOU SYSTEMS, INC.
NONSTATUTORY STOCK OPTION AGREEMENT]
6
<PAGE>
INFORMATION MANAGEMENT AGREEMENT
THIS AGREEMENT is entered into as of this first day of April, 1996, by and
between Candler Health System located at PO Box 9787, Savannah, Georgia
("Client") and DAOU Systems, Inc., a California corporation ("DAOU").
RECITALS
(A) DAOU is in the business of furnishing Information Management
Services in order to better align Client's organization leadership vision
with their operating practices through the applications of technology, and is
capable of providing trained personnel to perform management services,
consultation engagements, operational management functions and to staff
technical information processing activities of clients and has agreed to do
so in accordance with the terms of this Agreement;
(B) The Client desires to contract with DAOU to plan, manage, improve,
and operate the Management Information Services functions through the
application of DAOU's trained employees
(C) The Client has specific need for information management services
including management, operations, system administration, application support,
programming support, network management, and software acquisition and
development support, and currently identified in Exhibit A, Scope of Service
and Exhibit B, Level of Services, to this Agreement;
(D) DAOU and the Client are entering into this Agreement on the
understanding that the price for DAOU's services under this Agreement has
been set to reflect the fact that the legal and equitable remedies available
to each party under this Agreement are strictly limited to those remedies set
forth in this Agreement and neither party has undertaken and neither party
can undertake any liability for indirect, incidental, consequential or
punitive damages including but not limited to any loss of revenues, loss of
income, loss of profits or other financial remedies not expressly set forth
in this Agreement; and
(E) DAOU and the Client desire to avoid litigation and to fully and
finally resolve any disputes and all other disagreements pursuant to the
mediation and arbitration provisions of this Agreement.
In consideration of the foregoing and mutual promises contained herein, the
Client and DAOU agree as follows:
IT IS AGREED THAT:
SECTION 1. DEFINITIONS
The following definitions shall apply to the terms used in this Agreement:
1.1 AGREEMENT
The term "Agreement" means this Agreement and any Addendum, supplement
or other written amendment hereto signed by the parties to this Agreement.
1.2 CONFIDENTIAL INFORMATION
The term "Confidential Information" means all business, financial,
statistical, medical, personnel and technical data in tangible and/or
intangible form which is clearly and conspicuously marked "CONFIDENTIAL" or
as defined as confidential by law, or provided or disclosed, by one party to
the other, with notice of its confidential nature.
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
1.3 CONTRACT ADMINISTRATOR
The term "Contract Administrator" means that person. or his or her
replacement, designated by Client under Paragraph 3.2 of this Agreement.
1.4 EXCLUSIVE REMEDIES
The term "Exclusive Remedies" shall mean those remedies which are the
sole and exclusive remedies of each party under this Agreement as set forth
in Paragraph 9.
1.5 EXISTING SYSTEMS
The term "Existing Systems" shall mean those computer hardware and
software configurations set forth on Exhibit A hereto.
1.6 INFORMATION MANAGEMENT SERVICES
The term "Information Management Services" means the Services to be
provided to Client by DAOU as described in Exhibit A.
1.7 CHIEF INFORMATION OFFICER
The term " Chief Information Officer" means the individual designated by
DAOU to be responsible for the Services to be provided to the Client under
the terms of this Agreement.
1.8 LEVEL OF SERVICE
The term "Level of Service" means the level of services and during the
hours described in Exhibit B for which DAOU shall provide Client with
Information Management Services in accordance with the terms hereof.
1.9 PERFORMANCE STANDARDS
The term "Performance Standards" shall mean the standards to be
developed in Exhibit C for those services described in Exhibit A herein, at
the Level of Service described in Exhibit B.
1.10 SERVICE FEE
The term "Service Fee" shall mean the fees set forth in Exhibit B for
those services described in Exhibit A herein, at the Level of Service
described in Exhibit B.
1.11 SERVICES
The term "Services" means collectively the services described in Exhibit
A of this Agreement and the Level of Service described in Exhibit B of this
Agreement to be provided by DAOU to the Client
1.12 SUPPLEMENTAL SERVICES
The term "Supplemental Services" means those additional and separately
billable Information Management Services, software development or other
services which are beyond the Level of Service defined by this Agreement or
which are in addition to the items set forth in Exhibits A and B.
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
1.13 SYSTEM
The term "System" shall mean the Existing Systems, including but not be
limited to all replacements thereof and additions thereto, and the software,
operating together as a system.
1.14 TRANSITION SERVICES
The term "Transition Services" means the services described in Exhibit D
provided by DAOU at the termination of this Agreement.
SECTION 2. SERVICE
2.1 SCOPE OF SERVICE
DAOU agrees to furnish Client Information Management Services, Level of
Service, Performance Standards, and Transition Services as specifically
described in Exhibits A, B, C and D respectively. DAOU and Client may only
expand Services provided by DAOU by execution of amended exhibits signed by
both parties.
2.2 LEVEL OF SERVICE
The Level of Service, as described in Exhibit 8, is the basis for the
monthly fees provided for in Section 6. If, during the term of this
Agreement, or any renewals, the Level of Service to Client shall change, the
total monthly fee shall change as described in Exhibit B.
2.3 SUPPLEMENTAL SERVICES
Upon the written consent of Client and DAOU, DAOU shall provide
Supplemental Services, in addition to that listed in the attached exhibits,
at either the DAOU current published or negotiated rates between the parties.
Any such Supplemental Services shall be in accordance with all terms and
conditions of this Agreement. Nothing in this Agreement shall require that
either Client or DAOU agree to any Supplemental Services.
2.4 THIRD PARTY VENDORS
Client represents that the Existing System includes software of third
party vendors, which software is property owned by or property subject to
licensing or similar agreements between the Client and such vendors and
includes the rights of the Client for maintenance, upgrades and enhancements.
The Client shall, as soon as is practicable after the execution hereof,
deliver copies of all such agreements to DAOU. DAOU shall use reasonable
efforts to act on the Client's behalf with respect to such third party
agreements.
SECTION 3. PERSONNEL
3.1 CHIEF INFORMATION OFFICER
DAOU will designate , after consultation with client, a Chief
Information Officer who shall be responsible for coordinating DAOU's efforts
thereunder and for communicating with Client's Contract Administrator with
regard to the proper execution of this Agreement and the obligations and
duties thereunder.
3.2 CONTRACT ADMINISTRATOR
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Client shall designate the CFO or his or her designee as its Contract
Administrator. The Contract Administrator shall be responsible for
communicating with DAOU's Information Services Manager with regard to the
proper execution of this Agreement and the obligations and duties thereunder.
The Contract Administrator shall have complete authority to make decisions
on behalf of Client with regard to all matters relating to this Agreement.
3.3 DAOU/CLIENT REPORTING RELATIONSHIP
(a) DAOU shall provide written status reports to the Contract
Administrator on a monthly basis Such status reports shall provide the
information reasonably necessary to evaluate DAOU's performance.
(b) DAOU shall report to Client regarding an event or circumstance
which has occurred which shall materially impair DAOU's performance under
this Agreement and DAOU's proposed response to such event or circumstance.
3.4 CONTINGENCY SERVICES
DAOU personnel may occasionally perform services for the Client at other
locations or for others using the resources located on Client's premises for
which DAOU is responsible and DAOU may do so as long as the DAOU Services
under this Agreement shall not be adversely affected.
3.5 [*]
SECTION 4. TERM
The initial term of this Agreement shall be for a period of 5 years
commencing April 1, 1996 and continuing through March 31, 2001 with an
option, by mutual agreement to extend for an additional one 1 year
thereafter. Both parties agree that the fees outlined in Exhibit B are in
consideration of the entire initial term and that any adjustments to those
fees within the Term of this Agreement, other than those identified in
Paragraph 6.3 below, must be mutually agreed to and incorporated as an
addendum.
4.1 CHANGE OF CONTROL
In the event that Client merges with St. Joseph's Hospital (Savannah,
GA) or otherwise becomes controlled by or in common control with any entity
which also controls St. Joseph's Hospital, [*]
[*] Client shall pay the sum of six hundred thousand dollars ($600,000)
upon early termination due to the Change in control as provided herein. [*]
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
SECTION 5. TERMINATION
5.1 EVENTS OF TERMINATION
This Agreement may be terminated:
(a) By either party, to the extent permitted under applicable law, if
the other ceases to function as a going concern becomes insolvent, makes an
assignment for the benefit of creditors, files a petition in bankruptcy,
permits a petition in bankruptcy to be filed against it (which is not
dismissed within sixty (60) days) or admits in writing its inability to pay
its debts as they mature; or if a receiver is appointed over a substantial
part of its assets (which is not dismissed within sixty (60) days);
(b) By DAOU for the non-payment of any monthly fees or charges to
Client and which nonpayment continues for a period of thirty (30) days from
the date of invoice; provided, however, that if Client has a bona fide
dispute regarding a specific invoice, then such non-payment shall not be
grounds for a termination hereof if Client pays to DAOU the entire invoiced
amount whether or not disputed and continues to pay fully in accordance with
Paragraph 9.3 while submitting the dispute to the dispute resolution
procedures as set forth in Paragraph 9.2;
(c) By either party in event of a material breach or nonperformance by
the other of any provision of this Agreement, provided however, that written
notice of the alleged breach shall have been given to the allegedly breaching
party who shall not have remedied or cured the alleged breach within thirty
(30) days after delivery of such notice; or if remedy or cure requires more
than thirty (30) days, who shall not have actively commenced and diligently
continued efforts to remedy or cure the alleged breach, provided further,
that this Agreement shall not be terminated by such alleged breach if such
alleged breach is submitted to the dispute resolution procedures set forth
herein; or
(d) [*]
5.2 TRANSITION PLAN
Upon a proper notice of termination given by Client in accordance with
Paragraph 5.1, at the request of Client, DAOU shall make available to Client,
the personnel necessary to carry out a mutually agreed to transition plan to
be executed within the remaining term of the Agreement. The topics to be
included in the transition plan include, but are not limited, to those
outlined in attached and incorporated Exhibit D.
Each party will cooperate fully with the other and/or its designees, so
that the transition of Services rendered under this Agreement shall be timely
and efficient and implemented in a manner so as to least interfere with the
orderly conduct of Client's business and so as not to unduly interfere with
DAOU's other operations.
5.3 PERSONNEL TRAINING
Upon a proper notice of termination given by Client in accordance with
Paragraph 5.1 for any reason other than breach by Client for non-payment by
Client, Client, after notice and preceding termination date, shall have the
right to assign a reasonable number of Client's employees to participate with
the employees of DAOU in the performance of their remaining services. DAOU
shall cause its employees to acquaint and instruct the employees of Client
regarding the work, to facilitate a smooth transition according to the
Transition Plan, and to continuously operate all data processing functions
5.4 EQUIPMENT
Upon expiration or termination of this Agreement, or any extension or
renewals thereof, all office furniture, equipment, documents, records, books,
tapes, disks and files provided by Client or DAOU shall be returned to Client
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
or DAOU in substantially the same condition as received, ordinary wear and
tear expected. Neither Client nor DAOU shall dispose of the other party's
property without the prior consent of the other party.
SECTION 6. FEES FOR SERVICES AND TERMS OF PAYMENT
6.1 FEES FOR SERVICE
The monthly fees for Services provided thereunder are described in
Exhibit B.
6.2 PAYMENT
Monthly fees shall be due and payable the first day of each month.
Fractional months shall be prorated. Payment for Supplemental "Services
shall be invoiced monthly and due ten (10) days from the receipt of invoice.
Balances past due in excess of thirty (30) days from receipt of invoice shall
bear overdue service charges at one and one-half (1-1/2) percent per month or
the highest rate permitted by law, whichever is less.
6.3 ANNUAL ADJUSTMENT OF MONTHLY FEES
Annually, on the anniversary date of this Agreement, the Fees for
Services set forth in Exhibit B shall be adjusted, equal to the adjustment
provided by Client to Client employees during the most recent 12 month
period.. This adjustment shall apply only to the personnel portion of this
Agreement.
SECTION 7. INSURANCE AND TAXES
7.1 INSURANCE
DAOU shall procure and maintain public liability insurance in the amount
of [*] errors and omissions insurance in the amount of [*] per occurrence on
a claims made basis with a total of [*] aggregate on an annual claims made
basis, and workers' compensation insurance on its own employees. DAOU shall
provide Client with at least thirty (30) days' advance written notice prior
to any cancellation or reduction in coverage.
7.2 TAX AND LICENSES
Taxes, other than income taxes, applicable business taxes and license
fees, imposed by any taxing authority based upon any Services furnished under
this Agreement shall be the responsibility of Client and shall be payable in
addition to other fees or charges. Each party may provide the other, in lieu
of paying any such tax, with a certificate of exemption in form reasonably
satisfactory to the other party.
SECTION 8. PERFORMANCE UNDER THIS AGREEMENT
8.1 IN GENERAL
The parties acknowledge and agree that performance under this Agreement
will require the availability of their respective representatives for the
continued definition and setting of priorities, the balancing of competing
tasks and schedules, and the adjustment of priorities over different tasks
and different schedules so as to address, on a daily basis, the needs of the
Client within the scope of this Agreement.
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
8.2. COOPERATION
DAOU and the Client agree that they will each use good faith and
reasonable efforts to define, plan and coordinate the different priorities
and schedules agreed to by the parties within the scope of this Agreement.
8.3 FULL DISCLAIMER OF WARRANTIES
DAOU HEREBY DISCLAIMS ALL WARRANTIES OF ANY KIND, INCLUDING BUT NOT
LIMITED TO, ANY EXPRESS WARRANTIES NOT INCORPORATED INTO THIS AGREEMENT OR
ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
IMPOSED BY LAW OR WHICH COULD OTHERWISE ARISE IN CONNECTION WITH DAOU'S
OBLIGATIONS UNDER THIS AGREEMENT. DAOU'S SOLE AND EXCLUSIVE OBLIGATION
THEREUNDER IS TO USE REASONABLE EFFORTS AND ITS BEST BUSINESS JUDGMENT IN
PERFORMING THE TASKS SET FORTH IN THIS AGREEMENT, IN ACCORDANCE WITH THE
RESOURCE ASSUMPTIONS AND PARAMETERS SET FORTH HEREIN.
8.4 PROBLEMS IN PERFORMANCE
In the event of any failure of the parties mutually to agree on any
matters under this Agreement or in the event that either party believes that
the other has failed to satisfactorily perform or otherwise is in breach of
the Agreement and if the parties are unable to resolve such matter through
their respective representatives then the parties shall submit the matter to
resolution in accordance with the procedures set forth in Section 9 below.
SECTION 9. REMEDIES
9.1 LIMITATION OF LIABILITY; INDEMNIFICATION BY CLIENT
Except for the Service Fees and other amounts expressly due and payable
to DAOU, in no event shall either party be liable to the other for any
damages arising in any manner under this Agreement including but not limited
to indirect, incidental, consequential, special, exemplary or other damages
or loss of revenues, loss of income, loss of profits, other financial
remedies except those remedies for direct damages set forth as follows. To
the extent any claim is made and fully covered by insurance provided in
Paragraph 7.1 of this Agreement, the limitations of liability of this
Paragraph 9.1 shall not apply, but, if a claim by one party to this Agreement
against the other is not covered or is only partly covered by insurance
provided in Paragraph 7.1, then in no event shall either party's liability to
the other if there be any for any claims whatsoever or for any reason
whatsoever) exceed two hundred and fifty thousand dollars ($250,000).
9.2 Dispute Resolution Procedure
In the event that the parties have any disagreement, dispute, breach or
claim of breach, or nonperformance or repudiation arising from, in relation
to or in connection with this Agreement or any of the terms or conditions
hereof, or any transaction thereunder including but not limited to either
party's failure or alleged failure to comply with any of the provisions of
this Agreement (hereinafter collectively the "Dispute"), the parties shall
first promptly provide in writing to the other a general written statement of
their respective claims. This statement need not be complete and will not
limit the claims of either party in any further procedure with respect to
this Agreement. The statement shall indicate that it is the first statement
of a formal dispute resolution process under this Agreement. If the parties
are unable to resolve the dispute within ten (10) business days of receipt of
such written statement, the claimant may proceed as otherwise contemplated by
this Agreement.
(a) INTERNAL RESOLUTION PROCEDURES
* CONFIDENTIAL TREATMENT REQUESTED
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(i) Within ten (10) working days of the time that one party
informs the other of a Dispute, the Client's Contract Administrator and
DAOU's Chief Information Officer shall conduct a meeting to reach an
agreement to use their best efforts to either (a) resolve the matter and set
forth such resolution in writing or (b) define the Dispute in writing
including a description of the position of each party and the other projects
and tasks which would be affected by the proposed resolution submitted by the
Client's Contract Administrator and by the proposed resolution submitted by
DAOU's Chief Information Officer,
ii) If the Client's Contract Administrator and DAOU's Chief
Information Officer are unable to reach an agreement pursuant to Subparagraph
(i), then within ten (10) working days of such failure to agree, at least one
knowledgeable representative of DAOU management and at least one
knowledgeable representative of the Client shall meet in Savannah, GA, to
attempt to reach a resolution of the matter in light of the description of
the Dispute submitted by the parties and further discussion among and between
the parties and their respective representatives.
(b) MEDIATION RESOLUTION PROCEDURE
If the procedure set forth in Subparagraph (a) is unsuccessful in
resolving the Dispute, the parties shall, within fifteen (15) working days,
commence a mediation session by notice of selection of a third party, neutral
mediator and a proposed time and date for the mediation. If the other party
does not propose an alternative mediator then the mediation shall occur
before the first person proposed. If the other party does propose an
alternative mediator, then the two proposed shall promptly jointly select a
third party, neutral to act as the sole mediator. The mediation shall take
place in Savannah, Georgia, and all mediator fees shall be equally shared by
the parties. If the parties are able to reach a resolution of the Dispute,
the resolution so reached shall be memorialized in writing and shall, upon
the mutual written consent of both parties, become part of this Agreement.
If the parties are unable to resolve the Dispute through mediation, either
party has the option to terminate mediation and upon doing so, the parties
shall continue under this Agreement in accordance with Section 9.3 and the
parties shall submit any disputes to binding arbitration under subsection (c)
below.
(c) BINDING ARBITRATION
If the parties are unable to reach an agreement pursuant to
subparagraphs (a) and (b) above, the Dispute shall be resolved by
mandatory, binding expedited arbitration in Savannah, Georgia in accordance
with the following terms and conditions:
(i) AAA Rules Apply. Any dispute relating to or arising out of
the interpretation or performance of this Agreement (other than claims for
which injunctive relief is sought) and which have not been resolved pursuant
to the procedures set forth in Section 9.2 (a) shall be resolved at the
request of either party through binding arbitration pursuant to and under the
then existing commercial arbitration rules of the American Arbitration
Association. The decision of the arbitrators(s) shall be limited by those
Exclusive Remedies set forth herein, including but not limited to the
Limitation on Liability set forth in Section 9.1 herein.
(ii) Discovery. The parties shall be permitted to obtain discovery
from each other of documents and other tangible evidence at a time reasonably
prior to the arbitration hearing. No depositions shall be allowed.
(iii) Hearing. The arbitration hearing shall be conducted in
Savannah, Georgia The parties shall agree on a single arbitrator with
computer industry or data processing expertise or if they cannot so agree,
they shall each name one arbitrator and the two arbitrators shall jointly
name a third neutral arbitrator who has expertise in information management
and/or data processing services, and a decision of any two of the three
arbitrators shall bind the parties in all matters thereunder,
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(iv) Award. The arbitrators award shall be final and judgment upon
any award by the arbitrator may be entered by the state or federal district
courts in Savannah, Georgia
(v) Binding Obligation. Failure to meet any of the timelines in
this Section shall not be considered default in performance, nor shall it
affect the enforceability of the resolution procedures under this Section.
9.3 PERFORMANCE DURING DISPUTES
DAOU shall be under the obligation to continue to provide Services to
the Client while the parties are seeking to resolve any Dispute so long as
the Client shall continue to pay DAOU all Service Fees, both past due and as
they come due, with or without Client's reservation of rights.
SECTION 10. CONFIDENTIALITY
10.1 CONFIDENTIAL INFORMATION
Subject to Paragraph 10.2 below, both parties agree that:
(a) Each party shall not disclose any Confidential Information of the
other party to any third party without first obtaining written consent;
(b) Each party shall limit dissemination of the other party's
Confidential Information only to those employees, contractors and agents who
require access thereto to perform their functions under this Agreement;
(c) Each party agrees to return the Confidential Information to the
disclosing party upon receipt of written request therefor,
(d) Each party agrees that the standard of care to be applied in the
performance of the obligations set forth above shall be the standard of care
applied by the receiving party in treating its own Confidential Information,
but at least reasonable care to prevent unauthorized copying, use,
publication or disclosure; and
(e) The term of the provisions of this Section shall survive
termination of the Services or any determination that this Agreement or any
portion hereof or Exhibit hereto is void or voidable.
10.2 EXCEPTIONS TO CONFIDENTIALITY
The obligation of confidentiality set forth in Paragraph 10.1 shall not
apply to any data or information that the receiving party proves:
(a) Was already rightfully in the possession of the receiving party or
any of its related companies prior to disclosure;
(b) Was independently developed by employees having no access to
Confidential Information;
(c) Was publicly disclosed by a person other than the receiving party
or its employees or agents without restrictions;
(d) Was rightfully received from a third party without restrictions on
disclosure or use;
(e) Was approved for unrestricted release or unrestricted disclosure by
the disclosing party;
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
(f) Was available by inspection of products or services marketed
without restrictions, offered for sale or leased in the ordinary course of
business by either party hereto or others; or
(g) Was required to be produced or disclosed pursuant to applicable
laws, regulations or court order, provided the receiving party has given the
disclosing party the opportunity to defend, limit or protect such production
or disclosure.
10.3 [*]
SECTION 11. GENERAL
11.1 NOTICES
Any notice required or permitted by this Agreement shall be in writing
and accomplished by registered or certified mail. Such notice shall be
deemed to have been delivered five (5) days after it has been mailed
If to DAOU: President
DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92121
If to Client: Chief Financial Officer
Candler Health System
P. O. Box 9787
Savannah, GA 31405
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
11.2 WAIVER
Waiver of breach or failure to perform any provision of this Agreement
shall not be deemed a waiver of future performance nor shall it prejudice the
waiving party's right to require strict performance of the same provision or
any other provision in the future. No term or condition of this Agreement
shall be waived, modified or deleted except by an instrument, in writing,
signed by the parties hereto.
11.3 ASSIGNMENT
Neither this Agreement, nor any of either party's obligations under this
Agreement, shall be assignable by operation of law or otherwise, without the
prior written consent of both parties.
11.4 NO AUTHORITY
The parties are and shall remain independent contractors. Neither party
shall have any authority, and neither party shall represent that it has any
authority, to assume or create any obligation, express or implied, on behalf
of the other party, except as provided in this Agreement. This Agreement
shall not be construed as creating a partnership, joint venture, franchise,
agency or employment relationship between the parties or as creating any
other form of legal association that would impose liability on one party for
the act or failure to act of the other party.
11.5 EXHIBITS
All exhibits referred to in this Agreement are hereby incorporated by
reference as though fully set forth in the text of this Agreement; in the
event of any conflict between the body of this Agreement and any Exhibit to
this Agreement, the body of this Agreement shall control over any conflicting
provision in any Exhibit to this Agreement.
11.6 GOVERNING LAW
This Agreement shall be interpreted by the laws of the State of Georgia.
11.7 ATTORNEY'S FEES
Subject to Paragraphs 11.10 and 11.11 below, in the event any action is
instituted to enforce any right granted herein, neither party shall be
entitled to recover attorneys' fees or other costs incurred except for such
costs, if any, (excluding attorneys' fees) awarded by arbitration.
11.8 TIME TO SUE
All actions by either party arising out of this Agreement shall be
commenced within twelve (1 2) months after the party has knowledge of the
claim or within six (6) months of the expiration or earlier termination of
this Agreement, whichever first occurs. No action may be brought by either
party more than one (1) year after the cause of action has arisen.
11.9 SEVERABILITY
If any part of this Agreement found to be invalid by a court of
competent jurisdiction, all other provisions shall remain in full force and
effect and the provisions found invalid shall be enforced by the court to the
maximum enforceable by law.
11.10 INDEMNITY BY DAOU.
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
DAOU will defend Client against a claim that the licensed programs or
licensed materials furnished by by DAOU and used within the scope of this
Agreement by DAOU infringe a U.S. patent or copyright or another proprietary
right of a third party. DAOU will pay resulting costs, damages and attorney
fees finally awarded provided that: a) Client promptly notifies DAOU in
writing of the claim, and b) DAOU has sole control of the defense and of all
related settlement negotiations. If such claim has occurred or in DAOU's
opinion is likely to occur, Client agrees to permit DAOU, at its option and
expense, either to procure for Client the right to continue using the
licensed programs or licensed materials or to replace or modify the same with
functionally equivalent programs so that they become non-infringing.
11.11 INDEMNITY BY CLIENT
Client will defend DAOU against a claim that the licensed programs or
licensed materials fumished by Client and used within the scope of this
Agreement by Client infringe a U.S. patent or copyright or another proprietary
right of a third party. Client will pay resulting costs, damages and attorney
fees finally awarded provided that: a) DAOU promptly notifies Client in writing
of the claim, and b) Client has sole control of the defense and of all related
settlement negotiations. If such claim has occurred or in Client's opinion is
likely to occur, DAOU agrees to permit Client, at its option and expense, either
to procure for DAOU the right to continue using the licensed programs or
licensed materials or to replace or modify the same with functionally equivalent
programs so they become non-infringing.
11.12 FORCE MAJEURE
Neither party shall be liable for any delay or failure to perform its
obligations thereunder to the extent that such delay or failure is caused by a
force or event beyond the control of such party, including without limitation,
war, embargoes, strikes, governmental restrictions, riots, fires, floods,
earthquakes, or other Acts of God (the "Force Majeure") provided that DAOU shall
use its best efforts to assist Client in establishing necessary Services
elsewhere, in the event of the occurrences of a Force Majeure which:
(a) Materially prevents DAOU from providing any of the Services for more
than ten (10) business days, and DAOU has not successfully transferred Client's
data processing to a backup facility under terms and conditions reasonably
acceptable to the Client, or
(b) Causes the normal operations of the site to be interrupted for more
than forty-five (45) days, and in Client's reasonable business judgment it is
necessary to pursue alternative means of meeting Client's data processing
needs. DAOU shall use its best efforts to assist Client in establishing
necessary Services elsewhere.
11.13 AFFIRMATIVE ACTION
DAOU certifies that it is in compliance with the Equal Employment
Opportunity Requirement of Executive Order 11246 as amended by Executive Order
11375, Section 503 of the Rehabilitation Act of 1973 as amended and 38 U.S.C.
4212 (the Vietnam Era Veterans Readjustment Assistance Act of 1974 as amended),
Title VIl of the Civil Rights Restoration Act of 1987, the California Fair
Employment Practices Act, and any other federal or state laws pertaining to
equal employment opportunity, and that it will not discriminate against any
employee or applicant for employment on the basis of race, color, religion,
handicap, age, sex, national origin or ancestry in matters pertaining to
recruitment, hiring, training, upgrading, transfer, compensation or termination.
11.14 MEDICARE ACCESS TO BOOKS AND RECORDS
Until four (4) years following the completion of this Agreement, DAOU
shall make available to the Secretary of Health and Human Services, the
Inspector General, or their designees, any and all such books and records as
are necessary to substantiate the Services provided under this Agreement.
Should DAOU fulfill any part of the Services
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
rendered under this Agreement via subcontract with fees of ten thousand
dollars ($1 0,000) or more, DAOU shall require such access to subcontractors'
books and records as a condition of entering subcontract.
SECTION 12. ENTIRE AGREEMENT
THIS AGREEMENT SIGNED BY BOTH PARTIES, AND SO INITIALED
BY BOTH PARTIES IN THE MARGIN OPPOSITE THIS SECTION,
CONSTITUTES A FINAL WRITTEN EXPRESSION OF ALL OF THE
TERMS OF THIS AGREEMENT AND IS A COMPLETE AND EXCLUSIVE
STATEMENT OF THOSE TERMS. CLIENT WAS NOT INDUCED TO -------------
ENTER THIS AGREEMENT BY ANY STATEMENTS OR Client
REPRESENTATIONS NOT CONTAINED IN THIS AGREEMENT. ANY
AND ALL REPRESENTATIONS, PROMISES, WARRANTIES OR
STATEMENTS BY DAOU'S OFFICERS, EMPLOYEES, OR OTHER
AGENTS THAT DIFFER IN ANY WAY FROM THE TERMS OF THIS
WRITTEN AGREEMENT SHALL BE GIVEN NO FORCE OF AFFECT. -------------
THIS AGREEMENT SHALL BE CHANGED, AMENDED OR MODIFIED DAOU
ONLY BY WRITTEN INSTRUMENT SIGNED BY BOTH CLIENT AND
DAOU. This Agreement shall not be modified or altered
by any course of performance by either party or usage of
the trade or otherwise except through an instrument
signed by both Client and DAOU.
Candler Health System DAOU Systems, Inc.
By: /s/Kenneth W. Wood By:
--------------------------------- ------------------------------
Title: President Title:
------------------------------ ---------------------------
Date: April 19, 1996 Date:
------------------------------ ----------------------------
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT A THROUGH EXHIBIT D
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated January 17, 1997,
is made by and between DAOU Systems, Inc., a Delaware Corporation having its
principal offices at 5120 Shoreham Place, San Diego, California 92122 (the
"Company") and Robert McNeill ("Employee").
AGREEMENT
1. EFFECTIVE DATE.
Employee's employment commenced on November 11, 1996. This Agreement
formalizes the terms and conditions to which Employee orally agreed prior to
accepting and beginning his employment with the Company. This Agreement
therefore memorializes an Agreement already in existence between the parties,
and will, upon signature, be retroactive to November 11, 1996.
2. AT-WILL EMPLOYMENT.
Employee's employment relationship with the Company is at-will,
terminable at any time and for any reason by either the Company or Employee.
The Company nonetheless reserves the right to discharge an employee for acts of
gross misconduct in the performance of his duties or may otherwise terminate the
employee for a specific reason or for "cause". While certain paragraphs of this
Agreement describe events which could occur at a particular time in the future,
nothing in this Agreement may be construed as a guarantee of employment of any
length.
3. EMPLOYMENT DUTIES.
a. TITLE/RESPONSIBILITIES. Employee shall hold the title of
Executive Vice President of the Company. Employee shall also perform all duties
which from time to time are assigned to him by the Board of Directors ("BOARD").
b. FULL TIME ATTENTION. Employee shall devote all of his business
time and attention, energy and skills to the Company during the time he is
employed under this Agreement.
c. POLICY COMPLIANCE. Employee is required to comply with the
Company policy, practice and procedure in effect during his employment. Employee
must agree to the terms and conditions of the Company's Employee
Confidentiality and Inventions Agreement ("CONFIDENTIALITY AGREEMENT," attached
to this Agreement as Exhibit 1 and incorporated by reference.)
<PAGE>
4. COMPENSATION.
a. BASE SALARY. The Company shall pay Employee an annual Base
Salary of One Hundred Seventy Five Thousand Dollars ($175,000.00), which will
be paid bi-weekly during the year. Any increase to the Base Salary is within
the sole discretion of the Company.
b. SIGNING BONUS. In order to assist Employee in exercising the
options which he presently holds for shares of stock in his former employer,
Shared Medical Systems Corporation ("SMS"), the Company will pay Employee a
signing bonus of an amount equal to the tax liability Employee incurs in
exercising the above referenced options, up to a maximum payment of $105,000.00.
Employee understands and agrees to repay the Company the unearned portion of the
bonus if employee resigns or is discharged for "cause" prior to completion of
three years of employment. The bonus is earned pro rata over three years.
c. BONUS COMPENSATION. In addition to the compensation provided
above, the Company will pay Employee an incentive bonus in the amount of up to
$30,000.00 per quarter during the employment relationship. For 1996, Employee
is eligible for a pro-rata portion of this bonus, for the period from November
11, 1996 through December 31, 1996. Thereafter, from January 1, 1997, the bonus
will be paid quarterly, and will be paid within 10 days of the end of the
quarter. Such bonus shall be contingent upon the Company's achievement of
Quarterly Goals for revenue and profit. These Quarterly Goals will be set by
the Company at the beginning of each calendar year. All bonus arrangements are
established and reviewed by the Board and may be modified at any time by the
Board in its sole discretion.
d. STOCK OPTIONS.
(1) GRANT OF OPTIONS. Employee acknowledges that effective
November 11, 1996 he has been granted non-qualified options to purchase 100,000
shares of the Company's common stock under DAOU's 1996 Stock Option Plan ("THE
PLAN") subject to the terms and conditions of the Stock Option Agreements
reflecting that grant (the "OPTION AGREEMENTS") as follows: Employee has been
granted a non-qualified stock option exercisable into one hundred thousand
shares, in each case, at an exercise price of Six Dollars ($6) per share. These
options shall vest in five equal annual increments commencing on the first
anniversary date of his employment, rounded to the nearest whole number of
shares. The stock options are subject to the terms and provisions set forth in
the Option Agreements and the Plan as well as applicable state and federal laws
including, but not limited to, tax and securities laws. The length of time the
option to purchase will remain open and details of this grant are formalized in
the Option Agreement and the Plan.
(2) TAX EFFECT OF EXERCISE, SALE OR GIFT. The Company and
Employee intend that the after-tax effect of the options to Employee shall be
equivalent to the
2
<PAGE>
result that would pertain had they originally been issued as incentive stock
options (ISOs) with the same terms and conditions. Accordingly, should
Employee incur a tax liability as a result of the exercise of the options in
excess of the tax liability that would have been incurred had the options
originally been issued as ISOs ("Excess Tax"), the Company shall make an
interest-free loan to Employee equal to the Excess Tax. At the time of sale
or other disposition of the shares subject to the options, the loan will be
due and payable, but the amount payable shall be reduced by the amount, if
any, by which (1) the cumulative tax liability on exercise of the options and
on disposition of the underlying shares exceeds (2) the tax that would have
been incurred had the options originally been issued as ISOs. If the shares
are not sold or otherwise disposed of on or before the earlier of (1) the
Employee's date of termination or (2) January 17, 2002, the loan will be due
and payable in full. Other repayment terms will be established in writing at
the time of the loan ("Loan Agreement"). In the event Employee fails to
repay the loan in a timely manner, according to the Loan Agreement, the
Company reserves the right to offset the debt from Employee's future bonus
payments, if any.
(3) STOCK SPLIT. The Company is currently contemplating an
Initial Public Offering ("IPO"). The number of such shares into which
Employee's stock options are exercisable ("OPTION SHARES") will be adjusted
upward proportionately in the event of a stock split or other upward adjustment
in the number of outstanding shares of capital stock in the Company (by merger
or otherwise) preparation for that IPO, PROVIDED, HOWEVER, that in no event
shall the number of Option Shares exceed 200,000 at the time of the first split.
(4) SHORTFALL. If Employee is employed by the Company three
years from the option date, and if at that time the originally issued options
do not have a net value (exercise price of such options minus market value of
the Company's common stock, as defined below) of at least $1,550,000.00, a
cash bonus will be paid to make up the shortfall. If the Company is public,
the market value of the common stock will be determined by calculating the
trading price for the common stock (or any other securities received by
Employee in lieu thereof) for a sixty day trading period preceding that three
year date. Otherwise, the market value will be determined by the fair market
value of such securities as reasonably determined by the Board or the
Committee as that group is defined in the Plan.
(5) TAX IMPLICATIONS. The Company does not make any warranty or
representation with respect to the taxability or tax consequence of any of the
above grant of options or of the tax consequences of any exercise of the options
or consequent sale of the shares purchased. Employee is advised to consult with
his own tax advisor with respect to the tax treatment of the option grant.
e. FRINGE BENEFITS.
(1) VACATION. During the Term of this Agreement, Employee shall
be entitled to vacation in accordance with The Company's vacation policy as set
forth in the Employee Handbook.
3
<PAGE>
(2) HEALTH BENEFITS. The Company agrees to provide Employee
with comprehensive health insurance benefits during his employment.
(3) 401(k) PARTICIPATION. Employee may participate in any 401(k)
or other employee retirement plan according to the requirements of those plans
starting January, 1997.
(4) LIFE INSURANCE. The Company shall maintain a term life
insurance policy providing for payment of $500,000.00 to Employee's designated
beneficiaries.
(5) SHORT TERM AND LONG TERM DISABILITY INSURANCE. In the event
Employee suffers a short term disability, Employee will seek state short term
disability benefits. The Company shall provide short term disability payments
to ensure that Employee receives, in combination with state disability benefits,
if any, One Hundred Percent (100%) of Employee's base salary for a period of six
consecutive months of disability. The Company shall provide long term
disability insurance to provide Employee with $8,500.00 per month for any
consecutive period of disabilities after the six consecutive months of
disability for the term set by the policy.
(6) AUTOMOBILE. During his employment, the Company agrees to
provide Employee with an automobile allowance in the initial amount of $550.00
per month towards an automobile to be used in connection with the Company's
business.
f. REIMBURSEMENT OF EXPENSES. During his Employment, with approval
by the Chief Financial Officer, Employee shall be entitled to reimbursement of
reasonable and actual expenses, incurred on behalf of the Company, including but
not limited to travel and entertainment expenses, supplies and cellular phone
expenses.
5. CONFIDENTIALITY. As set forth above, Employee agrees to comply with
the terms and conditions of the Company's Employee Confidentiality and
Inventions Agreement (EXHIBIT 1).
6. RETURN OF PROPERTY. Employee agrees that all documents, records,
apparatus, equipment and other physical property which is furnished or obtained
by Employee in the course of his employment with the Company shall be and remain
the sole property of the Company. Employee agrees that, upon the termination of
his employment, he shall return all such property (whether or not it pertains to
Proprietary Information), and agrees not to make or retain copies, reproductions
or summaries of any such property.
7. NON COMPETITION. During the term of his employment, Employee shall
not, directly or indirectly, either as an employee, employer, consultant,
corporate officer,
4
<PAGE>
director, or in any other individual or representative capacity, engage or
participate in any business that is in competition in with the business of the
Company in any location, unless such participation or interest is fully
disclosed to the Company and approved by the Board.
8. AGREEMENT WITH PREVIOUS EMPLOYERS. Employee agrees that he does not
have any agreement with any previous employer which will prevent him from
performing under this agreement or which will limit his performance except as
follows: By virtue of an agreement with SMS, Employee is prohibited, for a
period of eighteen months from November 11, 1996, from using information which
he gained by soliciting and negotiating SMS contracts with (1) Crozer-Chester
Medical Center, Philadelphia; (2) Childrens' Medical Center, Pittsburgh; and (3)
Pinnacle Health Systems, Harrisburg, to displace SMS services or to reduce SMS's
revenues received from these three clients.
9. SEVERANCE.
a. UPON TERMINATION WITHOUT "CAUSE" As set forth above, the
employment relationship between the parties is at-will, terminable at any time
by either party for any reason or no reason. Where Employee is discharged
without "cause", Employee is eligible for severance payments equivalent to
eighteen months of base salary paid over an eighteen (18) month period. These
payments will cease if Employee obtains new employment within the eighteen month
period or becomes a consultant to any company.
b. UPON RESIGNATION, AT COMPANY OPTION If Employee voluntarily
resigns his employment at his own initiative with the Company, the Company at
its option and in its sole discretion may offer severance of up to eighteen (18)
monthly payments of base salary, IF AND ONLY IF he agrees to extend the non-
competition requirements set forth in paragraph 7 above for the severance
period. The Company reserves the right to cease any remaining Severance
Payments in the event Employee violates this Agreement.
c. DISCHARGE WITH "CAUSE" Where Employee is discharged as a result
of gross misconduct or otherwise for "cause", he is not eligible for severance.
d. COBRA REIMBURSEMENT Upon termination of the employment
relationship, Employee will be provided with election forms for medical
insurance continuation as provided by the Consolidated Omnibus Budget
Reconciliation Act (COBRA). If Employee elects to continue insurance under
COBRA, the Company will reimburse Employee for the cost of his continued health
insurance (not dependents), for up to eighteen (18) months. This does not
extend the length of the COBRA period. In the event Employee becomes eligible
for or obtains insurance through any replacement employment, this benefit will
cease.
5
<PAGE>
10. 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) and will be governed by the Model Employment Arbitration rules
of AAA. 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. Notwithstanding any rule
of AAA to the contrary, the parties will be entitled to conduct discovery (i.e.
investigation of facts through depositions and other means) which shall be
governed by the Code of Civil Procedure section 1283.05. The arbitrator shall
have all power and authority to enter orders relating to such discovery as are
allowed under the Code. The arbitrator will 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
actual 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.
11. GENERAL PROVISIONS.
a. GOVERNING LAW. This Agreement will be governed by and construed
in accordance with the laws of the State of California.
b. ASSIGNMENT. Employee may not assign, pledge or encumber his
interest in this Agreement or any part thereof.
c. NO WAIVER OF BREACH. The failure to enforce any provision of
this Agreement will not be construed as a waiver of any such provision, nor
prevent a party thereafter from enforcing the provision or any other provision
of this Agreement. The rights granted the parties are cumulative, and the
election of one will not constitute a waiver of such party's right to assert all
other legal and equitable remedies available under the circumstances.
d. 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, the remainder of the provisions, or enforceable parts of this
Agreement, will not be affected.
e. 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, including but not limited
to the Offer Letter.
6
<PAGE>
f. 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.
g. 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, 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.
h. AMENDMENT. This Agreement may be amended or supplemented only by
a writing signed by both of the parties hereto.
i. DUPLICATE COUNTERPARTS. This Agreement may be executed in
duplicate counterparts, each of which shall be deemed an original; provided,
however, such counterparts shall together constitute only one instrument.
j. 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.
k. 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.
Dated: January 20, 1997 DAOU Systems, Inc.
----------------
By: /s/ Fred McGee
-----------------------------------
Fred McGee, Chief Financial Officer
Dated: January 20, 1997 /s/ Robert McNeill
----------------- ------------------------------------
Robert McNeill
<PAGE>
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
HISTORICAL EARNINGS PER SHARE
Net income......................................................................... $ 26 $ 1,240 $ 83
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding......................................... 6,664 6,664 6,664
Net effect of dilutive common share equivalents (stock options) using the treasury
stock method...................................................................... -- 288 1,256
Adjustments to reflect requirements of the Securities and Exchange Commission
(Effect of SAB 83)................................................................ 567 567 567
--------- --------- ---------
Adjusted shares outstanding........................................................ 7,231 7,519 8,487
--------- --------- ---------
--------- --------- ---------
Historical net income per common share............................................. $ 0.00 $ 0.16 $ 0.01
--------- --------- ---------
--------- --------- ---------
PRO FORMA EARNINGS PER SHARE
Net income......................................................................... $ 83
---------
---------
Weighted average common shares outstanding......................................... 6,664
Net effect of dilutive common share equivalents (stock options) using the treasury
stock method...................................................................... 54
Effect of assumed conversion of preferred shares................................... 1,603
Adjustments to reflect requirements of the Securities and Exchange Commission
(Effect of SAB 83)................................................................ 567
---------
Adjusted shares outstanding........................................................ 8,888
---------
---------
Pro forma net income per common share.............................................. $ 0.01
---------
---------
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated January 14, 1997,
in the Registration Statement (Form SB-2) and the related Prospectus of DAOU
Systems, Inc. for the registration of shares of its common stock.
ERNST & YOUNG LLP
San Diego, California
January 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's Financial statements as of and for the year ended December 31,
1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,284
<SECURITIES> 0
<RECEIVABLES> 4,195
<ALLOWANCES> 110
<INVENTORY> 0
<CURRENT-ASSETS> 10,717
<PP&E> 1,430
<DEPRECIATION> 604
<TOTAL-ASSETS> 11,910
<CURRENT-LIABILITIES> 2,801
<BONDS> 0
8,190
0
<COMMON> 7
<OTHER-SE> 850
<TOTAL-LIABILITY-AND-EQUITY> 11,910
<SALES> 19,311
<TOTAL-REVENUES> 19,311
<CGS> 13,556
<TOTAL-COSTS> 19,306
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (197)
<INCOME-PRETAX> 202
<INCOME-TAX> 119
<INCOME-CONTINUING> 83
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<FN>
</TABLE>
