<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
REGISTRATION STATEMENT NO. 333-_____
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DAOU SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
330284454
(I.R.S. Employer Identification No.)
5120 Shoreham Place
San Diego, California 92122
(619) 452-2221
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Daniel J. Daou
5120 Shoreham Place
San Diego, California 92122
(619) 452-2221
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box: /X/
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 this 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: / /
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $0.001
per share . . . . . . . . . . . 1,437,859 $19.53125 $28,083,184 $8,285.00
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</TABLE>
(1) This Registration Statement shall also cover any additional shares of
Common Stock which become issuable by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without the
receipt of consideration which results in an increase in the number of the
Registrant's outstanding shares of Common Stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of the Securities Act of 1933, as amended.
Pursuant to Rule 457(c), the maximum offering price per share is
$19.53125, the average of the bid and asked prices of a share of the
Registrant's Common Stock as reported on the National Market System of the
National Association of Securities Dealers, Inc. Automated Quotation
System on May 14, 1998, and the maximum aggregate offering price of
$28,083,184 is the product of $19.53125 and the number of shares of the
Registrant's Common Stock being registered hereby.
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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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 18, 1998
PROSPECTUS
[LOGO]
DAOU SYSTEMS, INC.
1,437,859 SHARES OF COMMON STOCK
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This Prospectus relates to the offer and sale (this "Offering") of up to
1,437,859 shares (the "Shares") of Common Stock, par value $0.001 per share
("Common Stock"), of DAOU Systems, Inc., a Delaware corporation ("DAOU" or
the "Company"). The Shares may be sold by certain stockholders of DAOU who
received the Shares in connection with DAOU's acquisition of their respective
companies, or by such stockholders' transferees, pledgees, donees or their
successors (the "Selling Stockholders"), from time to time in transactions
effected on the National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation System ("Nasdaq"), or through
the facilities of any national securities exchange or U.S. automated
inter-dealer quotation system of a registered national securities
association, on which any of the Shares are then listed, admitted to unlisted
trading privileges or included for quotation, in privately negotiated
transactions or in a combination of such methods of sale. Such methods of
sale may be conducted at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. The
Selling Stockholders may effect such transactions directly, or indirectly
through underwriters, broker-dealers or agents acting on their behalf, and in
connection with such sales, such broker-dealers or agents may receive
compensation in the form of commissions, concessions, allowances or discounts
from the Selling Stockholders and/or the purchasers of the Shares for whom
they may act as agent or to whom they sell Shares as principal or both (which
commissions, concessions, allowances or discounts might be in excess of
customary amounts thereof). To the extent required, the names of any agents,
broker-dealers or underwriters and applicable commissions, concessions,
allowances or discounts and any other required information with respect to
any particular offer of the Shares by the Selling Stockholders, will be set
forth in a Prospectus Supplement. Certain restrictions exist which may
affect the ability of the Selling Stockholders to sell the Shares owned by
them. See "Selling Stockholders" and "Plan of Distribution."
None of the proceeds from the sale of the Shares by the Selling
Stockholders will be received by the Company. The Company has agreed to pay
all of the expenses incident to the registration of the Shares, except that
the Selling Stockholders will pay the commissions and discounts of
underwriters, dealers or agents, if any, incurred in connection with the sale
of the Shares. Each of the Company and the Selling Stockholders has agreed to
indemnify the other against certain civil liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), or otherwise, or,
to the extent that such indemnification is unavailable or insufficient, to
contribute to the amount paid or payable in connection therewith. See
"Selling Stockholders."
The Selling Stockholders and any underwriters, dealers or agents which
participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any commission
received by them and any profit realized on the resale of the Shares
purchased by them may be deemed to constitute underwriting commissions,
concessions, allowances or discounts under the Securities Act. See "Plan of
Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN MATERIAL RISKS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE SHARES OFFERED HEREBY.
<PAGE>
The Shares offered for resale by the Selling Stockholders are being
offered pursuant to certain registration rights set forth in the Synexus
Merger Agreement (as defined herein) and the Sentient Merger Agreement (as
defined herein). See "Selling Stockholders."
The Common Stock is traded on Nasdaq under the symbol "DAOU." On May
14, 1998, the closing bid and asked prices of the Common Stock were $19.50
and $19.5625, respectively.
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.
THE DATE OF THIS PROSPECTUS IS MAY [[___]], 1998.
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<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED OR
INCORPORATED BY REFERENCE 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 AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SHARES OF COMMON STOCK IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL
UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as applicable to U.S.
private issuers with securities registered thereunder, and, in accordance
therewith, files reports, proxy statements, information statements and other
information with the Securities and Exchange Commission (the "Commission").
Copies of such reports, proxy statements, information statements and other
information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the
Commission's regional offices located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 W. Madison Street, Suite
1400, Chicago, IL 60661-2511. Copies of such material also can be obtained
at prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Such
reports, proxy statements, information statements and other information
concerning the Company also may be inspected at the offices of The Nasdaq
Stock Market, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
Materials that the Company files electronically with the Commission are
available at the Commission's website (http://www.sec.gov), which contains
reports, proxy statements, information statements and other information
regarding issuers that file electronically with the Commission.
The Company has filed with the Commission a Registration Statement on
Form S-3 (together with all amendments thereto, the "Registration
Statement"), under the Securities Act with respect to the Shares. This
Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete and, with respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description
of the matter involved, and each such statement is deemed qualified in its
entirety by such reference.
REFERENCE DATA
Industry, market and market share information contained herein is based
on information appearing in publicly available reports. The Company has not
independently verified such information.
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<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the Exchange Act (File No.
0-22073) are incorporated by reference in this Prospectus:
1. the Company's Current Report on Form 8-K, as filed with the Commission
on May 18, 1998;
2. the Company's Current Report on Form 8-K/A, as filed with the
Commission on May 18, 1998;
3. the Company's Current Report on Form 8-K, as filed with the Commission
on May 8, 1998;
4. the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders, as filed with the Commission on April 21, 1998;
5. the Company's Current Report on Form 8-K, as filed with the Commission
on April 14, 1998;
6. the Company's Current Report on Form 8-K, as filed with the Commission
on April 2, 1998;
7. the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997, as filed with the Commission on March 10, 1998, and
as amended on Form 10-KSB/A, as filed with the Commission on March 31,
1998; and
8. the description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A, filed with the
Commission on January 29, 1997, including any amendment or reports
filed for the purpose of updating such description.
All reports and other documents filed by the Company with the Commission
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent
to the date of this Prospectus and prior to the termination of this Offering
shall be deemed to be incorporated herein by reference and to be a part
hereof on and from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein
or incorporated herein by reference or in any other subsequently filed
document that also is or is deemed to be incorporated herein by reference
modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all documents
incorporated by reference in this Prospectus (not including, however, the
exhibits to such documents unless such exhibits are specifically incorporated
by reference in such documents). Requests should be directed to DAOU
Systems, Inc., 5120 Shoreham Place, San Diego, California 92122; Attention,
Secretary, telephone number (619) 452-2221.
This Prospectus contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. Actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors."
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<PAGE>
SUMMARY
The following description is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and the consolidated
financial statements and notes thereto incorporated by reference in this
Prospectus. Unless otherwise indicated, all information in this Prospectus
assumes that Synexus Incorporated, a Pennsylvania corporation ("Synexus"),
and Sentient Systems, Inc., a Maryland corporation ("Sentient"), were both
wholly-owned subsidiaries of the Company for the periods discussed herein,
because the Company's acquisition of each such company was accounted for as a
pooling-of-interests. Unless the context otherwise requires, as used in this
Prospectus, the "Company" and "DAOU" refer to the Company, its predecessor
entity and its wholly-owned subsidiaries, DAOU-Integrex, Inc., a Delaware
corporation, DAOU On-Line, Inc., a Delaware corporation, DAOU-Synexus, Inc.,
a Delaware Corporation ("DAOU-Synexus"), and DAOU-Sentient, Inc., a Delaware
Corporation ("DAOU-Sentient"). In this Prospectus, references to "dollar"
and "$" are to United States dollars, and the terms "United States" and
"U.S." mean the United States of America, its territories, its possessions
and other areas subject to its jurisdiction.
THE COMPANY
DAOU designs, implements, supports and manages advanced computer network
systems primarily for hospitals, integrated healthcare delivery networks, and
other healthcare provider organizations ("provider organizations"). DAOU
combines its knowledge of the specialized information needs of the healthcare
industry, including voice, video and data requirements, with its
technological expertise in computer network systems to provide advanced,
reliable and cost-effective computer network solutions to 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 function 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.
The Company was incorporated in California on July 16, 1987 under the
name DAOU Systems, Inc., and reincorporated in Delaware on November 15, 1996
through its merger into a newly formed Delaware corporation. The Company's
principal executive offices are located at 5120 Shoreham Place, San Diego,
California 92122; its telephone and facsimile numbers are (619) 452-2221 and
(619) 452-1338, respectively; its e-mail address is [email protected]; and its
URL is http://www.daou.com.
------------------
For additional information relating to the Company's business,
operations, properties and other matters, see the documents referred to above
under "Incorporation of Certain Information by Reference."
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, THE ACCURACY
OF WHICH IS SUBJECT TO MANY RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING RISK FACTORS.
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. For the year ended December 31, 1997, the Company's revenues
increased 34% to $53.1 million from $39.8 million for the year ended December
31, 1996. For the year ended December 31, 1996, the Company's revenues
increased 37% to $39.8 million from $29.0 million for the year ended December
31, 1995. For the year ended December 31, 1995, the Company's revenues
increased 48% to $29.0 million from $19.6 million for the year ended December
31, 1994. In addition, since January 1, 1995, the Company's workforce
increased from 198 to 410 full-time employees as of December 31, 1997.
Further increases in staffing levels are expected during 1998. 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.
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.
RISKS ASSOCIATED WITH ACQUISITIONS. During 1997, the Company acquired
through pooling-of-interests mergers all of the issued and outstanding shares
of Integrex Systems Corporation, a Delaware corporation ("Integrex"), and
On-Line Networking, Inc., a New Jersey corporation ("On-Line"). During 1998,
the Company has acquired through pooling-of-interests mergers all of the
issued and outstanding shares of Synexus and Sentient. The Company currently
intends as part of its business strategy to pursue additional 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 integration of management information
and accounting systems 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. The Company's
management will be required to devote substantial time and attention to the
integration of these businesses and to any material operational or financial
problems arising as a result of the acquisitions. There can be no assurance
that operational or financial problems will not occur as a result of
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<PAGE>
any acquisition. Failure to effectively integrate acquired businesses could
have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company intends to continue to evaluate potential acquisitions of,
or investments in, companies which the Company believes will complement or
enhance its existing business. 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. There can be no assurance
that the Company will consummate any acquisition in the future or, if
consummated, that any such acquisition will ultimately be beneficial to the
Company.
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, certain of the Company's customers are
able to reduce or cancel their use of the Company's services before the end
of the contract term. For example, Candler Health System, Savannah, Georgia
("Candler"), a large I/S outsourcing customer of the Company, terminated its
contract with the Company effective November 30, 1997, which termination was
influenced by Candler's consolidation with another healthcare enterprise.
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.
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; (viii) the effect of
acquisitions; and (ix) 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 may 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.
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. For the year ended
December 31, 1997, the Company's five largest customers accounted for
approximately 29% of total revenues. For the year ended December 31, 1996,
the Company's five largest customers accounted for approximately 34% of total
revenues, with Catholic Medical Center of Brooklyn and Queens, Inc., New
York, accounting for approximately 10% of such revenues. 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. For example, Candler, a large I/S outsourcing customer of
the Company, terminated
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<PAGE>
its contract with the Company effective November 30, 1997, which termination
was influenced by Candler's consolidation with another healthcare enterprise.
The loss of any large customer could have a material adverse effect on the
Company's business, 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 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.
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. 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.
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, 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. The Company's competitors in the healthcare
information technology companies such as HBO & Company and Shared Medical
Systems Corporation; hardware firms such as Cisco Systems, Inc., FORE Systems
Inc., 3Com Corporation, and International Business Machines Corporation; and
networking/telecommunications firms such as GTE Corporation, AT&T Corporation
and Sprint Corporation. In addition to these major companies, the Company
also competes with smaller regional computer networking firms which have a
niche in selected geographical areas of the country. 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.
-8-
<PAGE>
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 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.
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. 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.
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 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.
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.
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.
POTENTIAL "YEAR 2000" PROBLEMS. It is possible that the Company's
currently installed computer systems, software products or other business
systems, or those of its suppliers or customers, will not always accept input
of, store, manipulate or output dates in the years 1999, 2000 or thereafter
without error or interruption. DAOU has conducted a review of its business
systems, including its computer systems, to attempt to identify ways in which
its systems could be affected by problems in correctly processing date
information. Based on this review, the Company does not expect the Year 2000
issue to have a material adverse effect on its operations. In addition, the
Company is requesting assurances
-9-
<PAGE>
from all software vendors from which it has purchased or from which it may
purchase software that the software sold to the Company will correctly
process all date information at all times and the Company is querying its
customers and suppliers as to their progress in identifying and addressing
problems that their computer systems will face in correctly processing date
information as the year 2000 approaches and is reached. However, there can be
no assurance that DAOU will identify all date-handling problems in its
business systems or those of its customers and suppliers in advance of their
occurrence or that DAOU will be able to successfully remedy problems that are
discovered. The expenses of the Company 's efforts to identify and address
such problems, or the expenses or liabilities to which the Company may become
subject as a result of such problems, could have a material adverse effect on
the Company's business, results of operations and financial condition.
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT. As of December 31,
1997, the Company's executive officers, directors and their respective family
members and affiliates beneficially own approximately 38% of the outstanding
shares of Common Stock. As a result, these stockholders are 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.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been, and is likely to continue to be, volatile. Factors
such as announcements of new customer contracts or services by the Company or
its competitors, changes in pricing policies by the Company or its
competitors, quarterly fluctuations in the Company's operating results,
announcements relating to strategic relationships or acquisitions, changes in
earnings estimates by analysts, government regulatory actions, general
conditions in the market for computer network services, overall market
conditions and other factors may have a significant impact on the market
price of the Common Stock. In addition, in recent years the stock market in
general, and the shares of technology companies in particular, have
experienced extreme price fluctuations. This volatility has had a substantial
effect on the market prices of securities issued by many companies for
reasons unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market could adversely affect prevailing market prices
for the Common Stock. Of the 13,405,447 shares of Common Stock outstanding
as of May 13, 1998, 8,967,533 shares of Common Stock will be freely tradeable
after this Offering 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") promulgated under the Securities Act. The remaining
4,437,914 shares will be "restricted securities" as such term is defined in
Rule 144.
As of December 31, 1997, the beneficial owners of approximately 850,000
shares of Common Stock and 133,285 shares of Common Stock issuable upon the
exercise of outstanding warrants were entitled to certain registration rights
with respect to such shares. In addition, the Company has registered on a
Form S-8 Registration Statement an aggregate of 1,367,925 shares of Common
Stock of the 4,000,000 shares of Common Stock reserved for issuance, subject
to stockholder approval, under the DAOU Systems, Inc. 1996 Stock Option Plan,
as amended, of which options to purchase a total of 1,221,495 shares were
outstanding as of December 31, 1997. As of such date, an additional 112,240
shares of Common Stock were subject to other outstanding stock options.
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.
-10-
<PAGE>
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.
USE OF PROCEEDS
The Shares are being offered hereby solely for the accounts of the
Selling Stockholders. The Company will not receive any of the proceeds from
the sale of the Shares by the Selling Stockholders. See "Selling
Stockholders."
-11-
<PAGE>
SELLING STOCKHOLDERS
On March 31, 1998, the Company acquired 100% of the issued and
outstanding shares of Synexus through the issuance of 161,235 shares of
Common Stock to the stockholders of Synexus (the "Synexus Stockholders").
This acquisition was accomplished by means of a merger of Synexus with and
into DAOU-Synexus pursuant to the terms of an Agreement and Plan of Merger,
dated as of March 27, 1998 (the "Synexus Merger Agreement"), by and among the
Company, DAOU-Synexus, Synexus and the Synexus Stockholders. In connection
with the Company's acquisition of Synexus, the Synexus Merger Agreement
provided that the Company would register twenty-five (25%) of the shares of
Common Stock issued to each of the Synexus Stockholders, respectively.
On March 31, 1998, the Company acquired 100% of the issued and
outstanding shares of Sentient through the issuance of 1,397,550 shares of
Common Stock to the stockholders of Sentient (the "Sentient Stockholders").
This acquisition was accomplished by means of a merger of Sentient with and
into DAOU-Sentient pursuant to the terms of an Agreement and Plan of Merger,
dated as of March 30, 1998 (the "Sentient Merger Agreement"), by and among
the Company, DAOU-Sentient, Sentient and the Sentient Stockholders. In
connection with the Company's acquisition of Sentient, the Sentient Merger
Agreement provided that the Company would register all of the shares of
Common Stock issued to each of the Sentient Stockholders, respectively.
The Sentient Stockholders and the Synexus Stockholders constitute all of
the Selling Stockholders. DAOU has filed the Registration Statement of which
this Prospectus forms a part (the "Registration Statement"), with respect to
the sale by the Selling Stockholders of the Shares from time to time on
Nasdaq or through the facilities of any national securities exchange or U.S.
automated inter-dealer quotation system of a registered national securities
association, on which the Shares are then listed, admitted to unlisted
trading privileges or included for quotation, in privately negotiated
transactions or otherwise, as more fully described below under "Plan of
Distribution."
Pursuant to the Synexus Merger Agreement, the Company has agreed to use
its best efforts to keep the Registration Statement continuously effective
(subject to the Company's right to require that the Synexus Stockholders
suspend their use of this Prospectus under certain circumstances) until the
earlier of such time as all of the securities covered by the Registration
Statement have been sold pursuant thereto or the conclusion of the period of
six months immediately following the effective date of the Registration
Statement (the "Synexus Effective Period"); provided, however, that in the
event that the Company determines in good faith that, because (i) it has
under consideration a significant acquisition or disposition or other
material transaction that has not been publicly disclosed or (ii) it is in
the process of preparing for filing with the Commission a Current Report on
Form 8-K or other form, the Registration Statement may contain a material
misstatement or omission, the Company may cause the Registration Statement to
not be used for an aggregate period not to exceed forty-five (45) days during
the Synexus Effective Period.
In connection with the Sentient Merger Agreement, the Company has agreed
to use its best efforts to keep the Registration Statement continuously
effective (subject to the Company's right to require that the Sentient
Stockholders suspend their use of this Prospectus under certain
circumstances) until the earlier of such time as all of the securities
covered by the Registration Statement have been sold pursuant thereto or the
conclusion of the period of three years immediately following the effective
date of the Registration Statement (the "Sentient Effective Period");
provided, however, that in the event that the Company determines in good
faith that, because (i) it has under consideration a significant acquisition
or disposition or other material transaction that has not been publicly
disclosed or (ii) it is in the process of preparing for filing with the
Commission a Current Report on Form 8-K or other form, the Registration
Statement may contain a material misstatement or omission, the Company may
cause the Registration Statement to not be used for an aggregate period not
to exceed forty-five (45) days during the Sentient Effective Period.
-12-
<PAGE>
The table below sets forth certain information concerning the beneficial
ownership of the Shares by each of the Selling Stockholders prior to this
Offering and as adjusted to give effect to the sale of all of the Shares
offered hereby, regardless of whether the Selling Stockholders have a present
intent to sell. The Shares are being registered to permit public secondary
trading of the Shares and the Selling Stockholders may offer the Shares from
time to time. See "Plan of Distribution." Because the Selling Stockholders
may offer all, some or none of their respective Shares, no definitive
estimate as to the number of Shares that will be held by the Selling
Stockholders after this Offering can be provided and the following table has
been prepared on the assumption that all of the Shares offered under this
Prospectus will be sold to unaffiliated parties.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
AT MAY 13, 1998(1) AFTER OFFERING(2)
------------------------- NUMBER OF SHARES ------------------------
NUMBER OF PERCENT COVERED BY NUMBER OF PERCENT
SELLING STOCKHOLDERS SHARES OF CLASS(2) THIS PROSPECTUS SHARES(3) OF CLASS(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John D. Smaling 115,168 * 28,792 86,376 *
Brian W. Cornell 46,067 * 11,517 34,550 *
Kristin N. Johnson 665,500 4.96% 665,500 -- --
Nicholas S. Johnson 665,500 4.96% 665,500 -- --
Stephen M. Casey 66,550 * 66,550 -- --
</TABLE>
- ---------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect
to securities. Except pursuant to applicable community property laws, the
Selling Stockholders have sole voting and investment power with respect to
the respective Shares owned by them.
(2) Based upon 13,405,447 shares of Common Stock outstanding as of May 13,
1998.
(3) Assumes the sale of all of the Shares offered hereby to persons who are not
affiliates of the Selling Stockholders.
-13-
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that the Shares may be
sold from time to time by the Selling Stockholders in transactions effected
on Nasdaq or through the facilities of any national securities exchange or
U.S. automated inter-dealer quotation system of a registered national
securities association, on which any of the Shares are then listed, admitted
to unlisted trading privileges or included for quotation, in privately
negotiated transactions or in a combination of such methods of sale. Such
methods of sale may be conducted at market prices prevailing at the time of
sale, at prices related to such prevailing market prices or at negotiated
prices. The Selling Stockholders may effect such transactions directly, or
indirectly through underwriters, broker-dealers or agents acting on their
behalf, and in connection with such sales, such broker-dealers or agents may
receive compensation in the form of commissions, concessions, allowances or
discounts from the Selling Stockholders and/or the purchasers of the Shares
for whom they may act as agent or to whom they sell Shares as principal or
both (which commissions, concessions, allowances or discounts might be in
excess of customary amounts thereof). To the extent required, the names of
any agents, broker-dealers or underwriters and applicable commissions,
concessions, allowances or discounts and any other required information with
respect to any particular offer of the Shares by the Selling Stockholders,
will be set forth in a Prospectus Supplement. Sales of the Shares will only
be made through broker-dealers registered as such in a subject jurisdiction
or in transactions exempt from such registration. The Company has not been
advised of any definitive selling arrangement as of the date of this
Prospectus between any of the Selling Stockholders and any broker-dealer or
agent. The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Stockholders.
The Company has agreed to use its best efforts to keep the Registration
Statement continuously effective (subject to the Company's right to require
that the Selling Stockholders suspend their use of this Prospectus under
certain circumstances), until the earlier of such time as all of the
securities covered by the Registration Statement have been sold pursuant
thereto or the conclusion of the Synexus Effective Period and the Sentient
Effective Period, respectively. In addition, any of the Shares that qualify
for sale pursuant to Rule 144 under the Securities Act may be sold under such
Rule 144 rather than pursuant to this Prospectus.
Any broker-dealer participating in any distribution of the Shares in
connection with this Offering may be deemed to be an "underwriter" within the
meaning of the Securities Act and may be required to deliver a copy of this
Prospectus, including a Prospectus Supplement, to any person who purchases
and of the Shares from or through such broker-dealer.
The Company has agreed to pay all of the expenses incident to the
registration of the Shares, except that the Selling Stockholders will pay the
commissions and discounts of underwriters, dealers or agents, if any,
incurred in connection with the sale of the Shares. Each of the Company and
the Selling Stockholders has agreed to indemnify the other against certain
civil liabilities arising under the Securities Act or otherwise, or, to the
extent that such indemnification is unavailable or insufficient, to
contribute to the amount paid or payable in connection therewith.
In accordance with applicable rules and regulations promulgated under
the Exchange Act, any person engaged in the distribution of any of the Shares
may not simultaneously engage in market activities with respect to any of the
Common Stock for a period of nine business days prior to the commencement of
such distribution. In addition and without limiting the foregoing, the
Selling Stockholders may be subject to applicable provisions of the Exchange
Act and the rules and regulations promulgated thereunder, including, without
limitation, Regulation M, which provisions may limit the timing of purchases
and sales of the Shares by the Selling Stockholders.
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for
the Company by Baker & McKenzie, San Diego, California.
EXPERTS
The consolidated financial statements of DAOU Systems, Inc. appearing in
DAOU Systems, Inc. Annual Report (Form 10-KSB/A) for the year ended December
31, 1997, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon included therein and incorporated herein by
reference. The supplemental consolidated financial statements of DAOU
Systems, Inc. appearing in DAOU Systems, Inc. Current Report on Form 8-K
dated May 18, 1998, incorporated by reference in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report incorporated by reference elsewhere
herein which, as to the years 1997, 1996 and 1995, are based in part on the
reports of Deloitte & Touche LLP, independent auditors, and Coopers &
Lybrand, LLP, independent accountants. The consolidated financial statements
and the supplemental consolidated financial statements referred to above are
incorporated by reference in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
-14-
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER
THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY SHARES OF COMMON STOCK BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM 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 AN IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Reference Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Incorporation of Certain Information by Reference . . . . . . . . . . . . . 4
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
1,437,859 SHARES
[LOGO]
COMMON STOCK
------------
PROSPECTUS
------------
May [[___]], 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated cumulative expenses of this Offering, all of which are to
be paid by the Registrant in connection with the issuance and distribution of
the securities being registered, are estimated as follows:
<TABLE>
<CAPTION>
Amount
---------
<S> <C>
Registration Fee - Securities and Exchange Commission (1) . . $ 8,285
Accounting Fees and Expenses . . . . . . . . . . . . . . . . 22,500
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . 10,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . 5,000
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $45,785
---------
---------
</TABLE>
- -------------------
(1) Registration fee paid upon the initial filing of this Registration
Statement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
"DGCL"), empowers a Delaware corporation to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer,
employee or agent of such corporation or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Such
indemnification may include expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding, provided that such
person acted in good faith and in a manner such person reasonably believed to
be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful. A Delaware corporation is
permitted to indemnify directors, officers, employees and other agents of the
corporation in an action by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the person to be indemnified has been adjudged to be liable to
the corporation. Where a director, officer, employee or agent of the
corporation is successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to above or in defense of any claim,
issue or matter therein, the corporation must indemnify such person against
the expenses (including attorneys' fees) which he or she actually and
reasonably incurred in connection therewith.
The Registrant's Certificate of Incorporation and Bylaws provide for the
indemnification of directors and executive officers to the fullest extent
permitted by the DGCL and authorize the indemnification by the Registrant of
other officers, employees and other agents as set forth in the DGCL. 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.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
<S> <C>
2.1(1) -- Agreement and Plan of Merger, dated as of January 9, 1997, by and
between the Registrant and DAOU Systems, Inc., a California
corporation.
2.2(2) -- Agreement and Plan of Merger, dated as of July 8, 1997, by and
among the Registrant, DAOU-Integrex, Inc., a Delaware corporation
and wholly-owned subsidiary of the Registrant, Integrex Systems
Corporation, a Delaware corporation, and the stockholders of
Integrex Systems Corporation.
2.3+(3) -- Agreement and Plan of Merger, dated as of September 25, 1997, by
and among the Registrant, DAOU On-Line, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant, On-
Line Networking, Inc., a New Jersey corporation, and the
stockholders of On-Line Networking, Inc.
2.4++(4) -- Agreement and Plan of Merger, dated as of March 27, 1998, by and
among the Registrant, DAOU-Synexus, Inc., a Delaware corporation
and wholly-owned subsidiary of the Registrant, Synexus
Incorporated, a Pennsylvania corporation, and the stockholders of
Synexus Incorporated.
2.5++(4) -- Agreement and Plan of Merger, dated as of March 30, 1998, by and
among the Registrant, DAOU-Sentient, Inc., a Delaware corporation
and wholly-owned subsidiary of the Registrant, Sentient Systems,
Inc., a Maryland corporation, and the stockholders of Sentient
Systems, Inc.
3.1(1) -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(1) -- Bylaws of the Registrant.
4.1 -- Reference is made to Exhibits 3.1 and 3.2.
4.2(1) -- Specimen stock certificate.
4.3(1) -- Investors' Rights Agreement, dated October 26, 1995, between the
Registrant and the parties named therein.
4.4(1) -- Series A Preferred Stock Purchase Warrant No. 1, dated
October 26, 1995, between the Registrant and Needham & Company,
Inc.
4.5(1) -- 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 as to the legality of the Common
Stock of the Registrant.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
23.2 -- Consent of Deloitte & Touche LLP, Independent Auditors.
23.3 -- Consent of Coopers & Lybrand LLP, Independent Accountants.
23.4 -- Consent of Baker & McKenzie (included in Exhibit 5.1).
24.1 -- Power of Attorney (included on the signature page of this
Registration Statement).
</TABLE>
- --------------------
+ Confidential treatment has been granted with respect to certain portions
of this exhibit.
++ Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated by reference to the similarly described exhibits filed in
connection with the Registrant's Registration Statement on Form SB-2, File
No. 333-18155, declared effective by the Commission on February 12, 1997.
(2) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on July
18, 1997.
(3) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on
October 29, 1997.
(4) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on April
14, 1998.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a twenty percent (20%) change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii)
above do not apply if the registration statement is on Form S-3 or Form S-8,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) 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 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 jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
Pursuant to 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 S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Diego, State of California, on
May 15, 1998.
DAOU SYSTEMS, INC.
By: /s/ DANIEL J. DAOU
---------------------------------
Daniel J. Daou, PRESIDENT
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature
appears below on this Registration Statement hereby constitutes and appoints
Daniel J. Daou, Georges J. Daou and Fred C. McGee, and each and either of
them, with full power to act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (until revoked in writing) to sign any and all amendments
(including, without limitation, post-effective amendments and amendments
thereto) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Georges J. Daou Chief Executive Officer and May 15, 1998
- ------------------------- Chairman of the Board of
Georges J. Daou Directors (Principal Executive
Officer)
/s/ Daniel J. Daou President and Director May 15, 1998
- -------------------------
Daniel J. Daou
/s/ Fred C. McGee Senior Vice President, Chief May 15, 1998
- -------------------------- Financial Officer and Secretary
Fred C. McGee (Principal Financial and
Accounting Officer)
/s/ Larry D. Grandia Director May 15, 1998
- --------------------------
Larry D. Grandia
/s/ Richard B. Jaffe
- -------------------------- Director May 15, 1998
Richard B. Jaffe
/s/ David W. Jahns Director May 15, 1998
- --------------------------
David W. Jahns
/s/ John H. Moragne Director May 15, 1998
- --------------------------
John H. Moragne
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1(1) -- Agreement and Plan of Merger, dated as of January 9, 1997, by and
between the Registrant and DAOU Systems, Inc., a California
corporation.
2.2(2) -- Agreement and Plan of Merger, dated as of July 8, 1997, by and
among the Registrant, DAOU-Integrex, Inc., a Delaware corporation
and wholly-owned subsidiary of the Registrant, Integrex Systems
Corporation, a Delaware corporation, and the stockholders of
Integrex Systems Corporation.
2.3+(3) -- Agreement and Plan of Merger, dated as of September 25, 1997, by
and among the Registrant, DAOU On-Line, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant, On-
Line Networking, Inc., a New Jersey corporation, and the
stockholders of On-Line Networking, Inc.
2.4++(4) -- Agreement and Plan of Merger, dated as of March 27, 1998, by and
among the Registrant, DAOU-Synexus, Inc., a Delaware corporation
and wholly-owned subsidiary of the Registrant, Synexus
Incorporated, a Pennsylvania corporation, and the stockholders of
Synexus Incorporated.
2.5++(4) -- Agreement and Plan of Merger, dated as of March 30, 1998, by and
among the Registrant, DAOU-Sentient, Inc., a Delaware corporation
and wholly-owned subsidiary of the Registrant, Sentient Systems,
Inc., a Maryland corporation, and the stockholders of Sentient
Systems, Inc.
3.1(1) -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(1) -- Bylaws of the Registrant.
4.1 -- Reference is made to Exhibits 3.1 and 3.2.
4.2(1) -- Specimen stock certificate.
4.3(1) -- Investors' Rights Agreement, dated October 26, 1995, between the
Registrant and the parties named therein.
4.4(1) -- Series A Preferred Stock Purchase Warrant No. 1, dated
October 26, 1995, between the Registrant and Needham & Company,
Inc.
4.5(1) -- 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 as to the legality of the Common
Stock of the Registrant.
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
23.2 -- Consent of Deloitte & Touche LLP, Independent Auditors.
23.3 -- Consent of Coopers & Lybrand LLP, Independent Accountants.
23.4 -- Consent of Baker & McKenzie (included in Exhibit 5.1).
24.1 -- Power of Attorney (included on the signature page of this
Registration Statement).
</TABLE>
- -------------------
+ Confidential treatment has been granted with respect to certain portions of
this exhibit.
++ Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated by reference to the similarly described exhibits filed in
connection with the Registrant's Registration Statement on Form SB-2, File
No. 333-18155, declared effective by the Commission on February 12, 1997.
(2) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on July
18, 1997.
(3) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on
October 29, 1997.
(4) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on April
14, 1998.
<PAGE>
EXHIBIT 5.1
May 15, 1998
DAOU Systems, Inc.
5120 Shoreham Place
San Diego, CA 92122
Ladies and Gentlemen:
We have acted as counsel to DAOU Systems, Inc., a Delaware corporation (the
"Company"), in connection with its filing with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities
Act"), of a Registration Statement on Form S-3, including exhibits thereto
(the "Registration Statement"), covering up to 1,437,859 shares of the
Company's Common Stock, par value $0.001 per share (the "Shares").
We have examined the originals, or photostatic or certified copies, of such
records of the Company, certificates of officers of the Company and of public
officials, and such other documents as we have deemed relevant and necessary
as the basis of the opinion set forth below. In such examination, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as photostatic or certified copies and the authenticity of
the originals of such copies.
Based upon our examination, we are of the opinion that the Shares have been
validly authorized and are legally issued, fully paid and non-assessable.
We express no opinion as to the applicability of, compliance with, or effect
of federal law or the law of any jurisdiction other than the General
Corporation Law of the State of Delaware.
We hereby consent to the use of our opinion as herein set forth as an exhibit
to the Registration Statement and to the use of our name under the caption
"Legal Matters" in the prospectus forming a part of the Registration
Statement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Securities Act.
Very truly yours,
BAKER & MCKENZIE
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-3 and related Prospectus of DAOU Systems,
Inc. for the registration of 1,437,859 shares of its common stock and to the
incorporation by reference therein of our report dated January 20, 1998, with
respect to the consolidated financial statements of DAOU Systems, Inc.
included in its Annual Report on Form 10-KSB/A for the year ended December
31, 1997 and our report dated February 13, 1998 with respect to the
supplemental consolidated financial statements of DAOU Systems, Inc.
included in its Current Report on Form 8-K dated May 18, 1998 filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
San Diego, California
May 15, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of DAOU Systems, Inc. on Form S-3 of our report dated February 13, 1998,
relating to the financial statements of Sentient Systems, Inc. appearing in
Form 8-K/A of DAOU Systems, Inc. dated May 18, 1998, and to the reference to
us under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
DELOITTE & TOUCHE LLP
McLean, Virginia
May 15, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Form S-3 of DAOU Systems, Inc. of our report, dated March 8, 1996, on our
audit of the financial statements of Sentient Systems, Inc. as of November
30, 1995 and for the year then ended, which report is included in the current
report on Form 8-K/A for DAOU Systems, Inc. dated May 18, 1998. We also
consent to the reference to our firm under the caption "Experts" in this
registration statement.
/s/ COOPER & LYBRAND L.L.P.
McLean, Virginia
May 15, 1998