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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 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: / /
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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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value 2,116,732 $3.875 $8,202,337 $2,285
$0.001 per share
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(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 $3.875,
the average of the high and low 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
November 30, 1998, and the maximum aggregate offering price of $8,202,337
is the product of $3.875 and the number of shares of the Registrant's
Common Stock being registered hereby.
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.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 1, 1998
PROSPECTUS
[LOGO]
DAOU SYSTEMS, INC.
2,116,732 SHARES OF COMMON STOCK
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This Prospectus relates to the offering (this "Offering"), which is
not being underwritten, of 2,116,732 shares (the "Shares") of Common Stock,
par value $0.001 per share ("Common Stock") of DAOU Systems, Inc. ("DAOU"
or the "Company"). All of the Shares may be offered by the selling
stockholders identified in this Prospectus ("Selling Stockholders") or by
their pledgees, donees, transferees or other successors in interest that
receive such shares from a named Selling Stockholder after the date of this
Prospectus. All of the Shares were issued by DAOU in connection with
certain acquisitions described in the section entitled "Selling
Stockholders" beginning on page 9. The Shares were issued pursuant to an
exemption from the registration requirements of the Securities Act of 1933,
as amended (the "Securities Act"), provided by Section 4(2) thereof. The
Shares are being registered by DAOU pursuant to the terms of the respective
mergers. DAOU will not receive any of the proceeds from the sale of the
Shares by the Selling Stockholders.
DAOU's Common Stock is listed on the Nasdaq National Market under the
symbol "DAOU". On November 30, 1998, the closing sale price of the Common
Stock, as reported on the Nasdaq National Market, was $3.75 per share.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," BEGINNING ON PAGE 4.
THE SHARES OFFERED OR SOLD UNDER THIS PROSPECTUS HAVE NOT BEEN
APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAVE THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The Selling Stockholders may sell the Shares described in this
Prospectus in public or private transactions, on or off the National Market
System of the Nasdaq Stock Market, at prevailing market prices, or at
privately negotiated prices. The Selling Stockholders may sell the Shares
directly to purchasers or through broker-dealers. Broker-dealers may
receive compensation in the form of discounts, concessions or commissions
from the Selling Stockholders. More information is provided in the section
titled "Plan of Distribution" beginning on page 13.
The date of this prospectus is December 1, 1998.
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.
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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. The public may obtain information on the operation of the public
reference room by calling the Commission at 1-800-SEC-0330. 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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act (File No. 0-22073) are incorporated by reference in this
Prospectus:
- Annual Report on Form 10-KSB for the year ended December 31, 1997,
filed on March 10, 1998, as amended on Form 10-KSB/A filed on March
31, 1998;
- Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998
(filed on May 15, 1998), June 30, 1998 (filed on August 13, 1998) and
September 30, 1998 (filed on November 16, 1998);
- Definitive Proxy Statement on Schedule 14A filed April 21, 1998;
- Current Reports on Form 8-K filed on April 2, 1998, April 14, 1998,
May 8, 1998, June 19, 1998, July 6, 1998, July 10, 1998, August 5,
1998, August 7, 1998, August 31, 1998 and November 24, 1998;
- Current Reports on Form 8-K/A filed May 19, 1998 and September 8,
1998; and
- The description of the Common Stock contained in DAOU's Registration
Statement on Form 8-A filed on January 29, 1997, including any
amendment filed for the purpose of updating such description.
You may request a copy of these filings at no cost, by writing, telephoning
or e-mailing us at the following address and contact information:
DAOU Systems, Inc.
5120 Shoreham Place
San Diego, California 92122
Attention: Secretary
T: (619) 452-2221
e-mail: [email protected]
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REFERENCE DATA
Industry, market and market share information contained in this
Prospectus is based on information appearing in publicly available reports.
The Company has not independently verified such information.
FORWARD LOOKING STATEMENTS
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 below in the section entitled "Risk
Factors."
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 Technology Management, Inc., an Indiana corporation ("TMI"),
International Health Care Systems, Inc., a Florida corporation ("IHCS"),
Resources in Healthcare Innovations, Inc., an Indiana corporation ("RHI"),
Healthcare Transition Resources, Inc., an Indiana corporation ("HTR"), Ultitech
Resources Group, Inc., an Indiana corporation ("URG"), Innovative Systems
Solutions, Inc., an Indiana corporation ("ISS"), and Grand Isle Consulting,
Inc., an Indiana corporation ("GIC"), were each 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-Sentient, Inc., a
Delaware corporation, DAOU-TMI, Inc., a Delaware corporation ("DAOU-TMI") and
DAOU-RHI, Inc., a Delaware corporation ("DAOU-RHI"). 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.
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RISK FACTORS
AN INVESTMENT IN DAOU'S 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 WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED. PROSPECTIVE INVESTORS ARE CAUTIONED
THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. FORWARD-LOOKING STATEMENTS USUALLY CONTAIN THE WORDS
"ESTIMATE," "ANTICIPATE," "BELIEVE", "EXPECT" OR SIMILAR EXPRESSIONS. ALL
FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON VARIOUS
EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS AND ARE SUBJECT TO
NUMEROUS KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. THE FORWARD-LOOKING
STATEMENTS INCLUDED HEREIN ARE BASED ON CURRENT EXPECTATIONS AND ENTAIL VARIOUS
RISKS AND UNCERTAINTIES AS THOSE SET FORTH BELOW AND IN THE COMPANY'S OTHER SEC
FILINGS. THESE RISKS AND UNCERTAINTIES COULD CAUSE THE COMPANY'S ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
MANAGEMENT OF GROWTH. The Company recently has experienced a period of
rapid growth that has placed significant and increasing demands on the
Company's management and operational, technical, financial and other
resources. For the nine months ended September 30, 1998, the Company's
revenues increased 71% to $79.4 million from $46.5 million for the nine
months ended September 30, 1997. For the year ended December 31, 1997, the
Company's revenues increased 36% to $69.1 million from $50.9 million for the
year ended December 31, 1996. For the year ended December 31, 1996, the
Company's revenues increased 40% to $50.9 million from $36.4 million for the
year ended December 31, 1995. In addition, since January 1, 1995, the
Company's workforce increased from 198 to more than 800 full-time employees
as of September 30, 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. These responsibilities and demands are
compounded by the fact that a substantial portion of the Company's current
revenue derives from businesses that have been acquired by the Company since
mid-1997. In addition, there can be no assurance 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 TECHNICAL
PERSONNEL. 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 future success of the
Company's labor-intensive business will depend in large part on its ability
to hire, train and retain qualified technical personnel who together have
expertise in a wide array of network and computer systems and a broad
understanding of the hospitals, integrated healthcare delivery networks and
other healthcare provider organizations that the Company serves. Competition
for qualified technical personnel 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 technical personnel 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 mergers Integrex Systems Corporation, a Delaware corporation, and
On-Line Networking, Inc., a New Jersey corporation. During 1998, the Company
has acquired through mergers Synexus Incorporated, a Pennsylvania
corporation, Sentient Systems, Inc. a Maryland corporation, TMI, IHCS, RHI,
HTR, URG, ISS and GIC. As part of its business strategy, the Company may
pursue additional acquisitions of complementary businesses as it seeks to
compete in the rapidly
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changing industry of healthcare information technology. Acquisitions involve
numerous risks, including (i) difficulties in the assimilation of the operations
and personnel of the acquired business, (ii) difficulties in the integration of
management information and accounting systems of the acquired business, (iii)
the diversion of management's attention from other business concerns, (iv) risks
of entering markets in which the Company has no direct prior experience, and (v)
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 the recently acquired businesses, any newly acquired businesses,
as well as to any material operational or financial problems arising from such
acquisitions. There can be no assurance that operational or financial problems
will not occur as a result of any acquisition. Failure to effectively integrate
acquired businesses could have a material adverse effect on the Company's
business, financial condition and results of operations.
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. The
Company believes that the number and size of its existing projects are not
reliable indicators or measures of future revenues. 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"), previously 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. 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 technical and other personnel to other projects in
order to minimize the under-utilization of employees and the resulting
adverse impact on operating results. Furthermore, 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 DAOU's 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, including increased labor costs due to delays in project
delivery schedules; (iv) the failure to secure new contracts at the budgeted
rate; (v) the relatively longer sales cycle in obtaining new customers and
larger contracts; (vi) the timing and extent of employee training or the loss
of key employees; (vii) competition; (viii) the development and introduction
of new services; (ix) variations in the product or professional service
content of the Company's projects; (x) the effect of acquisitions, including
additional administrative staffing and other increased infrastructure
requirements to integrate the acquired companies; (xi) the effect of negative
publicity or litigation; and (xii) 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 technical personnel and other employees, and
adding new offices, systems and other infrastructure. The resulting increase
in operating expenses, including personnel costs and related recruiting
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 projects or contracts, particularly at or near the end of any
quarter, may cause significant variations in operating results from quarter
to quarter. In addition, an unanticipated delay or termination of a major
project or contract (or series of smaller projects or contracts) 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
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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 nine months
ended September 30, 1998, the Company's five largest customers accounted for
approximately 18% of total revenues. For the year ended December 31, 1997,
the Company's five largest customers accounted for approximately 22% of total
revenues. For the year ended December 31, 1996, the Company's five largest
customers accounted for approximately 27% of total 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. 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 claims 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 (i) system integrators, (ii)
value added resellers, (iii) consulting companies, (iv) local and regional
network services firms, (v) telecommunications providers and network
equipment vendors, and (vi) computer systems and healthcare software vendors.
Many of the Company's competitors have significantly greater financial,
technical and marketing resources and greater name recognition than the
Company. The Company's competitors include 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,
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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. The Company also 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.
FIXED-PRICE, FIXED-TIME FRAME CONTRACTS. The Company provides 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 committed fixed-time frame 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 also could 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 technical
personnel 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.
7
<PAGE>
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. Many computer programs and microprocessors
use two digits rather than four to define the applicable year. 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. However, DAOU currently is conducting
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. The Company currently expects to complete this
review during the first quarter of 1999. Based on this review to date, the
Company does not expect the Year 2000 issue to have a material adverse effect on
its business, financial condition and results of operations. In addition, the
Company is requesting assurances from all software and hardware vendors from
which it has purchased or from which it may purchase software and software that
the software and hardware 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 and software will face in correctly processing date information as the
Year 2000 approaches and is reached. However, there can be no assurance that
DAOU has identified or 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.
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT. As of November 27,
1998, the Company's executive officers, directors and their respective family
members and affiliates beneficially own approximately 28% 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 17,689,728 shares of Common Stock outstanding
as of November 27, 1998, 15,452,081 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) or are
otherwise subject to certain sale volume limitations and other restrictions
under Rule 144. The remaining 2,237,647 shares will be "restricted
securities" as such term is defined in Rule 144.
In addition, the Company has registered on a Form S-8 Registration
Statement an aggregate of 4,000,000 shares of Common Stock reserved for
issuance under the DAOU Systems, Inc. 1996 Stock Option Plan, as amended, of
which options
8
<PAGE>
to purchase a total of 3,324,650 shares were outstanding as of September 30,
1998. 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. For example, Section 203 of the Delaware General Corporation Law
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 (the "Board") 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 (i) provide for a classified board of directors, (ii)
eliminate the right of stockholders to act by written consent without a meeting,
(iii) require advanced stockholder notice to nominate directors and raise
matters at the annual stockholders meeting, (iv) eliminate cumulative voting in
the election of directors and (v) 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.
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.
THE COMPANY
DAOU provides integrated information technology ("IT") solutions and
services to the United States healthcare industry. DAOU's capabilities range
from initial strategic consulting to IT system design, implementation and
long-term tactical support. DAOU's IT offerings include data, voice and video
networking, applications consulting and implementation, as well as operational
and Internet solutions. 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
designs. 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 and information systems
function outsourcing. DAOU offers a 24-hour technical support hotline available
to customers seven days a week.
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."
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."
SELLING STOCKHOLDERS
On June 25, 1998, the Company acquired 100% of the issued and outstanding
shares of TMI and IHCS through the issuance of 1,078,963 and 224,668 shares of
Common Stock, respectively, to the stockholders of TMI (the "TMI Stockholders"),
and the stockholders of IHCS (the "IHCS Stockholders"). This acquisition was
accomplished by means of a merger of TMI and IHCS with and into DAOU-TMI
pursuant to the terms of (i) an
9
<PAGE>
Agreement and Plan of Merger, dated as of June 16, 1998 (as amended, the "TMI
Merger Agreement"), by and among the Company, DAOU-TMI, TMI and the TMI
Stockholders and (ii) an Agreement and Plan of Merger, dated as of June 16,
1998 (as amended, the "IHCS Merger Agreement"), by and among the Company,
DAOU-TMI, IHCS and the IHCS Stockholders. In connection with the Company's
acquisition of TMI and IHCS, the TMI Merger Agreement and the IHCS Merger
Agreement provided that the Company would register fifty (50%) of the shares
of Common Stock issued to each of the TMI Stockholders and the IHCS
Stockholders, respectively.
On July 24, 1998, the Company acquired 100% of the issued and outstanding
shares of RHI, HTR, URG, ISS and GIC through the issuance of 1,839,381, 275,662,
282,551, 308,583 and 223,645 shares of Common Stock, respectively, to the
stockholders of RHI, HTR, URG, ISS and GIC (collectively, the "RHI
Stockholders"), which companies had certain common stockholders. This
acquisition was accomplished by means of a merger of RHI, HTR, URG, ISS and GIC
with and into DAOU-RHI pursuant to the terms of an Agreement and Plan of Merger,
dated as of June 26, 1998 (as amended, the "RHI Merger Agreement"), by and among
the Company, DAOU-RHI, RHI, HTR, URG, ISS, GIC and the RHI Stockholders. In
connection with the Company's acquisition of RHI, HTR, URG, ISS and GIC, the RHI
Merger Agreement provided that the Company would register fifty percent (50%) of
the shares of Common Stock issued to each of the RHI Stockholders, respectively.
The TMI Stockholders, the IHCS Stockholders and the RHI 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 any of 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 TMI Merger Agreement and the IHCS Merger Agreement, the
Company has agreed to use its best efforts to keep the Registration Statement
continuously effective, 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 ten months immediately following the effective date
of the Registration Statement (the "TMI/IHCS 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 TMI/IHCS Effective Period.
Pursuant to the RHI Merger Agreement, the Company has agreed to use its
best efforts to keep the Registration Statement continuously effective, 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 two
years immediately following the effective date of the Registration Statement
(the "RHI 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 RHI Effective Period.
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.
10
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
AT NOVEMBER 27, 1998(1) AFTER OFFERING(1)
--------------------------- ----------------------
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>
D. Parker Hinshaw 1,103,032 6.2% 551,516 551,516 3.1%
Eileen M. Weldon 885,519 5.0% 442,760 442,759 2.5%
Vincent K. Roach 689,527(4) 3.9% 315,641 373,886(5) 2.1%
Kent L. Wall 464,859 2.6% 232,430 232,429 1.3%
Larry W. Collins 457,195 2.6% 228,598 228,597 1.3%
Daniel W. Murry 123,433 * 61,717 61,716 *
Carol R. Selvey 113,020 * 56,510 56,510 *
Darryl Bollinger 110,265 * 55,133 55,132 *
Charles G. Shelley, Jr. 109,586 * 54,793 54,793 *
Michael A. Weiher 97,866(6) * 30,583 67,283(6) *
Linda K. Gentry 48,933(7) * 19,573 29,360(7) *
Micheal D. Fisher 48,934(8) * 14,680 34,254(8) *
Jennifer Arthur 27,772 * 13,886 13,886 *
Mercedes McKenzie-Veal 29,360(9) * 8,563 20,797(9) *
Vincent K. Roach, as Limited 11,649 * 5,825 5,824 *
Guardian for
Dov Zalman Sloman
Vincent K. Roach, as Limited 11,649 * 5,825 5,824 *
Guardian for Jonathan Sloman
Vincent K. Roach, as Limited 11,649 * 5,825 5,824 *
Guardian for
Adin Samuel Sloman
Vincent K. Roach, as Custodian 11,649 * 5,825 5,824 *
for Abel E. Herrera, Jr.
Vincent K. Roach, as Custodian 11,649 * 5,825 5,824 *
for Lisa Mendizabal
Gina M. Craig 2,447 * 1,224 1,223 *
</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.
11
<PAGE>
(2) Based upon 17,689,728 shares of Common Stock outstanding as of November 27,
1998.
(3) Assumes the sale of all of the Shares offered hereby to persons who are not
affiliates of the Selling Stockholders.
(4) Includes 58,245 shares of Common Stock, of which 11,649 are owned by each
of Dov Zalman Sloman, Jonathan Sloman, Adin Samuel Sloman, Abel E. Herrera,
Jr. and Lisa Mendizabal. Mr. Roach may be deemed to beneficially own such
shares in his capacity as Limited Guardian for Dov Zalman Sloman, Jonathan
Sloman and Adin Samuel Sloman, and in his capacity as Custodian for Abel E.
Herrera, Jr. and Lisa Mendizabal. Mr. Roach has exclusive power to vote
and to dispose of such shares.
(5) Includes 29,120 shares of Common Stock, of which 5,824 are owned by each of
Dov Zalman Sloman, Jonathan Sloman, Adin Samuel Sloman, Abel E. Herrera,
Jr. and Lisa Mendizabal. Mr. Roach may be deemed to beneficially own such
shares in his capacity as Limited Guardian for Dov Zalman Sloman, Jonathan
Sloman and Adin Samuel Sloman, and in his capacity as Custodian for Abel E.
Herrera, Jr. and Lisa Mendizabal. Mr. Roach has exclusive power to vote
and to dispose of such shares.
(6) Includes 36,700 shares issuable under stock options, which are currently
exercisable and expire on December 31, 1998.
(7) Includes 9,787 shares issuable under stock options, which are currently
exercisable and expire on December 31, 1998.
(8) Includes 19,574 shares issuable under stock options, which are currently
exercisable and expire on December 31, 1998.
(9) Includes 12,234 shares issuable under stock options, which are currently
exercisable and expire on December 31, 1998.
12
<PAGE>
PLAN OF DISTRIBUTION
The Company is registering the Shares on behalf of the Selling
Stockholders. As used herein, the "Selling Stockholders" include donees and
pledgees selling any of the Shares received from a named Selling Stockholder
after the date of this Prospectus. 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, through put or call
option transactions relating to the Shares, through short sales of Shares 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
underwriters, broker-dealers or agents 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 underwriter,
broker-dealer or agent. The Company will not receive any of the proceeds
from the sale of the Shares by the Selling Stockholders.
The Selling Stockholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in
short sales of shares of the Company's Common Stock in the course of hedging
the positions that they assume with the Selling Stockholders. The Selling
Stockholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of Shares offered hereby,
which Shares such broker-dealers or other financial institution may resell
pursuant to this Prospectus (as supplemented to reflect such transactions).
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 TMI/IHCS Effective Period and the RHI 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 Rule 144 rather than pursuant to this
Prospectus.
The Selling Stockholders and 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. Any
commissions received by such broker-dealers and any profit on the resale of the
Shares sold by such broker-dealers while acting as principals might be deemed to
be underwriting discounts or commissions under the Securities Act.
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, broker-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. The Selling Stockholders may
agree to indemnify any underwriter, broker-dealer or agent that participates in
transactions involving sales of the Shares against certain liabilities,
including liabilities arising under the Securities Act.
13
<PAGE>
Upon DAOU's being notified by a Selling Stockholder that any material
arrangement has been entered into with a broker-dealer for the sale of Shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
Prospectus will be filed, if required, pursuant to the Securities Act,
disclosing (i) the name of each such Selling Stockholder and of the
participating broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such shares were sold, (iv) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that
such broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this Prospectus and (vi)
other facts material to the transaction. In addition, upon DAOU's being
notified by a Selling Stockholder that a donee or pledgee intends to sell
more than 500 shares, a supplement to this Prospectus will be filed.
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 engage simultaneously 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 in this Prospectus 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.'s 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.'s Current Report on Form 8-K
dated November 24, 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
PricewaterhouseCoopers 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........................................ 2
Incorporation of Certain Information by Reference............ 2
Reference Data............................................... 3
Forward Looking Statements................................... 3
Summary...................................................... 3
The Company.................................................. 9
Use of Proceeds.............................................. 9
Selling Stockholders......................................... 9
Plan of Distribution......................................... 13
Legal Matters................................................ 14
Experts...................................................... 14
</TABLE>
2,116,732 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
December 1, 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) . . . $ 2,285
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . 7,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . 22,500
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
-------------
Total $36,785
-------------
-------------
</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
- ------- -----------
<C> <S>
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.
2.6+,(5) -- Agreement and Plan of Merger, dated as of June 16, 1998, by
and among the Registrant, DAOU-TMI, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant,
Technology Management, Inc., an Indiana corporation, and the
stockholders of Technology Management, Inc.
2.7+,(5) -- Agreement and Plan of Merger, dated as of June 16, 1998, by
and among the Registrant, DAOU-TMI, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant,
International Health Care Systems, Inc., a Florida
corporation, and the stockholders of International Health
Care Systems, Inc.
2.8+,(6) -- Agreement and Plan of Merger, dated as of June 26, 1998, by
and among the Registrant, DAOU-RHI, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant,
Resources in Healthcare Innovations, Inc., an Indiana
corporation, Healthcare Transition Resources, Inc., an
Indiana corporation, Ultitech Resources Group, Inc., an
Indiana corporation, Innovative Systems Solutions, Inc., an
Indiana corporation, Grand Isle Consulting, Inc., an Indiana
corporation, and the stockholders of Resources in Healthcare
Innovations, Inc., the stockholders of Healthcare Transition
Resources, Inc., the stockholders of Ultitech Resources
Group, Inc., the stockholders of Innovative Systems
Solutions, Inc., and the stockholders of Grand Isle
Consulting, Inc.
4.1(1) -- Amended and Restated Certificate of Incorporation of the
Registrant.
4.2(1) -- Bylaws of the Registrant.
4.3(1) -- Specimen stock certificate.
4.4(1) -- Investors' Rights Agreement, dated October 26, 1995, between
the Registrant and the parties named therein.
4.5(1) -- Series A Preferred Stock Purchase Warrant No. 1, dated
October 26, 1995, between the Registrant and Needham &
Company, Inc.
4.6(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 PricewaterhouseCoopers LLP, independent accountants
II-2
<PAGE>
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.
(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.
(5) 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
10, 1998.
(6) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on August
7, 1998.
II-3
<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-4
<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 December 1, 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 Chairman of the Board December 1, 1998
Georges J. Daou of Directors (Principal Executive Officer)
/s/ DANIEL J. DAOU
- ---------------------------- President and Director December 1, 1998
Daniel J. Daou
/s/ FRED C. MCGEE Executive Vice President, Chief Financial Officer December 1, 1998
- ---------------------------- and Secretary (Principal Financial and Accounting
Fred C. McGee Officer)
/s/ LARRY D. GRANDIA
- ---------------------------- Director December 1, 1998
Larry D. Grandia
/s/ RICHARD B. JAFFE
- ---------------------------- Director December 1, 1998
Richard B. Jaffe
/s/ DAVID W. JAHNS
- ---------------------------- Director December 1, 1998
David W. Jahns
- ---------------------------- Director December 1, 1998
John H. Moragne
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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.
2.6+,(5) -- Agreement and Plan of Merger, dated as of June 16, 1998,
by and among the Registrant, DAOU-TMI, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant,
Technology Management, Inc., an Indiana corporation, and
the stockholders of Technology Management, Inc.
2.7+,(5) -- Agreement and Plan of Merger, dated as of June 16, 1998,
by and among the Registrant, DAOU-TMI, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant,
International Health Care Systems, Inc., a Florida
corporation, and the stockholders of International Health
Care Systems, Inc.
2.8+,(6) -- Agreement and Plan of Merger, dated as of June 26, 1998,
by and among the Registrant, DAOU-RHI, Inc., a Delaware
corporation and wholly-owned subsidiary of the Registrant,
Resources in Healthcare Innovations, Inc., an Indiana
corporation, Healthcare Transition Resources, Inc., an
Indiana corporation, Ultitech Resources Group, Inc., an
Indiana corporation, Innovative Systems Solutions, Inc.,
an Indiana corporation, Grand Isle Consulting, Inc., an
Indiana corporation, and the stockholders of Resources in
Healthcare Innovations, Inc., the stockholders of
Healthcare Transition Resources, Inc., the stockholders of
Ultitech Resources Group, Inc., the stockholders of
Innovative Systems Solutions, Inc., and the stockholders
of Grand Isle Consulting, Inc.
4.1(1) -- Amended and Restated Certificate of Incorporation of the
Registrant.
4.2(1) -- Bylaws of the Registrant.
4.3(1) -- Specimen stock certificate.
4.4(1) -- Investors' Rights Agreement, dated October 26, 1995,
between the Registrant and the parties named therein.
4.5(1) -- Series A Preferred Stock Purchase Warrant No. 1, dated
October 26, 1995, between the Registrant and Needham &
Company, Inc.
4.6(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 PricewaterhouseCoopers 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>
<PAGE>
___________________________
+ Confidential treatment has been granted 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.
(5) 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
10, 1998.
(6) Incorporated by reference to the exhibit filed in connection with the
Registrant's Current Report on Form 8-K filed with the Commission on August
7, 1998.
<PAGE>
EXHIBIT 5.1
Opinion of Baker & McKenzie
December 1, 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 2,116,732 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
/s/ 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 2,116,732 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
on report dated August 4, 1998 with respect to the supplemental consolidated
financial statements of DAOU Systems, Inc. included in its Current Report on
Form 8-K filed with the Securities and Exchange Commission on November 24, 1998.
/s/ ERNST & YOUNG LLP
--------------------------
San Diego, California
November 30, 1998
<PAGE>
Exhibit 23.2
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
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
-------------------------------
McLean, Virginia
December 1, 1998
<PAGE>
Exhibit 23.3
CONSENT OF PricewaterhouseCoopers LLP, 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/PricewaterhouseCoopers LLP
-----------------------------
McLean, Virginia
November 30, 1998
