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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 17, 1998
REGISTRATION STATEMENT NO. 333-47777
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
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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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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PROSPECTUS
[LOGO]
DAOU SYSTEMS, INC.
253,691 SHARES OF COMMON STOCK
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This Prospectus relates to the offer and sale (this "Offering") of up to
253,691 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.
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The Shares offered for resale by the Selling Stockholders are being offered
pursuant to certain registration rights set forth in the Integrex Merger
Agreement and the On-Line Merger Agreement. See "Selling Stockholders."
The Common Stock is traded on Nasdaq under the symbol "DAOU." On March 9,
1998, the closing bid and asked prices of the Common Stock were $24.500 and
$24.750, 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 MARCH ___, 1998.
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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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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:
1 the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997, filed with the Commission on March 10, 1998;
and
2 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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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 Integrex Systems Corporation, a Delaware corporation ("Integrex"),
and On-Line Networking, Inc., a New Jersey corporation ("On-Line"), 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-Integrex"), and DAOU On-Line, Inc., a Delaware Corporation
("DAOU On-Line"). 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.
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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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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 47% to
$41.7 million from $28.4 million for the year ended December 31, 1996. For the
year ended December 31, 1996, the Company's revenues increased 43% to
$28.4 million from $19.9 million for the year ended December 31, 1995. For the
year ended December 31, 1995, the Company's revenues increased 83% to $19.9
million from $10.9 million for the year ended December 31, 1994. In addition,
since January 1, 1995, the Company's workforce increased from 78 to 300
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 and On-Line. 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 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.
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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 36% of
total revenues, with Candler accounting for approximately 10% of such revenues.
In 1996, the Company's five largest customers accounted for approximately 48% of
total revenues, with (i) Catholic Medical Center of Brooklyn and Queens, Inc.,
New York, (ii) Mercy Health Services, Farmington Hills, Michigan, and (iii)
Candler accounting for approximately 14%, 12% and 10% of such revenues,
respectively. The volume of work performed for specific customers is likely to
vary from year to year, and a major customer in one year may not provide the
same level of revenues in any subsequent year. For example, 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 loss of any
large customer could have a material adverse effect on the Company's business,
financial condition and results of operations.
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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.
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
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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 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
-9-
<PAGE>
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 11,826,654 shares of Common Stock outstanding as of
March 6, 1998, after this Offering, 7,492,514 shares of Common Stock will be
freely tradeable without restriction in the public market, unless such shares
are held by "affiliates" of the Company, as such term is defined in Rule 144
("Rule 144") promulgated under the Securities Act. The remaining 4,334,140
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 3,000,000 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.
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.
-10-
<PAGE>
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 July 9, 1997, the Company acquired 100% of the issued and outstanding
shares of Integrex through the issuance of 700,000 shares of Common Stock to the
stockholders of Integrex (the "Integrex Stockholders"). This acquisition was
accomplished by means of a merger of Integrex with and into DAOU-Integrex
pursuant to the terms of an Agreement and Plan of Merger, dated as of July 8,
1997 (the "Integrex Merger Agreement"), by and among the Company, DAOU-Integrex,
Integrex and the Integrex Stockholders. In connection with the Company's
acquisition of Integrex, the Integrex Merger Agreement provided that the Company
would register (i) ten percent (10%) of the shares of Common Stock issued to
each of the Integrex Stockholders (other than Charles C. Joyce) and (ii) all of
the shares of Common Stock issued to Charles C. Joyce. In addition, DAOU has
elected to register (i) twenty percent (20%) of the shares of Common Stock
issued to each of J. Kirby Farrell, Jr., Jonathan P. Kendall and Michael P.
Wheeler and (ii) all of the shares of Common Stock issued to each of John E.
Gray and Michael A. Brunner.
On October 15, 1997, the Company acquired 100% of the issued and
outstanding shares of On-Line through the issuance of 150,000 shares of Common
Stock to the stockholders of On-Line (the "On-Line Stockholders"). This
acquisition was accomplished by means of a merger of On-Line with and into DAOU
On-Line pursuant to the terms of an Agreement and Plan of Merger, dated as of
September 25, 1997 (the "On-Line Merger Agreement"), by and among the Company,
DAOU On-Line, On-Line and the On-Line Stockholders. Under the On-Line Merger
Agreement, the On-Line Stockholders received certain "piggyback" registration
rights with respect to 25% of the shares of Common Stock issued to each of the
On-Line Stockholders, respectively, in connection with the Company's acquisition
of On-Line.
The Integrex Stockholders and the On-Line Stockholders constitute all of
the Selling Stockholders. DAOU has filed the Registration Statement of which
this Prospectus forms a part 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 Integrex 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
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 period of six months immediately following the effective date of the
Registration Statement (the "Effective Period"); provided, however, that in the
event that the Company determines in good faith that, because it has under
consideration a significant acquisition or disposition or other material
transaction that has not been publicly disclosed or that 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 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 MARCH 6, 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 OF CLASS(2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J. Kirby Farrell, Jr. 249,996 2.1% 50,000 199,996 1.7%
Jonathan P. Kendall 249,996 2.1 50,000 199,996 1.7
Michael P. Wheeler 104,772 * 20,955 83,817 *
Charles C. Joyce 83,332 * 83,332 -- --
Steven C. Dickson 50,000 * 12,500 37,500 *
Kevin T. Carr 50,000 * 12,500 37,500 *
Clifford DiPalmer 50,000 * 12,500 37,500 *
John E. Gray 5,952 * 5,952 -- --
Michael A. Brunner 5,952 * 5,952 -- --
</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 11,826,654 shares of Common Stock outstanding as of March 6,
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 Effective Period. 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 the Company audited by Ernst &
Young LLP, are incorporated by reference herein, in reliance upon their report
given on 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>
253,691 SHARES
[DAOU SYSTEMS, INC. LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
March __, 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 . $ 2,050.00
Accounting Fees and Expenses. . . . . . . . . . . . . . 2,500.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . 22,500.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . 1,500.00
----------
Total. . . . . . . . . . . . . . . . . . . . . . . $28,550.00
----------
----------
</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> <C>
2.1(1) -- Agreement and Plan of Merger, dated 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, 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.
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.
23.2 -- Consent of Baker & McKenzie (included in Exhibit 5.1).
24.1* -- Power of Attorney.
</TABLE>
- ----------------------
+ Confidential treatment has been granted with respect to certain portions
of this exhibit.
* Previously filed.
(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.
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
II-2
<PAGE>
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
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on March 17, 1998.
DAOU SYSTEMS, INC.
By: /s/ DANIEL J. DAOU
----------------------------------------
Daniel J. Daou, PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities indicated on March 17, 1998.
SIGNATURE TITLE DATE
--------- ----- ----
* Chief Executive Officer and
- ---------------------------- Chairman of the Board of
Georges J. Daou Directors (Principal Executive
Officer)
/s/ DANIEL J. DAOU
- ---------------------------- President and Director
Daniel J. Daou
* Senior Vice President, Chief
- ---------------------------- Financial Officer and Secretary
Fred C. McGee (Principal Financial and
Accounting Officer)
*
- ---------------------------- Director
Richard B. Jaffe
*
- ---------------------------- Director
David W. Jahns
*
- ---------------------------- Director
John H. Moragne
* By: /s/ DANIEL J. DAOU
--------------------------------
Daniel J. Daou, Attorney-in-Fact
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------------
<S> <C> <C>
2.1(1) -- Agreement and Plan of Merger, dated 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, 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.
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.
23.2 -- Consent of Baker & McKenzie (included in Exhibit 5.1).
24.1* -- Power of Attorney.
</TABLE>
- -------------------------
+ Confidential treatment has been granted with respect to certain portions
of this exhibit.
* Previously filed.
(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.
<PAGE>
March 17, 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 253,691 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,
/s/ BAKER & MCKENZIE
- --------------------
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
Amendment No. 1 to the Registraton Statement (Form S-3) for the registration
of shares of DAOU Systems, Inc. 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 (Form 10-KSB) for the year ended December 31, 1997, filed with
the Securities and Exchange Commission.
San Diego, California ERNST & YOUNG LLP
March 16, 1998
