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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 27, 1999
DAOU SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
0-22073 330284454
(Commission File Number) (IRS Employer Identification No.)
5120 Shoreham Place, San Diego, California 92122
(Address of principal executive offices, including zip code)
(619) 452-2221
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS.
On July 27, 1999, DAOU Systems, Inc. ("DAOU") completed a $12 million
private placement financing involving the sale of 2,181,818 shares of Series A
Preferred Stock (the "SHARES") to certain investors at the purchase price of
$5.50 per share. DAOU will use the net proceeds from the sale of the Shares for
general corporate and working capital purposes.
The Shares were purchased by Galen Partners III, L.P., a Delaware
limited partnership ("GALEN III"), and certain affiliated entities. Each Share
is convertible into one share of DAOU Common Stock, subject to certain
anti-dilution adjustments. Holders of the Shares will be entitled to receive
dividends at the annual rate of six percent, payable in shares of Series A
Preferred Stock.
The Shares are redeemable at DAOU's option on or after July 27, 2003,
and at the option of the holders under specified terms and conditions. In
addition, the Shares are subject to mandatory conversion in the event that the
price per share of DAOU's Common Stock reaches certain specified price targets.
The above summary is qualified in its entirety by the terms and
provisions of the exhibits filed with this Current Report on Form 8-K.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
The following exhibits are filed herewith or incorporated by reference
as part of this report:
<TABLE>
<CAPTION>
Exhibit
No. Document Description
-------------- --------------------------------------------
<S> <C>
4.1 Certificate of Designations of DAOU, as
filed with the Secretary of State of the
State of Delaware on July 23, 1999.
4.2 Registration Rights Agreement, dated as of
July 26, 1999, by and among DAOU, Galen
III, Galen Partners International III,
L.P., a Delaware limited partnership
("GALEN INTERNATIONAL"), and Galen Employee
Fund III, L.P., a Delaware limited
partnership ("GALEN EMPLOYEE FUND").
10.1 Voting Agreement, dated as of July 26, 1999,
by and among DAOU, Daniel J. Daou, Georges
J. Daou, Galen III, Galen International and
Galen Employee Fund.
10.2 Stock Purchase Agreement, dated as of July
26, 1999, by and among DAOU, Galen III,
Galen International and Galen Employee
Fund.
99 Press release dated July 28, 1999, entitled
"DAOU Systems, Inc. Completes $12 Million
Private Placement Financing from Galen
Partners."
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
Date: July 29, 1999 DAOU SYSTEMS, INC.
By: /s/ FRED C. MCGEE
--------------------------------------
Fred C. McGee, Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Document Description
-------------- --------------------------------------------
<S> <C>
4.1 Certificate of Designations of DAOU, as
filed with the Secretary of State of the
State of Delaware on July 23, 1999.
4.2 Registration Rights Agreement, dated as of
July 26, 1999, by and among DAOU, Galen III,
Galen International and Galen Employee Fund.
9 Voting Agreement, dated as of July 26, 1999,
by and among DAOU, Daniel J. Daou, Georges
J. Daou, Galen III, Galen International and
Galen Employee Fund.
10 Stock Purchase Agreement, dated as of July
26, 1999, by and among DAOU, Galen III,
Galen International and Galen Employee Fund.
99 Press release dated July 28, 1999, entitled
"DAOU Systems, Inc. Completes $12 Million
Private Placement Financing from Galen
Partners."
</TABLE>
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CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
SERIES A PREFERRED STOCK
OF
DAOU SYSTEMS, INC.
-------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-------------------------
DAOU Systems, Inc. (the "CORPORATION"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, certifies
that pursuant to the authority contained in Article IV of its Restated
Certificate of Incorporation (the "CERTIFICATE OF INCORPORATION") and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, the Board of Directors of the Corporation by resolution
dated July 22, 1999 duly approved and adopted the following resolution which
resolution remains in full force and effect on the date hereof:
RESOLVED, that pursuant to the authority vested in the Board of
Directors by its Certificate of Incorporation, the Board of Directors does
hereby designate, create, authorize and provide for the issue of Series A
Preferred Stock (the "SERIES A PREFERRED STOCK"), par value $0.001 per share,
consisting of Three Million Five Hundred Twenty Thousand Two Hundred Fifty-Five
(3,520,255) shares, having the following voting powers, preferences and
relative, participating, optional and other special rights, and qualifications,
limitations and restrictions thereof as follows:
1. DIVIDEND PROVISIONS. Subject to the rights of series of
Preferred Stock which may from time to time come into existence in compliance
with the provisions of SECTION 7 and the other limitations set forth in this
SECTION 1, the holders of shares of the Series A Preferred Stock shall be
entitled to receive dividends out of any assets legally available therefor,
prior and in preference to any declaration or payment of any dividend (other
than a dividend payable solely in Common Stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of Common Stock) on the Common Stock, at the rate
(1) of six percent (6%) per annum based on the Series A Issue Price (as
hereinafter defined in SUBSECTION 2(A)) per share of the Series A Preferred
Stock (appropriately adjusted for any stock split, dividend, combination or
other recapitalization) for the first two
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years after the date upon which any shares of Series A Preferred Stock were
first issued (the "PURCHASE DATE" with respect to such series), plus (2) an
additional one percent (1%) per annum based on the Series A Issue Price
(appropriately adjusted for any stock split, dividend, combination or other
recapitalization) for each successive year after the second anniversary of
the Purchase Date, which shall accrue and be payable (whether or not
declared) semi-annually in shares of Series A Preferred valued at such Series
A Issue Price (the "PIK DIVIDEND"). The PIK Dividend shall increase to a
rate of twelve percent (12%) per annum if a Registration Statement on Form
S-3 (or other similar form) covering the continuous sale of the shares of
Common Stock into which the Series A Preferred Stock shall have converted
pursuant to Rule 415 under the Securities Act or any successor thereto has
not been declared effective by the Securities and Exchange Commission ("SEC")
by the date that is 120 days after the Purchase Date (the "SHELF REGISTRATION
DEADLINE"). In such event, the PIK Dividend rate shall return to its prior
rate (six percent (6%) as of the Purchase Date) after the date that the
Registration Statement is declared effective. Such dividends shall be
subject to the rights of series of Preferred Stock which may from time to
time come into existence in compliance with the provisions of SECTION 7,
shall be paid to the extent assets are legally available therefor and any
amounts for which assets are not legally available shall be paid promptly as
assets become legally available therefor; any partial payment will be made
pro rata among the holders of such shares. Unless full dividends on the
Series A Preferred Stock for the then current dividend period shall have been
paid or declared and a sum sufficient for the payment thereof set apart, no
dividend whatsoever (other than a dividend payable solely in Common Stock or
other securities and rights convertible into or entitling the holder thereof
to receive, directly or indirectly, additional shares of Common Stock) shall
be paid or declared, and no distribution shall be made, on any Common Stock.
After full dividends on the Series A Preferred Stock for the then current
dividend period have been paid, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock shall participate in any
further dividends on a pro rata basis determined by the number of shares of
Common Stock held by each (assuming conversion of all such Series A Preferred
Stock).
In the event that payment of PIK Dividends on any dividend payment
date would cause the Corporation to issue more than 19.9% of its outstanding
shares of Common Stock at a price below the market price on the principal market
on which its equity securities are traded ("PRINCIPAL MARKET"), the dividends
which otherwise would be payable as PIK Dividends shall become payable in cash.
2. LIQUIDATION PREFERENCE.
a. In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock which may from time to time come into existence in
compliance with the provisions of SECTION 7, the holders of Series A Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets of the Corporation to the holders of Common Stock by reason
of their ownership thereof, an amount per share equal to the sum of (i) Five
Dollars and Fifty Cents ($5.50) for each outstanding share of Series A Preferred
Stock (the "SERIES A ISSUE PRICE") and (ii) an amount in cash equal to any
accrued (whether or not declared) but unpaid dividends (such amount, in the
aggregate, being referred to herein as the "PREMIUM"). If upon the occurrence
of such event, the assets and funds thus distributed among the holders of the
Series A Preferred Stock shall be insufficient to permit the payment to such
holders of the
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full aforesaid preferential amounts, then, subject to the rights of series of
Preferred Stock which may from time to time come into existence in compliance
with the provisions of SECTION 7, the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock in proportion to the amount
of such stock owned by each such holder.
b. Upon the completion of the distribution required by
SUBSECTION (a) of this SECTION 2 and any other distribution which may be
required with respect to series of Preferred Stock which may from time to time
come into existence in compliance with the provisions of SECTION 7, remaining
assets shall be distributed among the holders of the Common Stock of the
Corporation.
c. A consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale, conveyance or disposition of
all or substantially all of the assets of the Corporation or the effectuation by
the Corporation of a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Corporation is disposed of,
shall not be deemed to be a liquidation, dissolution or winding up within the
meaning of this SECTION 2, but shall instead be treated pursuant to SECTION 5.
d. The Corporation shall give each holder of record of Series A
Preferred Stock written notice of a liquidation, dissolution or winding up
described in subsection (a), above, not later than ten (10) days prior to the
stockholders' meeting called to approve such transaction, or ten (10) days prior
to the closing of such transaction, whichever is earlier, and shall also notify
such holders in writing of the final approval of such transaction. The first of
such notices shall describe the material terms and conditions of the impending
transaction and the provisions of this SECTION 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than ten (10) days after the
Corporation has given the first notice provided for herein or sooner than five
(5) days after the Corporation has given notice of any material changes provided
for herein; provided, however, that such periods may be shortened upon the
written consent of the holders of Preferred Stock which are entitled to such
notice rights or similar notice rights and which represent at least a majority
of the voting power of all then outstanding shares of such Preferred Stock.
3. REDEMPTION.
a. Subject to the rights of series of Preferred Stock which may
from time to time come into existence in compliance with the provisions of
SECTION 7, within thirty (30) days after the occurrence of a Redemption Event
(defined below) upon receipt by the Corporation of a written request from the
holders of a majority of the then outstanding Series A Preferred Stock, that all
or some of such holders' shares be redeemed, and concurrently with surrender by
such holders of the certificates representing such shares to be redeemed, the
Corporation shall, to the extent it may lawfully do so, redeem in cash the
shares specified in such request by paying in cash therefor a sum per share
equal to the Series A Issue Price plus any accrued but unpaid dividends (the
"SERIES A REDEMPTION PRICE"). The Corporation shall give each holder of Series
A Preferred Stock at least ten (10) days prior written notice of the date (the
"REDEMPTION DATE") and place of redemption and the dollar amount of the Series A
Redemption
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Price, which notice shall be effective upon delivery or three days after
deposit in the United States mail, postage prepaid and addressed to each
holder of record at his address appearing on the books of the Corporation.
If the certificate surrendered represents a greater number of shares than the
number redeemed, the Corporation shall issue to such holder a new certificate
representing the shares which remain outstanding.
For purposes of this SUBSECTION (A) of SECTION 3, a Redemption
Event shall be (1) the resignation of Larry D. Grandia as Chief Executive
Officer of the Corporation; (2) the failure of the Corporation to hire a
replacement for Larry D. Grandia as Chief Executive Officer of the Corporation
within 180 days following his termination as Chief Executive Officer by the
Corporation, or (3) the failure of Georges J. Daou or Daniel J. Daou to vote
their shares of the Corporation in favor of a transaction described in
SECTION 2(a) or (c), above, in the event that the majority of the Board of
Directors of the Corporation vote in favor of such transaction.
b. From and after the Redemption Date, unless there shall have
been a default in payment of the Series A Redemption Price, all dividends on the
Series A Preferred Stock designated for redemption in the Redemption Notice
shall cease to accrue, all rights of the holders of such shares as holders of
Series A Preferred Stock (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. Subject to the rights of series of Preferred Stock
which may from time to time come into existence in compliance with the
provisions of SECTION 7, if the funds of the Corporation legally available for
redemption of shares of Series A Preferred Stock on any Redemption Date, or any
subsequent date as provided in SUBSECTION 3(a), are insufficient to redeem the
total number of shares of Series A Preferred Stock to be redeemed on such date,
those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed. The shares of Series A Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein.
Subject to the rights of series of Preferred Stock which may from time to time
come into existence in compliance with the provisions of SECTION 7, at any time
thereafter when additional funds of the Company are legally available for the
redemption of shares of Series A Preferred Stock, such funds will immediately be
used to redeem the balance of the shares which the Company has become obligated
to redeem on any Redemption Date but which it has not redeemed.
c. The Corporation may, upon a vote of its Board of Directors,
redeem the remaining outstanding Series A Preferred Stock by payment in cash of
the Series A Redemption Price in accordance with the notice and other terms and
conditions set forth above in this SECTION 3 at any date which is four years
after the Purchase Date.
4. CONVERSION. The holders of the Series A Preferred Stock shall
have conversion rights as follows (the "CONVERSION RIGHTS"):
a. RIGHT TO CONVERT.
i. Subject to SUBSECTION (c), each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of
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issuance of such share and prior to the close of business on any Redemption
Date as may have been fixed in any Redemption Notice with respect to such
share, at the office of the Corporation or any transfer agent for the Series
A Preferred Stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Series A Issue Price by the
Conversion Price at the time in effect for such share. The initial
"CONVERSION PRICE" per share for shares of Series A Preferred Stock shall be
the Series A Issue Price; provided, however, that the Conversion Price for
the Series A Preferred Stock shall be subject to adjustment as set forth in
SUBSECTION 4(c).
ii. In the event of a call for redemption of any shares of
Series A Preferred Stock pursuant to SECTION 3, unless there shall have been a
default in payment of the Series A Redemption Price, the Conversion Rights shall
terminate as to the shares designated for redemption at the close of business on
the Redemption Date.
iii. Each share of Series A Preferred Stock shall
automatically and immediately be converted into shares of Common Stock at the
Conversion Price at the time in effect for such Series A Preferred Stock in the
event that the closing price of the Corporation's Common Stock on the Principal
Market equals or exceeds $11.00 per share (appropriately adjusted for any stock
split, dividend, combination or other recapitalization) for twenty (20)
consecutive trading days at any time after the first anniversary date of the
Purchase Date. In addition, fifty percent (50%) of the Series A Preferred Stock
held by each Holder shall automatically and immediately convert into shares of
Common Stock at the Conversion Price at the time in effect for such Series A
Preferred Stock in the event that at any time during the period commencing 180
days from the Purchase Date and ending on the anniversary date of the Purchase
Date the closing price of the Corporation's Common Stock on the Principal Market
equals or exceeds $13.75 (appropriately adjusted for any stock split, dividend,
combination or other recapitalization) for twenty (20) consecutive trading days.
b. MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice by mail, postage
prepaid, to the Corporation at its principal corporate office, of the election
to convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred Stock, or to the nominee or nominees
of such holder, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date.
c. CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The
Conversion Price of the Series A Preferred Stock shall be subject to adjustment
from time to time as follows:
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i. A. Upon each issuance by the Corporation of any
Additional Stock (as defined below) after the Purchase Date and before the first
anniversary date of the Purchase Date, without consideration or for a
consideration per share less than the Conversion Price for such series in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for such series in effect immediately prior to each such issuance shall
forthwith (except as otherwise provided in this CLAUSE (i)) be adjusted to a
price determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (not including shares excluded from the
definition of Additional Stock by SUBSECTION 4(c)(ii)(b)) plus the number of
shares of Common Stock which the aggregate consideration received by the
Corporation for such issuance of Additional Stock would purchase at such
Conversion Price; and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issuance (not including
shares excluded from the definition of Additional Stock by SUBSECTION
4(c)(ii)(b)) plus the number of shares of such Additional Stock.
However, the foregoing calculation shall not take into account shares
deemed issued pursuant to SUBSECTION 4(c)(i)(e) on account of options, rights or
convertible or exchangeable securities (or the actual or deemed consideration
therefor), except to the extent (i) such options, rights or convertible or
exchangeable securities have been exercised, converted or exchanged or (ii) the
consideration to be paid upon such exercise, conversion or exchange per share of
underlying Common Stock is less than or equal to the per share consideration for
the Additional Stock which has given rise to the Conversion Price adjustment
being calculated.
B. Except to the limited extent provided for in
SUBSECTIONS (e)(3) and (e)(4), no adjustment of such Conversion Price pursuant
to this SUBSECTION 4(c)(i) shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment,
and (for purposes of clarification only) in no event will such adjustment have
the effect of increasing the Conversion Price above the Series A Issue Price.
C. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by the Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before, on or
after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this SUBSECTION 4(c)(i) and SUBSECTION 4(c)(ii):
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1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
SUBSECTIONS 4(c)(i)(c) and (c)(i)(d)), if any, received by the Corporation upon
the issuance of such options or rights plus the exercise price provided in such
options or rights for the Common Stock covered thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by the Corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the additional consideration, if
any, to be received by the Corporation upon the conversion or exchange of such
securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in SUBSECTIONS 4(c)(i)(c)
and (c)(i)(d)).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A Preferred Stock, to the extent
in any way affected by or computed using such options, rights or securities or
options or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
5. The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to SUBSECTIONS
4(c)(i)(e)(1)
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and (2) shall be appropriately adjusted to reflect any change, termination or
expiration of the type described in either SUBSECTION 4(c)(i)(e)(3) or (4).
ii. "ADDITIONAL STOCK" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to SUBSECTION 4(c)(i)(e))
by the Corporation after the Purchase Date and before the first anniversary date
of the Purchase Date, other than:
A. Common Stock issued pursuant to a transaction
described in SUBSECTION 4(c)(iii),
B. shares of Common Stock issuable or issued to
employees, consultants or directors of the Corporation directly or pursuant to a
stock option plan, stock option agreement, stock purchase plan or restricted
stock plan approved by the Board of Directors of the Corporation, or in
connection with lease lines, bank financings or other similar transactions,
C. securities issued in connection with an
underwritten public offering,
D. securities issued in connection with a merger or
stock or asset acquisition, or
E. securities issued to multiple Qualified
Institutional Buyers in a transaction which is managed by an investment bank and
in which the gross proceeds equal or exceeds Fifty Million Dollars
($50,000,000).
iii. In the event the Corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of each share of
such series shall be increased in proportion to such increase of the aggregate
of shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents with the number of shares issuable with respect to
Common Stock Equivalents determined from time to time in the manner provided for
deemed issuances in SUBSECTION 4(c)(i)(e).
iv. If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock shall be
appropriately increased so that the number of shares of
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Common Stock issuable on conversion of each share of such series shall be
decreased in proportion to such decrease in outstanding shares.
v. Notwithstanding the above, in no event shall the
Conversion Price on the Series A Preferred Stock be adjusted to a price that
would cause the Corporation to issue that number of shares of Common Stock upon
conversion of the Series A Preferred Stock which would be greater than 19.9% of
the number of outstanding shares of the Corporation's Common Stock on the
Purchase Date.
d. OTHER DISTRIBUTIONS. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in SUBSECTION 4(c)(iii), then,
in each such case for the purpose of this SUBSECTION 4(d), the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
e. RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this SECTION 4 or SECTION 5), provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series A Preferred Stock the number of shares of stock or other
securities or property of the Company or otherwise, to which a holder of Common
Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this SECTION 4 with respect to the rights of
the holders of the Series A Preferred Stock after the recapitalization to the
end that the provisions of this SECTION 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
f. NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this SECTION 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
g. NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
i. No fractional shares shall be issued upon conversion of
the Series A Preferred Stock, and the number of shares of Common Stock to be
issued shall be rounded up to the nearest whole share.
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ii. Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A Preferred Stock pursuant to this SECTION 4,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price at the time in effect, and (C) the number
of shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series A Preferred
Stock.
h. NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series A Preferred Stock, at least ten (10) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
i. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
j. NOTICES. Any notice required by the provisions of this
SECTION 4 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
5. MERGER, CONSOLIDATION.
a. At any time, in the event of:
i. any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
which will result in the Corporation's stockholders immediately prior to such
transaction not holding (by virtue of such
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shares or securities issued solely with respect thereto) at least fifty
percent (50%) of the voting power of the surviving or continuing entity,
ii. a sale of all or substantially all of the assets of the
Corporation, unless the Corporation's stockholders immediately prior to such
sale will, as a result of such sale, hold (by virtue of securities issued as
consideration for the Corporation's sale) at least fifty percent (50%) of the
voting power of the purchasing entity, then, subject to the rights of series of
Preferred Stock which may from time to time come into existence in compliance
with the provisions of SECTION 7, unless waived as evidenced by the consent of
the holders of a majority of the shares of Series A Preferred Stock, holders of
the Series A Preferred Stock shall receive for each share of such stock in cash
or in securities received from the acquiring corporation, or in a combination
thereof, at the closing of any such transaction, an amount equal to the greater
of (A) the Series A Issue Price, plus an amount equal to the Premium as of the
date of closing of such transaction or (B) that share of the total consideration
to be paid by the acquiring entity in such transaction as equals the proportion
that the number of shares of Common Stock and Common Stock issuable upon
conversion of the outstanding Series A Preferred Stock then held by each of them
bears to the total number of shares of outstanding Common Stock and shares of
Common Stock issuable upon conversion of the outstanding Series A Preferred
Stock. Such payments shall be made with respect to the Series A Preferred Stock
(A) by redemption of such shares in one installment pursuant to SUBSECTION 3(b)
(provided that in such event the moment immediately prior to the closing of such
transaction shall, for purposes of this subparagraph, be deemed to be the
"REDEMPTION DATE", only ten (10) days' prior notice of the date fixed for
redemption need be given and the consent of the holders of the Series A
Preferred Stock shall be deemed to have been given) or (B) by purchase of such
shares of Series A Preferred Stock by the surviving corporation, entity or
person or by the Corporation. In the event the proceeds of the transaction are
not sufficient to make full payment of the aforesaid preferential amounts to the
holders of the Series A Preferred Stock in accordance herewith, then, subject to
the rights of series of Preferred Stock which may from time to time come into
existence in compliance with the provisions of SECTION 7, the entire amount
payable in respect of the proposed transaction shall be distributed among the
holders of the Series A Preferred Stock in proportion to the amount of such
stock owned by each such holder.
b. Any securities to be delivered to the holders of the Series
A Preferred Stock pursuant to SUBSECTION 5(a) above shall be valued as follows:
i. Securities not subject to investment letter or other
similar restrictions on free marketability (covered by (ii) below):
A. If traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 15-day period ending three (3) days prior to the closing;
B. If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
are applicable) over the 15-day period ending three (3) days prior to the
closing; and
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C. If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of Preferred Stock which would be entitled to
receive such securities or the same type of securities and which Preferred Stock
represents at least a majority of the voting power of all then outstanding
shares of such Preferred Stock.
ii. The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in (i) (A),
(B) or (C) to reflect the approximate fair market value thereof, as mutually
determined by the Corporation and the holders of Preferred Stock which would be
entitled to receive such securities or the same type of securities and which
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock.
c. In the event the requirements of SUBSECTION 5(a) are not
complied with, the Corporation shall forthwith either:
i. cause such closing to be postponed until such time as
the requirements of this SECTION 5 have been complied with, or
ii. cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series A Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in SECTION 5.
d. The Corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than ten
(10) days prior to the stockholders' meeting called to approve such transaction,
or ten (10) days prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this SECTION 5,
and the Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than ten
(10) days after the Corporation has given the first notice provided for herein
or sooner than five (5) days after the Corporation has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of Preferred Stock which is
entitled to such notice rights or similar notice rights and which represents at
least a majority of the voting power of all then outstanding shares of such
Preferred Stock.
e. The provisions of this SECTION 5 are in addition to the
protective provisions of SECTION 7.
6. VOTING RIGHTS. Except as set forth below, the holder of each
share of Series A Preferred Stock shall have the right to one vote for each
share of Common Stock into which such Series A Preferred Stock could then be
converted (with any fractional share determined on an aggregate conversion basis
being rounded up to the nearest whole share), and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting
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rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting
in accordance with the Bylaws of the Corporation, and shall be entitled to
vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote.
7. PROTECTIVE PROVISIONS. So long as fifty percent (50%) of the
Series A Preferred Stock are outstanding, the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, voting as a separate class:
a. liquidate or dissolve, or sell, convey, or otherwise dispose
of or encumber all or substantially all of its property or business or merge
into or consolidate with any other corporation (other than a wholly owned
subsidiary corporation) or effect any transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Corporation is disposed of (provided, however that the holders of Series A
Preferred Stock will not be entitled to vote as a class on a liquidation, a
dissolution, mergers, consolidations, sales of assets, business combinations or
similar transactions in which the holders of Series A Preferred Stock receive
per share consideration of at least Eight Dollars ($8.00) (appropriately
adjusted for any stock split, dividend, combination or other recapitalization)
after the Purchase Date; or
b. alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock so as to affect adversely such shares; or
c. increase the authorized number of shares of Series A
Preferred Stock; or
d. create any new class or reclassify any series of stock or
any other securities convertible into equity securities of the Corporation
having a preference over, or being on a parity with, the Series A Preferred
Stock with respect to voting, redemption, dividends or upon liquidation; or
e. repurchase or redeem any shares of the Corporation's capital
stock other than the Series A Preferred Stock and shares repurchased at cost
from employees or officers; or
f. declare or pay any dividend on any shares of capital stock,
except the Series A Preferred Stock; or
g. increase to more than seven the authorized size of the
Corporation's Board of Directors; or
h. amend the Certificate of Incorporation or Bylaws of the
Corporation to adversely effect the rights, preferences or privileges of the
Series A Preferred Stock; or
i approve any acquisitions of capital stock or assets that
would require the issuance of more than ten percent (10%) of the Corporation's
then outstanding
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Common Stock (assuming conversion of the Series A Preferred Stock) or cash
consideration of more than $15,000,000.
8. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares
of Series A Preferred Stock shall be redeemed or converted pursuant to SECTION 3
or SECTION 4, the shares so converted or redeemed shall be canceled and shall
not be issuable by the Corporation. The Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Corporation has caused this certificate to be
duly executed by Larry D. Grandia, Chief Executive Officer and President, and
attested by Fred C. McGee, its secretary, this 22nd day of July, 1999.
DAOU SYSTEMS, INC.
By: /s/ Larry D. Grandia
---------------------------------
Larry D. Grandia
Chief Executive Officer
and President
ATTEST:
By: /s/ Fred C. McGee
-------------------------
Fred C. McGee
Secretary
[SIGNATURE PAGE TO CERTIFICATE OF DESIGNATIONS]
15
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DAOU SYSTEMS, INC.
REGISTRATION RIGHTS
AGREEMENT
---------
JULY 26, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Form S-3 Registration. . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.3 Company Registration . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.4 Obligations of the Company . . . . . . . . . . . . . . . . . . . . . . . .2
1.5 Furnish Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1.6 Expenses of Registration . . . . . . . . . . . . . . . . . . . . . . . . .3
1.7 Underwriting Requirements. . . . . . . . . . . . . . . . . . . . . . . . .3
1.8 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
1.9 Reports Under 1934 Act . . . . . . . . . . . . . . . . . . . . . . . . . .6
1.10 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . . . . . .6
1.11 Rule 144 Availability. . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE II MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.2 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.4 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.5 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
2.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.7 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.9 Aggregation of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.10 Entire Agreement; Amendment; Waiver. . . . . . . . . . . . . . . . . . . .8
2.11 Adjustments for Stock Splits . . . . . . . . . . . . . . . . . . . . . . .8
</TABLE>
-i-
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 26, 1999, is among
DAOU SYSTEMS, INC., a Delaware corporation (the "COMPANY"), and the investors
listed on SCHEDULE 1 to this Agreement, each of which is referred to in this
Agreement as an "INVESTOR."
RECITALS
WHEREAS, the Company and the Investors are parties to the Series A
Preferred Stock Purchase Agreement of even date herewith (the "SERIES A
AGREEMENT"); and
WHEREAS, in order to induce the Company to enter into the Series A
Agreement and to induce the Investors to invest funds in the Company pursuant to
the Series A Agreement, the Investors and the Company hereby agree that this
Agreement will govern the rights of the Investor to cause the Company to
register shares of the Company's common stock (the "COMMON STOCK") issued or
issuable to the Investors and certain other matters as set forth in this
Agreement;
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
ARTICLE I
REGISTRATION RIGHTS
1.1 DEFINITIONS. For purposes of this Agreement:
(a) the term "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"ACT"), and the declaration or ordering of effectiveness of such registration
statement or document;
(b) the term "REGISTRABLE SECURITIES" means (i) the Common Stock
issuable or issued upon conversion of the Series A Preferred Stock (whether or
not sold pursuant to the Series A Agreement), and (ii) any Common Stock issued
as (or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, such Series A Preferred Stock or Common
Stock, excluding in all cases, however, any Registrable Securities sold by a
person in a transaction in which such person's rights under this ARTICLE I are
not assigned;
(c) the number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING"
will be determined by the number of shares of Common Stock outstanding which
are, and the number of shares of Common Stock issuable pursuant to then
exercisable or convertible securities which are, Registrable Securities;
(d) the term "HOLDER" means any person owning or having the right to
acquire Registrable Securities or any permitted assignee thereof; and
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(e) the term "FORM S-3" means such form under the Act as in effect on
the date of this Agreement or any registration form under the Act subsequently
adopted by the Securities and Exchange Commission ("SEC") which permits
inclusion or incorporation of substantial information by reference to other
documents filed by the Company with the SEC.
1.2 FORM S-3 REGISTRATION. As soon as reasonably practicable after the
Closing (currently anticipated to be approximately 45 days), the Company shall
file with the SEC a Registration Statement on Form S-3 (or other similar form)
covering the continuous sale of the Registrable Securities pursuant to Rule 415
under the Securities Act or any successor thereto (the "SHELF REGISTRATION
STATEMENT"), in the manner specified therein. The Company shall use all
reasonable efforts to cause the Shelf Registration Statement to be declared
effective by the SEC as soon as reasonably practicable after its filing with the
SEC, and to remain effective until the earlier of (x) such time as all of the
Registrable Securities are sold pursuant to the Shelf Registration Statement or
(y) each Holder is able to sell within any 90-day period all Registrable
Securities owned by such Holder pursuant to SEC Rules as then in effect,
including Rule 144 under the Securities Act, or any successor thereto ("SEC RULE
144") (the "EFFECTIVE PERIOD"); provided that in the event that Company
determines in good faith that, because it has under consideration a significant
(as defined under Regulation S-X of the SEC) acquisition or disposition or other
material transaction or corporate event that has not been publicly disclosed or
that it is in the process of preparing for filing with the SEC a Current Report
on Form 8-K or other form, the Shelf Registration Statement may contain a
material misstatement or omission, Parent may cause the Shelf Registration
Statement to not be used during the period in question. The Company agrees it
will use its best efforts to ensure that such deferral will be for the shortest
period of time reasonably required not exceeding, in the aggregate, 90 days in
any 12-month period. In the event the Shelf Registration Statement has not been
declared effective by the SEC within 120 days after the Closing, the dividend
rate on the Series A Preferred Stock shall increase in accordance with Section 1
of the Certificate of Designations until the Shelf Registration Statement has
been declared effective.
1.3 COMPANY REGISTRATION. In the event that (i) the Company fails to
satisfy its obligations pursuant to SECTION 1.2 or (ii) for any period of not
less than 30 consecutive days the Shelf Registration Statement may not be used
for any reason, and if (but without any obligation to do so) the Company
proposes to register (including for this purpose a registration effected by the
Company for shareholders other than the Holders) any of its stock or other
securities under the Act in connection with the public offering of such
securities solely for cash (other than a registration relating solely to the
sale of securities to participants in a Company stock plan, or a registration on
any form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
Registrable Securities), the Company will, at such time, promptly give each
Holder written notice of such registration. Upon the written request of each
Holder given within 20 days after mailing of such notice by the Company in
accordance with SECTION 2.5, the Company will, subject to the provisions of
SECTION 1.7, cause to be registered under the Act all of the Registrable
Securities that each such Holder has requested to be registered.
1.4 OBLIGATIONS OF THE COMPANY. Except as otherwise expressly specified
in this Agreement, whenever required under this ARTICLE I to effect the
registration of any Registrable Securities, the Company will, as expeditiously
as reasonably practicable:
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<PAGE>
(a) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.
(b) Furnish to the Holders such number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.
(c) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as will be reasonably requested by the Holders,
provided that the Company will not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(d) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting will also enter into and perform its obligations under such
an agreement.
(e) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
1.5 FURNISH INFORMATION. It will be a condition precedent to the
obligations of the Company to take any action pursuant to this ARTICLE I with
respect to the Registrable Securities of any selling Holder that such Holder
will furnish to the Company such information regarding itself, the Registrable
Securities held by it, the intended method of disposition of such securities and
all of the other pertinent information as will be required to effect the
registration of such Holder's Registrable Securities.
1.6 EXPENSES OF REGISTRATION. Subject to restrictions under applicable
state securities laws, all expenses other than underwriting discounts and
commissions incurred in connection with registrations, filings or qualifications
pursuant to SECTIONS 1.2 and 1.3, including (without limitation) all
registration, filing and qualification fees, printers' and accounting fees, and
fees and disbursements of counsel for the Company and the reasonable fees and
disbursements of one counsel representing the Holders will be borne by the
Company.
1.7 UNDERWRITING REQUIREMENTS. In connection with any offering involving
an underwriting of shares of the Company's capital stock, the Company will not
be required under SECTION 1.3 to include any of the Holders' securities in such
underwriting unless they accept the terms of the underwriting as agreed upon
between the Company and the underwriters selected by it (or by other persons
entitled to select the underwriters), and then the Company will have a
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<PAGE>
right to limit the number of shares to such number as it will determine in
good faith will not jeopardize the success of the offering by the Company.
If the total amount of securities, including Registrable Securities,
requested by shareholders to be included in such offering exceeds the amount
of securities sold other than by the Company that the Company determines in
good faith is compatible with the success of the offering, then the Company
will be required to include in the offering only that number of such
securities, including Registrable Securities, which the Company determines in
good faith will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata first among selling shareholders which
are either (i) Holders of Registrable Securities or (ii) holders of Warrants
referenced in Section 2.2(c)(ii) of the Series A Agreement according to the
total amount of securities entitled to be included therein owned by each such
Holder or holders until all securities desired by such Holders are included,
then among the other selling shareholders according to the total amount of
securities entitled to be included therein owned by each other selling
shareholder or in such other proportions as will mutually be agreed to by
such selling shareholder; provided that any Registrable Securities held by
officers and directors of the Company will be excluded from such registration
to the extent required by such limitations). For purposes of the preceding
parenthetical concerning apportionment, for any selling shareholder which is
a Holder of Registrable Securities and which is a partnership or corporation,
the partners, retired partners and shareholders of such Holder, or the
estates and family members of any such partners and retired partners an any
trusts for the benefit of any of the foregoing persons will be deemed to be a
single "SELLING SHAREHOLDER," and any pro-rata reduction with respect to such
"selling shareholder" will be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included
in such "selling shareholder," as defined in this sentence.
1.8 INDEMNIFICATION. If any Registrable Securities are included in a
registration statement under this ARTICLE I:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, each of its directors and each of its officers,
any underwriter (as defined in the Act) for such Holder and each person, if
any, who controls such Holder or underwriter within the meaning of the Act or
the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), against
any losses, claims, damages, or liabilities (joint or several) to which they
may become subject under the Act, or the Exchange Act, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "VIOLATION"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading, or (iii) any violation or
alleged violation by the Company of the Act, the Exchange Act, or any rule or
regulation promulgated under the Act, or the Exchange Act; and the Company
will pay to each such Holder, director, officer, underwriter or controlling
person, any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
SUBSECTION 1.8(a) will not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent will not be unreasonably
withheld), nor will the Company be liable in any such case for
4
<PAGE>
any such loss, claim, damage, liability, or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and
in conformity with written information furnished expressly for use in
connection with such registration by any such Holder, director, officer,
underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, any underwriter, any other
Holder selling securities in such registration statement and any controlling
person of any such underwriter or other Holder, against any losses, claims,
damages, or liabilities (joint or several) to which any of the foregoing persons
may become subject, under the Act or the Exchange Act insofar as such losses,
claims, damages, or liabilities (or actions in respect thereto) arise out of or
are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay any legal or other
expenses reasonably incurred by any person intended to be indemnified pursuant
to this SUBSECTION 1.8(b), in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this SUBSECTION 1.8(b) will not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Holder, which consent
will not be unreasonably withheld; provided, that, in no event will any
indemnity under this SUBSECTION 1.8(b) exceed the proceeds from the offering net
of sales commission, if any, received by such Holder.
(c) Promptly after receipt by an indemnified party under this SECTION
1.8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this SECTION 1.8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party will have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel satisfactory to
the indemnified party (which shall not unreasonably withhold its approval);
provided, however, that an indemnified party (together with all other
indemnified parties which may be represented without conflict by one counsel)
will have the right to retain one separate counsel, with the reasonable fees and
expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party is
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, will relieve such indemnifying party of
any liability to the indemnified party under this SECTION 1.8, but the omission
so to deliver written notice to the indemnifying party will not relieve it of
any liability that it may have to any indemnified party otherwise than under
this SECTION 1.8.
(d) If the indemnification provided for in this SECTION 1.8 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party to this Agreement, will contribute to the amount paid or
5
<PAGE>
payable by such indemnified party as a result of such loss, liability, claim,
damage, or expense in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense as well as
any other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party will be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement will
control.
(f) The obligations of the Company and Holders under this SECTION 1.8
will survive the completion of any offering of Registrable Securities in a
registration statement under this ARTICLE I, and otherwise.
1.9 REPORTS UNDER 1934 ACT. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Act and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a registration on
Form S-3, the Company will:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the Exchange Act; and
(c) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144, the Act and the
Exchange Act, or that it qualifies as a registrant whose securities may be
resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.10 "MARKET STAND-OFF" AGREEMENT. Notwithstanding the rights granted
pursuant to SECTION 1.2, each Investor hereby agrees that, during the period of
duration (not to exceed 180 days) specified by the Company and an underwriter of
Common Stock or other securities of the Company, following the effective date of
a registration statement of the Company filed under the Act, it will not, to the
extent requested by the Company and such underwriter, directly or indirectly
sell, offer to sell, contract to sell (including, without limitation, any short
sale), grant any option to purchase or otherwise transfer or dispose of (other
than to donees who agree to be
6
<PAGE>
similarly bound) any securities of the Company held by it at any time during
such period except Common Stock included in such registration; provided,
however, that all executive officers and directors of the Company and all
other persons with registration rights (whether or not pursuant to this
Agreement) enter into similar agreements. The right of the Company hereunder
may be exercised by it not more than once in any one-year period.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
1.11 RULE 144 AVAILABILITY. Notwithstanding anything to the contrary above
in this ARTICLE I, prior to exercising any right provided for in this ARTICLE I
each Holder will (i) evaluate in good faith whether such Holder is otherwise
permitted to sell the entire amount of Registrable Securities it is then seeking
to register within the time period it desires to sell pursuant to Rule 144 of
the Exchange Act, or any successor regulation thereto and (ii) exercise such
rights only in the case that it determines in good faith that such rights are
necessary to sell such Registrable Securities in a timely manner.
ARTICLE II
MISCELLANEOUS
2.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this
Agreement, the terms and conditions of this Agreement will inure to the benefit
of and be binding upon the respective successors and assigns of the parties
(including transferees of any shares of Registrable Securities). Nothing in
this Agreement, express or implied, is intended to confer upon any party other
than the parties to this Agreement or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
2.2 GOVERNING LAW. This Agreement will be governed by and construed under
the laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
2.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
2.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
2.5 NOTICES. Unless otherwise provided, any notice required or permitted
under this Agreement will be given in writing and will be deemed effectively
given upon personal delivery to the party to be notified, by telecopy upon the
appropriate answer-back, or upon deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the party to be
notified at the address indicated for such party on the signature page of this
Agreement, or at such other address as such party may designate by ten days'
advance written notice to the other parties.
7
<PAGE>
2.6 EXPENSES. If any action at law or in equity is necessary to enforce
or interpret the terms of this Agreement, the prevailing party will be entitled
to reasonable attorneys' fees, costs and necessary disbursements in addition to
any other relief to which such party may be entitled.
2.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the Holders of a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this paragraph will be binding upon each Holder of any
Registrable Securities then outstanding, each future Holder of all such
Registrable Securities, and the Company.
2.8 SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision will be excluded from this
Agreement and the balance of the Agreement will be interpreted as if such
provision were so excluded and will be enforceable in accordance with its terms.
2.9 AGGREGATION OF STOCK. All shares of Registrable Securities held or
acquired by affiliated entities or persons will be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
2.10 ENTIRE AGREEMENT; AMENDMENT, WAIVER. This Agreement (including the
Exhibits to this Agreement, if any) constitutes the full and entire
understanding and agreement between the parties with regard to the subjects of
this Agreement and thereof.
2.11 ADJUSTMENTS FOR STOCK SPLITS. Wherever in this Agreement there is a
reference to a specific number of shares of Common Stock or Preferred Stock of
the Company of any class or series, or a reference to any amount of dollars per
any such share, then, upon the occurrence of any subdivision, combination or
stock dividend of such class or series of stock, the specific number of shares
or the specific dollar amount so referenced in this Agreement will automatically
be proportionately adjusted to reflect the effect on the outstanding shares of
such class of series of stock by such subdivision, combination or stock
dividend.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
DAOU SYSTEMS, INC.
By: /s/ Larry D. Grandia
------------------------------------
Name: Larry D. Grandia
Title: Chief Executive Officer
THE INVESTORS:
GALEN PARTNERS III, L.P.,
a Delaware Limited Partnership
By: Claudius, L.L.C.,
a Delaware Limited Liability Company
By: /s/ Bruce F. Wesson
------------------------------------
Senior Managing Member
GALEN PARTNERS INTERNATIONAL III, L.P.,
a Delaware Limited Partnership
By: Claudius, L.L.C.,
a Delaware Limited Liability Company
By: /s/ Bruce F. Wesson
------------------------------------
Senior Managing Member
GALEN EMPLOYEE FUND III, L.P.,
a Delaware Limited Partnership
By: Wesson Enterprises, Inc.
By: /s/ Bruce F. Wesson
------------------------------------
Bruce F. Wesson
President
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
9
<PAGE>
SCHEDULE 1
INVESTORS
---------
NAME AND ADDRESS
----------------
Galen Partners III, L.P.
610 Fifth Avenue
5th Floor
New York, NY 10020
Galen Partners International III, L.P.
610 Fifth Avenue
5th Floor
New York, NY 10020
Galen Employee Fund III, L.P.
610 Fifth Avenue
5th Floor
New York, NY 10020
S-1
<PAGE>
VOTING AGREEMENT
This VOTING AGREEMENT (the "AGREEMENT") is made and entered into this 26th
day of July 1999, by and among DAOU Systems, Inc., a Delaware corporation (the
"COMPANY"), Daniel J. Daou and Georges J. Daou (the "SHAREHOLDERS"), and the
persons listed on EXHIBIT A hereto (the "INVESTORS").
WITNESSETH:
WHEREAS, the Shareholders are the beneficial owners of shares of the Common
Stock of the Company; and
WHEREAS, the Company proposes to sell shares of its Series A Preferred
Stock (the "SERIES A PREFERRED STOCK") to the Investors pursuant to the Series A
Preferred Stock Purchase Agreement of even date herewith (the "FINANCING"); and
WHEREAS, in connection with the consummation of the Financing, the Company,
the Shareholders and the Investors have agreed to provide for the future voting
of capital stock of the Company, solely with respect to (1) the election of
directors of the Company, as set forth below, and (2) certain corporate
transactions, described below;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
VOTING
1.01. The Shareholders each agree to hold all shares of voting capital
stock of the Company registered in their respective names or beneficially owned
by them as of the date hereof or hereafter acquired (hereinafter collectively
referred to as the "VOTING SHARES") subject to, and to vote the Voting Shares in
accordance with, the provisions of this Agreement.
1.02. Each time the shareholders of the Company meet, or act by written
consent in lieu of meeting, for the purpose of electing directors, each of the
Shareholders agrees to vote the Voting Shares and to otherwise use their
respective best efforts for the election of one nominee designated by Galen
Partners III, L.P. ("GALEN") as a director of the Company (collectively, the
"INVESTORS' NOMINEE").
Each of the Shareholders shall vote for the Investors' Nominee as many of
the Voting Shares as are necessary to elect such Nominee as a director of the
Company, assuming that each Investor also votes all of its shares as set forth
in this Section 1.02. The Company shall furnish written notice to the
Shareholders and the Investors at least twenty (20) days prior to any such
meeting or proposed action by written consent in lieu of meeting. Galen shall
furnish written notice to each of the Shareholders and to the Board of
Directors, no later than ten (10) days following receipt of the Company's notice
of any such meeting, or proposed action by written
<PAGE>
consent in lieu of meeting, of the name of the Investor's Nominee designated
by them. In the absence of such notice, the director then serving on behalf
of and/or previously nominated by Galen in accordance with this Section 1.02
shall be deemed to be the Investors' Nominee.
1.03. Each time the shareholders of the Company meet, or act by written
consent in lieu of meeting, for the purpose of voting on the dissolution and
liquidation of the Company or a merger or consolidation of the Company with or
into, or the sale of all or substantially all of the Company's Common Stock or
assets to another corporation or entity (each, a "LIQUIDATION"), each of the
Shareholders agrees to vote the Voting Shares and to otherwise use their
respective best efforts in favor of such Liquidation, provided that a majority
of directors then constituting the Board of Directors have voted to approve such
Liquidation.
1.04. Except as provided by this Agreement, each Shareholder shall
exercise the full rights of a shareholder with respect to the Voting Shares.
ARTICLE II
EFFECT; TERMINATION
2.01. This Agreement shall continue in full force and effect with respect
to the Voting Shares from the date hereof through the earliest of the following
dates, on which it shall terminate in its entirety;
(a) ten (10) years from the date hereof;
(b) the date as of which Investors holding at least a majority
in interest of all shares of the Company's stock then held by all Investors
agree in writing to the termination of this Agreement;
(c) the date as of which Galen, together with its affiliates,
cease to hold, in the aggregate, at least twenty-five percent (25%) of the
Series A Preferred Stock which it originally purchased in the Financing or a
corresponding amount of the Company's Common Stock into which the Series A
Preferred Stock is convertible.
ARTICLE III
MISCELLANEOUS
3.01. Each Shareholder represents and warrants to the Investors hereto
that such Shareholder has full power and capacity to execute, deliver and
perform this Agreement, which has been duly executed and delivered by, and
evidences the valid and binding obligation of, such Shareholder enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors.
3.02. The parties hereto hereby declare that the terms of this Agreement
shall be specifically enforceable.
-2-
<PAGE>
3.03. This Agreement, and the rights of the parties hereto, shall be
governed by and construed in accordance with the laws of the State of Delaware.
3.04. This Agreement may be amended only by an instrument in writing
signed by a majority in interest of the Investors, provided that no amendment
shall be made which would adversely affect a Shareholder without such
Shareholder's written consent.
3.05. If any provision of this Agreement is held to be invalid or
unenforceable, the validity and enforceability of the remaining provisions of
this Agreement shall not be affected thereby.
3.06. This Agreement may be executed in one or more counterparts, each of
which will be deemed an original but all of which together shall constitutes one
and the same agreement.
3.07. No waivers of any breach of this Agreement extended by any party
hereto to any other party shall be construed as a waiver of any rights or
remedies of any other party hereto or with respect to any subsequent breach.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
DAOU SYSTEMS, INC.
By: /s/ Larry D. Grandia
------------------------------------
President
SHAREHOLDERS:
/s/ Georges J. Daou
---------------------------------------
Georges J. Daou
/s/ Daniel J. Daou
---------------------------------------
Daniel J. Daou
INVESTORS:
GALEN PARTNERS III, L.P.
By: /s/ Bruce F. Wesson
------------------------------------
Title
----------------------------------
GALEN PARTNERS INTERNATIONAL III,
By: /s/ Bruce F. Wesson
------------------------------------
Title
----------------------------------
GALEN EMPLOYEE FUND III, L.P.
By: /s/ Bruce F. Wesson
------------------------------------
Title
----------------------------------
-4-
<PAGE>
[SIGNATURE PAGE TO VOTING AGREEMENT]
-5-
<PAGE>
EXHIBIT A
TO
VOTING AGREEMENT
Galen Associates III, L.P.
Galen Associates International III, L.P.
Galen Employee Fund III, L.P.
-6-
<PAGE>
DAOU SYSTEMS, INC.
SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
-------------------
JULY 26, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I PURCHASE AND SALE OF STOCK ........................................... 1
1.1 Sale and Issuance of Series A Preferred Stock ........................ 1
1.2 Closing .............................................................. 1
ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY ............. 2
2.1 Organization, Good Standing and Qualification ........................ 2
2.2 Capitalization and Voting Rights ..................................... 2
2.3 Subsidiaries ......................................................... 3
2.4 Authorization ........................................................ 3
2.5 Valid Issuance of Preferred and Common Stock ......................... 3
2.6 Governmental Consents ................................................ 4
2.7 Litigation ........................................................... 4
2.8 Patents and Trademarks ............................................... 4
2.9 Compliance with Other Instruments .................................... 4
2.10 Agreements; Action ................................................... 5
2.11 Changes .............................................................. 5
2.12 Employee Benefit Plans ............................................... 6
2.13 Tax Returns, Payments and Elections .................................. 6
2.14 Labor Agreements and Actions ......................................... 7
2.15 Insurance ............................................................ 7
2.16 Disclosure ........................................................... 7
2.17 Use of Proceeds ...................................................... 8
2.18 Year 2000 Compliance ................................................. 8
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR............. 9
3.1 Authorization ........................................................ 9
3.2 Purchase Entirely for Own Account .................................... 9
3.3 Due Diligence; Disclosure of Information ............................. 9
3.4 Investment Experience ................................................ 9
3.5 Accredited Investor; Investor Status ................................. 9
3.6 Restricted Securities ................................................10
3.7 Further Limitations on Disposition ...................................10
3.8 No Transfers Except Pursuant to Registration Statement ...............10
3.9 Legends ..............................................................10
3.10 Securities Law Compliance ............................................11
ARTICLE IV CALIFORNIA COMMISSIONER OF CORPORATIONS ..............................12
4.1 Corporate Securities Law .............................................12
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
PAGE
----
ARTICLE V CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING ......................12
5.1 Representations and Warranties .......................................12
5.2 Performance ..........................................................12
5.3 Compliance Certificate ...............................................12
5.4 Charter Document .....................................................12
5.5 Proceedings and Documents ............................................12
5.6 Board of Directors ...................................................13
5.7 Opinion of Company Counsel ...........................................13
5.8 Other Agreements .....................................................13
ARTICLE VI CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING ...................13
6.1 Representations and Warranties .......................................13
6.2 Payment of Purchase Price ............................................13
6.3 Other Agreements .....................................................13
ARTICLE VII MISCELLANEOUS ........................................................13
7.1 Survival of Warranties ...............................................13
7.2 Successors and Assigns ...............................................13
7.3 Governing Law ........................................................14
7.4 Counterparts .........................................................14
7.5 Titles and Subtitles .................................................14
7.6 Notices ..............................................................14
7.7 Finders' Fee or Commission ...........................................14
7.8 Expenses .............................................................14
7.9 Amendments and Waivers ...............................................14
7.10 Severability .........................................................15
7.11 Aggregation of Stock .................................................15
7.12 Entire Agreement .....................................................15
</TABLE>
-ii-
<PAGE>
SERIES A PREFERRED
STOCK PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT, ("AGREEMENT") dated
July 26, 1999, is among DAOU SYSTEMS, INC., a Delaware corporation (the
"COMPANY"), and the investors listed on SCHEDULE 1, each of which is referred to
in this Agreement as an "INVESTOR."
THE PARTIES HEREBY AGREE AS FOLLOWS:
ARTICLE I
PURCHASE AND SALE OF STOCK
1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK.
(a) The Company will adopt and file with the Secretary of State of
Delaware on or before the Closing (as defined below) a Certificate of
Designations in the form attached to this Agreement as EXHIBIT A (the
"CERTIFICATE OF DESIGNATIONS").
(b) Subject to the terms and conditions of this Agreement, each
Investor will purchase at the Closing and the Company will sell and issue to
each Investor at the Closing that number of shares of the Company's Series A
Preferred Stock set forth opposite each Investor's name on SCHEDULE 1 for the
purchase price set forth thereon.
(c) Any such Investor will become a party to this Agreement and that
certain Registration Rights Agreement of even date herewith, by and among the
Company and the Investors, the form of which is attached to this Agreement as
EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT") and will have the rights and
obligations under this Agreement and thereunder, unless such Investor enters
into an agreement which provides otherwise.
1.2 CLOSING. The purchase and sale of the Series A Preferred Stock will
take place at the offices of Baker & McKenzie, 101 West Broadway, Suite 1200,
San Diego, California, at 10:00 A.M., on July 26, 1999, or at such other time
and place as the Company and Investors acquiring in the aggregate more than half
the shares of Series A Preferred Stock sold pursuant to this Agreement mutually
agree upon orally or in writing (which time and place are designated as the
"CLOSING"). At the Closing the Company will deliver to each Investor a
certificate representing the Series A Preferred Stock which such Investor is
purchasing against delivery to the Company by such Investor of a check or wire
transfer in the amount of the purchase price therefor payable to the Company's
order.
<PAGE>
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
The Company hereby represents and warrants to each Investor that the statements
in the following Sections are true and correct, except as set forth on a
Schedule of Exceptions furnished each Investor, and special counsel for the
Investors, which exceptions will be deemed to be representations and warranties
as if made pursuant to this Agreement.
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company and each
of its subsidiaries ("SUBSIDIARIES") is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite corporate power and authority to carry on its business as now
conducted. The Company and each Subsidiary is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify would have a material adverse effect on the business or properties of
the Company and its Subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT").
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
Company at June 30, 1998 consisted of:
(a) PREFERRED STOCK. Five Million (5,000,000) shares of Preferred
Stock, par value .001 par share (the "PREFERRED STOCK"), of which Three Million
Five Hundred Twenty Thousand Two Hundred Fifty Five (3,520,255) shares have been
designated Series A Preferred Stock and Two Million One Hundred Eighty-One
Thousand Eight Hundred Eighteen (2,181,818) of which will be sold pursuant to
this Agreement and One Million Three Hundred Thirty-Eight Thousand Four Hundred
Thirty-Seven (1,338,437) of which have been reserved for payment of
payment-in-kind dividends and possible issuance pursuant to adjustment of the
Conversion Price pursuant to the anti-dilution provisions of the Certificate
of Designations with respect to the Series A Preferred Stock. The rights,
privileges and preferences of the Series A Preferred Stock will be as stated
in the Company's Certificate of Designations. No Shares of Preferred Stock
are outstanding.
(b) COMMON STOCK. Fifty Million (50,000,000) shares of common stock,
par value .001 per share ("COMMON STOCK"), of which Seventeen Million Six
Hundred Eighty-Nine Thousand Seven Hundred Twenty-Eight (17,689,728) shares were
issued and outstanding as of June 30, 1999.
(c) Except for (i) the conversion privileges of the Series A
Preferred Stock to be issued under this Agreement, (ii) warrants to purchase an
aggregate of 130,393 shares of Common Stock at a price of $4.99 per share issued
to Needham & Company, and Needham Capital, S.B.I.C. L.P. in connection with the
Company's private placement of Preferred Stock in October 1995, (iv) options to
employees pursuant to the Company's 1996 Stock Option Plan, (v) other employee
options reflected in the Company's public filings with the Securities and
Exchange Commission ("SEC") (the "SEC FILINGS"), or (vi) as otherwise set forth
in the SEC Filings, there are no outstanding options, warrants, rights
(including conversion or preemptive rights) or agreements for the purchase or
acquisition from the Company of any shares of its
2
<PAGE>
capital stock. The Company is not a party or subject to any agreement or
understanding, and, to the Company's knowledge, there is no agreement or
understanding between any persons and/or entities, which affects or relates
to the voting or giving of written consents with respect to any security or
by a director of the Company. No person holds registration rights other than
pursuant to the Registration Rights Agreement, the holder or holders of the
warrant referred to in CLAUSE (ii) above and as reflected in the Company's
SEC Filings in connection with the Company's acquisition by merger of certain
corporations in 1997 and 1998. Except with respect to the warrants
referenced in CLAUSE (ii), above, no person holds registration rights senior
to, or PARI PASSU with, those granted to the Investors under the Registration
Rights Agreement.
2.3 SUBSIDIARIES. Except as set forth in the SEC Filings, the Company
does not presently own or control, directly or indirectly, any interest in any
other corporation, association, or other business entity. All of the capital
stock of the Subsidiaries is owned by the Company.
2.4 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and shareholders necessary for the authorization, execution
and delivery of this Agreement, the Registration Rights Agreement and the Voting
Agreement, the performance of all obligations of the Company pursuant to this
Agreement, the Registration Rights Agreement and the Voting Agreement and the
authorization, issuance (or reservation for issuance) and delivery of the
Series A Preferred Stock being sold pursuant to this Agreement and the Common
Stock issuable upon conversion of the Series A Preferred Stock has been taken or
will be taken prior to the Closing, and this Agreement, the Registration Rights
Agreement and the Voting Agreement constitute valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (b) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (c) to the extent the indemnification provisions contained in the
Registration Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK.
(a) The Series A Preferred Stock which is being purchased by the
Investors pursuant to this Agreement, when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration expressed in
this Agreement, will be duly and validly issued, fully paid and nonassessable
free of any liens, encumbrances, and restrictions (other than restrictions under
this Agreement and the Registration Rights Agreement) and, based in part upon
the representations of the Investors in this Agreement, will be issued in
compliance with all applicable federal and state securities laws. The Common
Stock issuable upon conversion of the Series A Preferred Stock purchased under
this Agreement has been duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Certificate of Designations, will
be duly and validly issued, fully paid and nonassessable, free of any liens,
encumbrances, and restrictions (other than restrictions under this Agreement and
the Registration Rights Agreement) and issued in compliance with all applicable
securities laws, as presently in effect, of the United States and each of the
states whose securities laws govern the issuance of any of the Series A
Preferred Stock pursuant to this Agreement.
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(b) The outstanding shares of Common Stock are all duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
compliance with all applicable federal and state securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization
of, or registration, qualification, designation, declaration or filing with, any
federal, state, local or provincial governmental authority on the part of the
Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for (a) the filing pursuant to Section
25102(f) of the California Corporate Securities Law of 1968, as amended, and the
rules thereunder, which filing will be effected within 15 days of the sale of
the Series A Preferred Stock pursuant to this Agreement, (b) any filings
required by the Blue Sky laws of the State of New York or Delaware and (c) any
filings required pursuant to Regulation D, as amended, as promulgated by the
Securities and Exchange Commission.
2.7 LITIGATION. There is no action, suit, proceeding or investigation
pending or currently threatened against the Company or its Subsidiaries which
questions the validity of this Agreement, or the Registration Rights Agreement
or the right of the Company to enter into any of them, or to consummate the
transactions contemplated hereby or thereby, or, except as set forth in the SEC
Filings, which might result, either individually or in the aggregate, in a
Material Adverse Effect. The foregoing includes, without limitation, actions
pending or threatened involving the prior employment of any of the employees of
the Company or its Subsidiaries, their use in connection with the Company's
business of any information or techniques allegedly proprietary to any of their
former employers, or their obligations under any agreements with prior
employers. Neither the Company nor any of its Subsidiaries is a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality. There is no action, suit,
proceeding or investigation by the Company or any of its Subsidiaries currently
pending or which the Company or its Subsidiaries intends to initiate.
2.8 PATENTS AND TRADEMARKS. To the Company's knowledge, the Company and
its Subsidiaries each has sufficient title and ownership of all patents,
trademarks, service marks, trade names, copyrights, trade secrets, information,
proprietary rights and processes necessary for its business as now conducted
without any conflict with or infringement of the rights of others. Neither the
Company nor any of its Subsidiaries has received any communications alleging
that the Company or its Subsidiaries has infringed or violated or, by conducting
its business as proposed, would violate any of the patents, trademarks, service
marks, trade names, copyrights or trade secrets or other proprietary rights of
any other person or entity. Neither the Company nor any of its Subsidiaries is
aware that it has or is currently infringing or violating any such rights.
Neither the Company nor any of its Subsidiaries is aware of any infringement by
third parties of any such rights of the Company or its Subsidiaries. As used in
this SECTION 2.8 and elsewhere in this Agreement, "to the Company's knowledge"
means to the Company's current, actual knowledge, without implication of a duty
to investigate.
2.9 COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor its
Subsidiaries is in violation or default of any provisions of its respective
Certificate of Incorporation or Bylaws or in material violation or default of
any instrument, judgment, order, writ, decree or contract to which it is a party
or by which it is bound. To the Company's best knowledge, the Company and
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its Subsidiaries is in compliance in all respects with all federal or state
statutes, rules or regulations applicable to the Company and its
Subsidiaries, the lack of compliance of which would cause a Material Adverse
Effect. The execution, delivery and performance of this Agreement, the
Registration Rights Agreement and the Voting Agreement and the consummation
of the transactions contemplated hereby and thereby will not result in any
such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such
provision, instrument, judgment, order, writ, decree or contract or an event
which results in the creation of any lien, charge or encumbrance upon any
assets of the Company or its Subsidiaries or the suspension, revocation,
impairment, forfeiture, or nonrenewal of any material permit, license,
authorization, or approval applicable to the Company or its Subsidiaries,
their respective businesses or operations or any of their respective assets
or properties.
2.10 AGREEMENTS; ACTION.
(a) There are no agreements (written or oral), understandings,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company or its Subsidiaries is a party or by which it is bound which
restrict or affect the development, manufacture or distribution of the products
or services of the Company or its Subsidiaries.
(b) Neither the Company nor any of its Subsidiaries has (i) declared
or paid any dividends, or authorized or made any distribution upon or with
respect to or repurchased any class or series of its capital stock, (ii) except
pursuant to its Loan Agreement dated June 30, 1999 with HCFP Funding, Inc.,
incurred any indebtedness for money borrowed or any other liabilities
individually in excess of $100,000 or, in the case of indebtedness and/or
liabilities individually less than $100,000, in excess of $500,000 in the
aggregate, (iii) made any loans or advances to any person, other than ordinary
advances for travel expenses which exceed, in the aggregate, $100,000, or (iv)
sold, exchanged or otherwise disposed of any of its assets or rights, other than
the sale of its inventory in the ordinary course of business.
(c) For the purposes of SUBSECTIONS (a) and (b) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company or its Subsidiaries has reason to believe are affiliated
therewith) will be aggregated for the purpose of meeting the individual minimum
dollar amounts of such subsections.
(d) Neither the Company nor any of its Subsidiaries is subject to any
restriction under its Restated Certificate of Incorporation or Bylaws, which
adversely affects its business as now conducted.
2.11 CHANGES. Since March 31, 1999, there has not been:
(a) any change in the assets, liabilities, financial condition or
operating results of the Company from that reflected in the Company's quarterly
report on Form 10-Q for the period ending March 31, 1999, except changes which
have been reported in the SEC Filings or
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otherwise in the ordinary course of business which have not been, in the
aggregate, materially adverse.
(b) any damage, destruction or loss, whether or not covered by
insurance, which would have a Material Adverse Effect;
(c) any waiver by the Company or any of its Subsidiaries of a
material right or of a material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or encumbrance
or payment of any obligation by the Company or its Subsidiaries, except in the
ordinary course of business and which would have a Material Adverse Effect;
(e) any change or amendment to, and neither the Company nor its
Subsidiaries has received any notice of termination of and is not otherwise
aware of any customer's intention to terminate, a material contract or
arrangement by which the Company or its Subsidiaries or any of their respective
assets or properties is bound or subject except as reflected in the SEC Filings;
or
(f) any material change in any compensation arrangement or agreement
with any executive officer except as reflected in the SEC Filings.
2.12 EMPLOYEE BENEFIT PLANS. With respect to each Employee Benefit Plan
(within the meaning of Section 3.3 of the Employee Retiree Income Security Act
of 1974, as amended ("ERISA")) maintained by, or to which the Company or its
Subsidiaries contributes to or is obligated to contribute to: (i) each such
Plan satisfies all of the provisions of ERISA, to the extent applicable; (ii)
each such Plan intended to qualify under Section 401(a) or the Internal Revenue
Code of 1986, as amended (the "CODE") or for any other tax-exempt or tax-favored
status under the Code so qualifies; (iii) except with respect to outstanding
liabilities for contributions or benefits relating to each such Plan (to the
extent applicable, the amount of such outstanding current liabilities for
contributions or benefits having been appropriately reserved against and
reflected in the Company's publicly reported financial statements), neither the
Company, any of its Subsidiaries nor any member of a controlled group of
corporations or other entities (within the meaning of Sections 414(b), (c), (m)
or (o) of the Code that includes the Company or its Subsidiaries is subject to
any outstanding or potential liabilities or obligations, direct or indirect,
relating to any such Plan, and (iv) there are no actual or potential claims or
actions (other than claims for benefits in the normal course) relating to any
such Plan.
2.13 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company and its Subsidiaries
have filed all tax returns and reports as required by federal and state law or
has obtained timely extensions to filing thereof. These returns and reports are
true and correct in all material respects. The Company and its Subsidiaries
have paid all taxes and other assessments due, except those contested by it in
good faith which are listed in the Schedule of Exceptions. The provision for
taxes of the Company and its Subsidiaries as shown in the financial statements
contained in the March 31, 1999 Form 10-Q is adequate for taxes due or accrued
as of the date thereof.
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2.14 LABOR AGREEMENTS AND ACTIONS.
(a) Neither the Company nor any of its Subsidiaries is bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the knowledge of the
Company, has sought to represent any of the employees, representatives or agents
of the Company or its Subsidiaries. There is no strike or other labor dispute
involving the Company or its Subsidiaries pending, or to the knowledge of the
Company threatened, which could have a Material Adverse Effect, nor is the
Company aware of any labor organization activity involving the employees of the
Company or its Subsidiaries. Neither the Company nor its Subsidiaries is aware
that any officer or key employee, or that any group of key employees, intends to
terminate their employment with the Company or any of its Subsidiaries, nor does
the Company or its Subsidiaries have a present intention to terminate the
employment of any of the foregoing. Except as set forth in the SEC Filings,
subject to general principles related to wrongful termination of employees and
the employment policies of the Company and its Subsidiaries regarding payment of
severance pay, the employment of each executive officer of the Company and its
Subsidiaries is terminable at the will of the Company.
(b) Except as reflected in the SEC Filings and for regular salary
payments and fringe benefits under an individual's compensation package with the
Company or its Subsidiaries, none of the officers, employees, directors,
shareholders, or other affiliates of the Company or its Subsidiaries, or members
of their families is a party to any agreements, understandings or proposed
transactions with the Company or its Subsidiaries. Neither the Company nor any
of its Subsidiaries has guaranteed or assumed any obligations of its respective
officers, directors, employees or affiliates of the Company or its Subsidiaries.
(c) To the Company's knowledge, no employee of the Company or its
Subsidiaries is, or is now expected to be, in violation of any term of any
employment contract, patent assignment agreement, or any other contract or
agreement or any restrictive covenant or any other common law obligation to a
former employer relating to the right of any such employee to be employed by the
Company or its Subsidiaries because of the nature of the business conducted, or
to be conducted, by the Company or its Subsidiaries or to the use of trade
secrets or proprietary information of others, and, to the Company's knowledge,
the employment of the employees of the Company and its Subsidiaries does not
subject the Company or its Subsidiaries to any material liability. There is
neither pending nor, to the Company's best knowledge, threatened any actions,
suits, proceedings or claims with respect to any contract, agreement, covenant
or obligation referred to in the preceding sentence.
2.15 INSURANCE. The Company believes that it and its Subsidiaries maintain
an amount of casualty and liability insurance which is reasonably adequate to
protect the Company and its financial condition against material risks arising
out of the current nature of its business.
2.16 DISCLOSURE. Neither this Agreement, the Registration Rights
Agreement, nor any other written statements or certificates made or delivered in
connection with this Agreement or therewith contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
made in this Agreement or therein not misleading in light of
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the circumstances under which they were made. The Company's Form 10-K for
the fiscal year ending December 31, 1998 as updated by its subsequent SEC
Filings does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made not misleading in
light of the circumstances under which they were made.
The Company covenants that as long as Galen Partners III, L.P., Galen Partners
International III, L.P. and Galen Employee Fund III, L.P. ("Galen") hold, in the
aggregate, at least 25% of the Series A Preferred Stock or a corresponding
amount of Common Stock into which the Series A Preferred Stock is convertible,
the Company shall use its best efforts to cause to be elected one representative
selected by Galen Partners III, L.P. on the Company's Board of Directors
assuming that candidate is otherwise qualified for service and his or her
appointment as a director will be consistent with the fiduciary duties of the
Board of Directors nominating this individual as a director. It is further
agreed that (1) the Board of Directors of the Company shall consist of seven
individuals at the Closing, (2) that, subject to SECTION 7 of the Certificate of
Designations of the Series A Preferred Stock, the size of the board may not be
altered except with majority consent of the outside directors of the Company,
(3) subject to compliance with fiduciary duties, that the Galen representative
will be included on the audit and compensation committee and any other
appropriate committee, including, but not limited to, a search committee for the
new chief financial officer and any nominating committee for new or replacement
directors, and (4) that all such committees will be comprised solely of outside
directors.
2.17 USE OF PROCEEDS. The Company will use the proceeds from the sale of
the Series A Preferred Stock for general corporate and working capital purposes.
2.18 YEAR 2000 COMPLIANCE. The Company will employ all reasonable
commercial efforts to ensure that all devices, systems, machinery, information
technology, computer software and hardware and other date sensitive technology
(collectively, the "SYSTEMS") necessary for the Company and its Subsidiaries to
carry on its business as currently conducted and as contemplated to be conducted
in the future are Year 2000 Compliant or will be Year 2000 Complaint within a
period of time reasonably calculated to avoid a Material Adverse Effect. For
purposes of these provisions, "Year 2000 Compliant" means that such Systems are
designed to be used before, during and after the Gregorian calendar year 2000
A.D. and will operate during each such time period without error related to date
data, specifically including any error relating to, or the product of, date data
that represents or refers to different centuries or more than one century.
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ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR
Each Investor hereby represents, warrants and covenants that:
3.1 AUTHORIZATION. This Agreement constitutes its valid and legally
binding obligation, enforceable in accordance with its terms except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
other laws of general application affecting enforcement of creditors' rights
generally and (b) as limited by laws relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with each
Investor in reliance upon such Investor's representation to the Company, which
by such Investor's execution of this Agreement such Investor hereby confirms,
that the Series A Preferred Stock to be received by such Investor and the Common
Stock issuable upon conversion thereof (collectively, the "SECURITIES") will be
acquired for investment for such Investor's own account, not as a nominee or
agent, and not with a view to the resale or distribution of any part thereof,
and that such Investor has no present intention of selling, granting any
participation in, or otherwise distributing the same. By executing this
Agreement, each Investor further represents that such Investor does not have any
contract, undertaking, agreement or arrangement with any person to sell,
transfer or grant participations to such person or to any third person, with
respect to any of the Securities. Each Investor represents that it has full
power and authority to enter into this Agreement.
3.3 DUE DILIGENCE; DISCLOSURE OF INFORMATION. Each Investor has performed
a due diligence investigation of the Company and its industry. Each Investor
further represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Series A Preferred Stock.
3.4 INVESTMENT EXPERIENCE. Each Investor is a professional investor with
substantial knowledge about the industry in which the Company functions.
Accordingly, each Investor has such knowledge and experience regarding the
industry of the Company and in financial or business matters that it is capable
of evaluating fully the merits and risks of the investment in the Series A
Preferred Stock. Each Investor acknowledges that it is able to fend for itself,
can bear the economic risk of its investment and if other than an individual,
Investor also represents it has not been organized for the purpose of acquiring
the Series A Preferred Stock. Each Investor represents and warrants that it
maintains its principal place of business at the address indicated for such
Investor on the signature page of this Agreement and that each such Investor is
organized under the laws of the state indicated for each such Investor on such
signature pages.
3.5 ACCREDITED INVESTOR; INVESTOR STATUS. Each Investor is an "accredited
investor" within the meaning of SEC Rule 501 of Regulation D, as presently in
effect. Each of Galen Partners III, L.P., Galen Partners International III,
L.P. and Galen Employee Fund III, L.P. is an institutional buyer as referenced
in the General Business Law of the State of New York.
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3.6 RESTRICTED SECURITIES. Each Investor understands that the shares of
Series A Preferred Stock it is purchasing are characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may be resold
without registration under the Securities Act of 1933, as amended (the "ACT"),
only in certain limited circumstances. In this connection, each Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the
representations set forth above, each Investor further will not make any
disposition of all or any portion of the Series A Preferred Stock (or the Common
Stock issuable upon the conversion thereof) unless and until the transferee has
agreed in writing for the benefit of the Company to be bound by this ARTICLE III
and ARTICLE VII, provided and to the extent such sections are then applicable
and the Registration Rights Agreement and:
(a) There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
(b) (i) Such Investor will have notified the Company of any such
proposed disposition (with the exception of sales pursuant to Rule 144 of the
Act) and will have furnished the Company with a detailed statement of the
circumstances surrounding the proposed disposition, and (ii) if reasonably
requested by the Company, such Investor will have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of such shares under the Act.
3.8 NO TRANSFERS EXCEPT PURSUANT TO REGISTRATION STATEMENT. Each Investor
further agrees that it may effect no transfer of the Series A Preferred Stock or
the Common Stock issued upon conversion thereof except (i) pursuant to the
registrations to be filed pursuant to SECTION 1.2 or 1.3 of the Registration
Rights Agreement, (ii) pursuant to SECTION 1.11 of the Registration Rights
Agreement, or (iii) in pro rata distribution to its partners.
3.9 LEGENDS. It is understood that the certificates evidencing the
Series A Preferred Stock (and the Common Stock issuable upon conversion thereof)
may bear one or all of the following legends:
(a) THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE
SECURITIES ACT OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY LAWS OF CALIFORNIA,
DELAWARE, NEW YORK OR ANY OTHER STATE AND MAY NOT BE OFFERED OR SOLD UNLESS
REGISTERED AND/OR QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND
STATE SECURITIES OR BLUE SKY LAWS, OR AN EXEMPTION FROM SUCH REGISTRATION OR
QUALIFICATION IS APPLICABLE. THEREFORE, NO SALE OR TRANSFER OF THIS SECURITY
WILL BE MADE, NO ATTEMPTED SALE OR TRANSFER WILL BE VALID, AND THE ISSUER WILL
NOT BE REQUIRED TO GIVE ANY EFFECT TO ANY SUCH TRANSACTION
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UNLESS (A) SUCH TRANSACTION WILL HAVE BEEN DULY REGISTERED UNDER THE ACT AND
QUALIFIED OR APPROVED UNDER APPROPRIATE STATE SECURITIES OR BLUE SKY LAWS, OR
(B) THE ISSUER WILL BE REASONABLY SATISFIED THAT SUCH REGISTRATION,
QUALIFICATION OR APPROVAL IS NOT REQUIRED.
(b) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO (A)
THE RESTRICTIONS ON TRANSFER OF A CERTAIN SERIES A PREFERRED STOCK PURCHASE
AGREEMENT DATED JULY 26, 1999, AS AMENDED FROM TIME TO TIME AND (B) THE TERMS
AND CONDITIONS OF A CERTAIN REGISTRATION RIGHTS AGREEMENT DATED JULY 26, 1999,
AS AMENDED FROM TIME TO TIME. THE CORPORATION WILL, UPON WRITTEN REQUEST,
FURNISH A COPY OF EACH SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE.
(c) THE SHARES EVIDENCED HEREBY ARE CONVERTIBLE INTO SHARES OF COMMON
STOCK OF THE CORPORATION AND WILL BE AUTOMATICALLY SO CONVERTED IN CERTAIN
SITUATIONS, SUBJECT TO ADJUSTMENT IN CERTAIN CIRCUMSTANCES, IN EACH CASE AS MORE
FULLY SET FORTH IN THE CERTIFICATE OF DESIGNATIONS TO THE CERTIFICATE OF
INCORPORATION OF THE CORPORATION DATED JULY 22, 1999 (THE "CERTIFICATE OF
DESIGNATIONS"). A FULL STATEMENT OF RIGHTS, PREFERENCES, PRIVILEGES AND
RESTRICTIONS GRANTED TO OR IMPOSED UPON THE RESPECTIVE CLASSES AND SERIES OF
SHARES OF THE CORPORATION AND UPON THE HOLDERS THEREOF ARE SET FORTH IN THE
CERTIFICATE OF DESIGNATIONS. THE CERTIFICATE OF DESIGNATIONS MAY BE OBTAINED
FROM THE SECRETARY OF THE CORPORATION UPON REQUEST AND WITHOUT CHARGE.
(d) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations and
Sections 417 and 418 of the Code.
(e) Any other legend required to comply with applicable state
securities laws.
3.10 SECURITIES LAW COMPLIANCE. Each Investor acknowledges and understands
that the Company is relying on the representations and warranties set forth
above in this ARTICLE III for compliance with applicable federal and state
securities laws.
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ARTICLE IV
CALIFORNIA COMMISSIONER OF CORPORATIONS
4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
ARTICLE V
CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING
The obligations of each Investor under SUBSECTION 1.1(b) are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which will not be effective against any Investor who does not consent
in writing thereto:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in ARTICLE II will be true on and as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the date of such Closing.
5.2 PERFORMANCE. The Company will have performed and complied with all
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
5.3 COMPLIANCE CERTIFICATE. The President of the Company will deliver to
each Investor at the Closing a certificate certifying that the conditions
specified in SECTIONS 5.1 and 5.2 have been fulfilled and stating that there
will have been no material adverse change in the business, affairs, operations,
properties, assets or condition of the Company since March 31, 1999.
5.4 CHARTER DOCUMENT. The Company will have adopted and filed with the
Secretary of State of the State of Delaware the Certificate of Designations and
such instrument will have become effective as provided by Delaware law.
5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all documents
incident thereto will be reasonably satisfactory in form and substance to
Investors' special counsel, and they will have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request.
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5.6 BOARD OF DIRECTORS. As of Closing, the members of the Board of
Directors of the Company shall be: Georges J. Daou, Daniel J. Daou, David W.
Jahns, Richard B. Jaffe, John H. Moragne, Larry D. Grandia and Kevin M.
Fickenscher, M.D.
5.7 OPINION OF COMPANY COUNSEL. Each Investor will have received from
Baker & McKenzie, counsel for the Company, an opinion, dated as of the Closing,
in form and substance reasonably satisfactory to the special counsel to the
Investors.
5.8 OTHER AGREEMENTS. The Company and each Investor will have entered
into the Registration Rights Agreement in the form attached as EXHIBIT B and
each of Georges J. Daou and Daniel J. Daou and each Investor will have entered
into the Voting Agreement attached as EXHIBIT C dated as of the date of this
Agreement.
ARTICLE VI
CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING
The obligations of the Company to each Investor under this Agreement are subject
to the fulfillment on or before the Closing of each of the following conditions
by that Investor:
6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Investor contained in ARTICLE III will be true on and as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the Closing.
6.2 PAYMENT OF PURCHASE PRICE. Each Investor will have delivered the
purchase price as required by SECTION 1.2.
6.3 OTHER AGREEMENTS. Each Investor will have entered into the
Registration Rights Agreement dated as of the date of this Agreement.
ARTICLE VII
MISCELLANEOUS
7.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants
of the Company and Investors contained in or made pursuant to this Agreement
will survive the execution and delivery of this Agreement and the Closing for
two years and will not be affected by any investigation of the subject matter
thereof made by or on behalf of the Investors or the Company.
7.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
will not inure to the benefit of and be binding upon the respective successors
and permitted assigns of Investor. The terms and conditions of this Agreement
will inure to the benefit of and be binding upon the respective assigns of the
Company. Nothing in this Agreement, express or implied, is intended to confer
upon any party other than the parties to this Agreement or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
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7.3 GOVERNING LAW. This Agreement will be governed by and construed under
the laws of the State of California as applied to agreements among California
residents entered into and to be performed entirely within California.
7.4 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
7.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
7.6 NOTICES. Unless otherwise provided, any notice required or permitted
under this Agreement will be given in writing and will be deemed effectively
given upon personal (including air-courier) delivery to the party to be
notified, by telecopy upon receipt of the appropriate answer-back or 3 days
following deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page of this Agreement, or at such
other address as such party may designate by ten days' advance written notice to
the other parties.
7.7 FINDERS' FEE OR COMMISSION. Each party represents that it neither is
nor will be obligated for any finders' fee or commission in connection with this
transaction except with respect to the fee payable by the Company to Hambrecht &
Quist in the amount previously disclosed to the Investors. Each Investor will
indemnify and hold harmless the Company from any liability for any commission or
compensation in the nature of a finders' fee (and the costs and expenses of
defending against such liability or asserted liability) arising out of any
dealing, commitment or agreement of the Investor or any of its officers,
partners, employees, or representatives.
The Company will indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) arising out of any dealing, commitment or agreement of the Company or
any of its officers, employees or representatives.
7.8 EXPENSES. Irrespective of whether the Closing is effected, the
Company will pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement and the other
Agreements and instruments contemplated hereby or entered into in connection
herewith. If (and only if) the Closing is effected, the Company will reimburse
up to $75,000 of the reasonable out-of-pocket expenses of Investors, including
fees of special counsel and certain other professional advisers to the
Investors. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement or the Certificate of Designations the
prevailing party will be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
7.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company
14
<PAGE>
and the holders of a majority of the Common Stock issued or issuable upon
conversion of the Series A Preferred Stock. Any amendment or waiver effected
in accordance with this SECTION 7.9 will be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
7.10 SEVERABILITY. If one or more provisions of this Agreement are held to
be unenforceable under applicable law, such provision will be excluded from this
Agreement and the balance of the Agreement will be interpreted as if such
provision were so excluded and will be enforceable in accordance with its terms.
7.11 AGGREGATION OF STOCK. All shares of the Preferred Stock held or
acquired by affiliated entities or persons will be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
7.12 ENTIRE AGREEMENT. This Agreement and the documents referred to in
this Agreement constitute the entire agreement among the parties and no party
will be liable or bound to any other party in any manner by any warranties,
representations, or covenants except as specifically set forth in this Agreement
or therein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
THE COMPANY:
DAOU SYSTEMS, INC.
By: /s/ Larry D. Grandia
-------------------------------------
Name: Larry D. Grandia
Title: Chief Executive Officer
GALEN PARTNERS III, L.P.,
a Delaware Limited Partnership
By: Claudius, L.L.C.,
a Delaware Limited Liability Company
By: /s/ Bruce F. Wesson
-------------------------------------
Senior Managing Member
GALEN PARTNERS INTERNATIONAL III, L.P.,
a Delaware Limited Partnership
By: Claudius, L.L.C.,
a Delaware Limited Liability Company
By: /s/ Bruce F. Wesson
-------------------------------------
Senior Managing Member
GALEN EMPLOYEE FUND III, L.P.,
a Delaware Limited Partnership
By: Wesson Enterprises, Inc.
By: /s/ Bruce F. Wesson
-------------------------------------
Bruce F. Wesson
President
[SIGNATURE PAGE OF STOCK PURCHASE AGREEMENT]
16
<PAGE>
INVESTORS
---------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
NAME PURCHASE PRICE NUMBER OF
FOR SHARES SHARES TOTAL
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Galen Partners III, L.P. $5.50 1,993,234 $10,962,788
- ---------------------------------------------------------------------------------------
Galen Partners International III, L.P. $5.50 180,422 $992,321
- ---------------------------------------------------------------------------------------
Galen Employee Fund III, L.P. $5.50 8,162 $44,891
- ---------------------------------------------------------------------------------------
TOTAL 2,181,818 $12,000,000
- ---------------------------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATIONS
[SEE ATTACHED]
A-1
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
[SEE ATTACHED]
B-1
<PAGE>
EXHIBIT C
VOTING AGREEMENT
[SEE ATTACHED]
C-1
<PAGE>
NEWS RELEASE
[LOGO]
FOR IMMEDIATE RELEASE
CONTACT: Aruna Lalwaney
Corporate Marketing Director
858.452.2221
[email protected]
www.daou.com
[email protected]
DAOU SYSTEMS, INC. COMPLETES $12 MILLION PRIVATE PLACEMENT FINANCING
FROM GALEN PARTNERS
San Diego, CA, July 28, 1999 -- DAOU Systems, Inc. (Nasdaq: DAOU) today
announced that it has completed a $12 million private placement financing,
consisting of 2.2 million shares of Series A Preferred Stock sold at $5.50
per share. Net proceeds of the offering will be used for general corporate
and working capital purposes.
The Preferred Stock was purchased by Galen Partners III and affiliated
parties, the successor fund to Galen Partners II which had invested in a
previous placement of DAOU Series A Preferred Stock in 1995. Those shares
were since converted to shares of DAOU Common Stock in connection with the
Company's initial public offering in February 1997. DAOU currently has a
total of five million shares of Preferred Stock authorized, none of which was
issued and outstanding prior to the current investment by Galen Partners III.
<PAGE>
"We are pleased with this follow-on investment on the part of Galen
Partners," stated Larry Grandia, Chief Executive Officer and President of
DAOU Systems, Inc. "Their purchase of our Preferred Stock demonstrates that
substantial, quality investors have confidence in DAOU and our future
opportunities. The additional financial resources provided through this
financing will help us to fund our strategic plans and invest in high
potential opportunities."
Added David W. Jahns, General Partner of Galen Partners and a member of
DAOU's Board of Directors, "We believe DAOU is uniquely positioned in the
market to deliver healthcare IT solutions, and we welcome this opportunity to
support the Company's ability to execute its strategy for growth and value
creation on behalf of its shareholders."
Each share of the Series A Preferred Stock is convertible into one share
of common stock at $5.50 per share, at the option of the holder, subject to
certain antidilution adjustments. Holders of shares of the Series A
Preferred Stock will be entitled to receive dividends at the annual rate of
six percent, payable in kind in the form of shares of Series A Preferred
Stock.
The Series A Preferred Stock is redeemable at the option of the Company
four years after the date of issuance, and at the option of the holders under
certain terms and conditions. In addition, the Preferred Stock is subject to
mandatory conversion in the event DAOU's Common Stock price reaches certain
predetermined price targets.
A complete description of the rights, preferences and privileges of the
Preferred Stock, along with other terms and conditions of the private
placement transaction, is attached to DAOU's Form 8-K filed with the
Securities and Exchange Commission on July 28, 1999.
DAOU Systems, Inc. is a provider of integrated Information Technology
(IT) solutions and services to the U.S. healthcare industry. DAOU's
capabilities range from up-front strategic consulting to IT system design,
implementation and long-term tactical support. DAOU's IT
<PAGE>
offerings include data, voice and video networking, applications consulting
and implementation, as well as operational and Internet solutions. DAOU has
nearly 800 employees, and has provided services to more than 1,300 healthcare
organizations, including many of the nation's top 100 integrated delivery
systems. DAOU's clients include organizations such as the Cleveland Clinic,
Catholic Healthcare West, and Saint Mary's Health Network, Reno, Nevada. More
information about DAOU Systems can be found at WWW.DAOU.COM on the World Wide
Web.
Galen Partners is a premiere private equity firm that invests
exclusively in the healthcare industry and is known for highly successful
mid-to-later stage investments in service, device, generic drugs and
information technology. More information about Galen Partners can be found at
WWW.GALEN-PARTNERS.COM on the World Wide Web.
This press release contains forward-looking statements within the meaning of
section 27A of the Securities Act of 1933, as amended. Such statements are
only predictions and actual events or results may differ materially. Forward-
looking statements usually contain the word "estimate", "anticipate",
"believe", "expect" or similar expressions. The forward-looking statements
included herein are based on current expectations and certain assumptions and
entail various risks and uncertainties, including uncertainties related to
the intensely competitive nature of the company's marketplace and the
inherent difficulties of successfully implementing staffing reorganizations.
These factors and the matters set forth in the company's annual report on
Form 10-K under the caption "Risk Factors" could cause actual results to
differ materially from those indicated by such forward-looking statements.
