-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ca2IkHd5xnf0wnkKlUmityhaNZkezQJxyEjB5Erb8eA6CaDi5PQEWv/J2jU3xpxY CrhpJ+I+V6iheuOYha1KXg== 0000898430-01-501917.txt : 20010815 0000898430-01-501917.hdr.sgml : 20010815 ACCESSION NUMBER: 0000898430-01-501917 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAOU SYSTEMS INC CENTRAL INDEX KEY: 0001003989 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 330284454 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22073 FILM NUMBER: 1713696 BUSINESS ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 BUSINESS PHONE: 8584522221 MAIL ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 10-Q 1 d10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ______________ to ___________ Commission File No.: 000-22073 DAOU SYSTEMS, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 33-0284454 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 5120 Shoreham Place San Diego, California 92122 (Address of Principal Executive Offices) (Zip Code) (858) 452-2221 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of registrant's Common Stock, par value $.001 per share, outstanding as of August 10, 2001: 17,143,164 DAOU SYSTEMS, INC. Index to Form 10-Q
Page ---------- PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements 2 Condensed Balance Sheets at June 30, 2001 (unaudited) and December 31, 2000 2 Condensed Statements of Operations (unaudited) for the Three Months and Six Months Ended June 30, 2001 and 2000 3 Condensed Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2001 and 2000 4 Notes to Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17
PART I. FINANCIAL INFORMATION Item 1. Condensed Financial Statements DAOU Systems, Inc. Condensed Balance Sheets (In thousands, except for per share data)
June 30, December 31, 2001 2000 ------------------------------------ (unaudited) Assets Current assets: Cash and cash equivalents $ 13,841 $ 10,504 Short-term investments, available-for-sale 82 82 Accounts receivable, net of allowance for doubtful accounts of $809 and $1,138 at June 30, 2001 and December 31, 2000, respectively 8,263 11,900 Contract work in progress 350 1,060 Other current assets 611 558 ------------------------------------ Total current assets 23,147 24,104 Equipment, furniture and fixtures, net 1,639 2,565 Other assets 107 163 ------------------------------------ Total Assets $ 24,893 $ 26,832 ==================================== Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable and other accrued liabilities $ 1,549 $ 3,286 Accrued salaries and benefits 3,194 2,273 Deferred revenue 782 397 Current portion of severance payable 210 210 ------------------------------------ Total current liabilities 5,735 6,166 Long-term liabilities 206 306 Commitments and contingencies Stockholders' equity: Convertible preferred stock, $.001 par value. Authorized 3,520 shares; issued and outstanding 2,182 shares at June 30, 2001 and December 31, 2000 2 2 Common stock, $.001 par value. Authorized 50,000 shares; issued and outstanding 17,143 shares at June 30, 2001 and 17,831 shares at December 31, 2000 18 18 Additional paid-in capital 53,094 51,614 Notes receivable from stockholders (1,204) -- Accumulated other comprehensive income (49) (49) Accumulated deficit (32,909) (31,225) ------------------------------------ Total stockholders' equity 18,952 20,360 ------------------------------------ Total Liabilities and Stockholders' Equity $ 24,893 $ 26,832 ====================================
See accompanying notes to the condensed financial statements. - -------------------------------------------------------------------------------- 2 DAOU Systems, Inc. Condensed Statements of Operations (In thousands, except for per share data) (unaudited)
Three Months Ended June 30, Six Months Ended June 30, ----------------------------------- -------------------------------------- 2001 2000 2001 2000 ----------------- ----------------- ----------------- ------------------ Revenues $ 10,121 $ 16,127 $ 22,881 $ 33,702 Cost of revenues 7,190 13,045 16,614 29,001 ----------------- ----------------- ----------------- ------------------- Gross profit 2,931 3,082 6,267 4,701 Operating expenses: Sales and marketing 724 1,651 1,650 3,441 General and administrative 3,198 4,178 6,113 8,642 Restructuring charges - 827 - 827 ----------------- ----------------- ----------------- ------------------- 3,922 6,656 7,763 12,910 ----------------- ----------------- ----------------- ------------------- Loss from operations (991) (3,574) (1,496) (8,209) Other income, net 125 164 264 333 ----------------- ----------------- ----------------- ------------------- Loss before income taxes (866) (3,410) (1,232) (7,876) Provision for income taxes - - (61) - ----------------- ----------------- ----------------- ------------------- Net loss (866) (3,410) (1,293) (7,876) Accrued dividends on preferred stock (196) (185) (391) (369) ----------------- ----------------- ----------------- ------------------- Net loss available to common stockholders $ (1,062) $ (3,595) $ (1,684) $ (8,245) ================= ================= ================= =================== Basic and diluted net loss available to common stockholders per common share $ (0.06) $ (0.20) $ (0.10) $ (0.47) ================= ================= ================= =================== Shares used in computing basic and diluted net loss available to common stockholders per common share 17,198 17,713 17,512 17,712 ================= ================= ================= ===================
See accompanying notes to the condensed financial statements. - -------------------------------------------------------------------------------- 3 DAOU Systems, Inc. Condensed Statements of Cash Flows (In thousands) (unaudited)
Six Months Ended June 30, ---------------------------------------- 2001 2000 ----------------- ------------------ Operating Activities Net loss $ (1,293) $ (7,876) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 709 1,156 Provision for uncollectible accounts 399 197 Loss on retirement of fixed assets 352 - Changes in operating assets and liabilities: Accounts receivable 3,238 7,023 Contract work in process 710 1,360 Other current assets (53) (644) Accounts payable and accrued liabilities (1,709) (2,411) Accrued salaries and benefits 921 (743) Deferred revenue 385 - Other long term liabilities (100) (2) -------- -------- Net cash provided by (used in) operating activities 3,559 (1,940) Investing Activities: Purchases of equipment, furniture and fixtures, net (135) (869) Changes in other assets 56 150 -------- -------- Net cash used in investing activities (79) (719) Financing Activities: Proceeds from issuance of common stock 55 1 Purchase of treasury stock (198) - -------- -------- Net cash (used in) provided by financing activities (143) 1 -------- -------- Increase (decrease) in cash and cash equivalents 3,337 (2,658) Cash and cash equivalents at beginning of period 10,504 15,480 -------- -------- Cash and cash equivalents at end of period $ 13,841 $ 12,822 ======== ======== Supplemental Disclosure of Non-cash Activities: Common stock issued for services $ 25 $ - ======== ======== Common stock issued for settlement $ 3 $ - ======== ======== Common stock issuable for notes receivable from stockholder $ 1,204 $ - ======== ======== Accrued preferred stock dividends $ 391 $ 391 ======== ========
See accompanying notes to the condensed financial statements. - -------------------------------------------------------------------------------- 4 DAOU SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited condensed financial statements of DAOU Systems, Inc. ("DAOU" or the "Company") at June 30, 2001 and for the three and six-month periods ended June 30, 2001 and 2000 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for a complete set of financial statements. These financial statements reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary to fairly present the financial position of the Company at June 30, 2001 and the results of operations for the three and six-month periods ended June 30, 2001 and 2000. The results of operations for the three and six-months ended June 30, 2001 are not necessarily indicative of the results to be expected for the year ending December 31, 2001. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in revenues, expenses and net income or losses will continue. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financials should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 30, 2001. The Company has two operating divisions: Application Services and Technology Services. The Application Services division provides clients with strategic consulting, software implementation, project management, and support services, including staff augmentation. The Technology Services division provides clients with solutions in key areas, including network infrastructure (servers, data and voice networks, and security), web development and integration projects, help desk solutions (remote or on-site) and network management. Certain of the 2000 amounts have been reclassified to conform to the current presentation. 2. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about the future that affect the amounts reported in the financial statements and disclosures made in the accompanying notes of the financial statements. The actual results could differ from those estimates. 3. Lines of Credit On June 29, 2001, the Company's $8.0 million revolving line of credit expired. No amounts were outstanding under this revolving line of credit as of June 29, 2001. 4. Net Loss Per Share Net loss per share is computed in accordance with FASB Statement No. 128, EARNINGS PER SHARE. Basic net loss per share is computed using the weighted average number of common shares outstanding during each period. Diluted net loss per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options and warrants. For the three and six months ended June 30, 2001 and 2000, diluted loss per share is unchanged from basic loss per share because the effects of the assumed conversion of stock options and warrants would be anti-dilutive. - -------------------------------------------------------------------------------- 5 The following table details the computation of basic and diluted net loss per share: (In thousands, except per share information) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- --------------------------- 2001 2000 2001 2000 ----------- ---------- --------- --------- Numerator: Net loss available to common stockholders $ (1,062) $ (3,595) $ (1,684) $ (8,245) =========== ========== ========= ========= Denominator: Denominator for basic net loss per share - weighted average common shares outstanding 17,198 17,713 17,512 17,712 ----------- ---------- --------- --------- Denominator for diluted net loss per share - adjusted weighted average common shares outstanding 17,198 17,713 17,512 17,712 =========== ========== ========= ========= Basic net loss per share $ (.06) $ (0.20) $ (.10) $ (0.47) =========== ========== ========= ========= Diluted net loss per share $ (.06) $ (0.20) $ (.10) $ (0.47) =========== ========== ========= =========
5. Comprehensive Loss Comprehensive loss for the three months ended June 30, 2001 and 2000 totaled $(1,029,000) and $(3,598,000), respectively. Comprehensive loss for the six months ended June 30, 2001 and 2000 totaled $(1,684,000) and $(8,249,000), respectively. The difference from reported net loss arises from the unrealized gains and losses on short-term investments. 6. Stockholders Equity Treasury Stock On April 25, 2001, the Company re-purchased 992,111 shares of the Company's common stock from the former Chairman of the Board of the Company at a price equal to $.20 per share for a total purchase price of $198,000. The Company holds these shares in treasury as of June 30, 2001. Employee Stock Purchase Plan Under the Company's Employee Stock Purchase Plan ("ESPP"), employees are allowed to purchase the Company's common stock at six-month intervals. Employees pay the lower of 85% of the fair market value of the common stock at the beginning of the measurement period or 85% of the fair market value of the common stock at the end of the measurement period. On June 30, 2001, the Company recorded the issuance of 205,714 shares of common stock under the ESPP with proceeds of $55,000. On June 30, 2001, 1,176,061 shares remained reserved for issuance under the ESPP. 7. Related Party Transactions On June 1, 2001, the Company agreed to sell 1,500,000, 150,000 and 2,500,000 shares of restricted common stock at the June 1, 2001 closing price of $.29 per share to Messers. James T. Roberto, Neil R. Cassidy and Vincent K. Roach, respectively, of the Company in exchange for full-recourse notes receivable that accrue interest at a rate of 6.75% and which are due on May 31, 2006. As part of the agreement, 1,710,000 options to purchase common stock previously granted to these executive officers were cancelled. - -------------------------------------------------------------------------------- 6 8. Series A Preferred Stock Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at the rate of six percent per annum, payable in the form of shares of Series A Preferred Stock. Such dividend rate shall increase an additional one-percent per annum for each successive year after the second anniversary of the purchase date. As of June 30, 2001, the Company has accrued but undeclared preferred stock dividends of $1,450,000, which is payable in shares of Series A Preferred Stock. 9. Restructuring Plan The Company recorded restructuring charges in 2000, totaling $2,133,000 in connection with its restructuring plans. Such charges were determined in accordance with Staff Accounting Bulletin No. 100, RESTRUCTURING AND IMPAIRMENT CHARGES, and Emerging Issues Task Force No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A RESTRUCTURING). The following table summarizes the restructuring and other related charges paid in 2001 and remaining charges in accrued liabilities as of June 30, 2001.
Restructuring Charges ------------------------------------------------------ Accrued as of Paid in Six Accrued as of December 31, Months Ended June 30, 2000 June 30, 2001 2001 ---------------- ------------------- ----------------- Severance costs for involuntary employee terminations $ 388,000 $ 388,000 $ - Costs related to closure and combination of facilities 918,000 387,000 531,000 ---------------- ------------------- ----------------- $1,306,000 $ 775,000 $ 531,000 ================ =================== =================
10. Disclosure of Segment Information For the three and six months ended June 30, 2001, the Company has the following two reportable segments: Application Services division and Technology Services division. Application Services - provides clients with strategic consulting, software implementation, project management, and support services, including staff augmentation. Technology Services - provides clients with solutions in key areas, including network infrastructure, application development and integration projects, help desk solutions and network management. The Company manages segment reporting at a gross margin level. Selling, general and administrative expenses, and fixed assets are managed at the corporate level separately from the segments and therefore are not separately allocated to the segments. The Company's segments are managed on an integrated basis in order to serve clients by assembling multi-disciplinary teams, which provide comprehensive services across its principal services. Segment disclosures for the three and six months ended June 30, 2000 were restated to correspond to the 2001 reportable segment disclosures for comparative purposes. - -------------------------------------------------------------------------------- 7
Technology Application Services Services Total ------------------------------------------------------ Three months ended June 30, 2001 - -------------------------------- Total revenues $ 5,776 $ 4,345 $ 10,121 Cost of services 3,915 3,275 7,190 ------------------------------------------------------ Gross profit 1,861 1,070 2,931 Gross profit percent 32% 25% 29% Sales and marketing 724 General and administrative 3,198 Restructuring charges - ----------------- Loss from operations $ (991) ================= Three months ended June 30, 2000 - -------------------------------- Total revenues $ 10,655 $ 5,472 $ 16,127 Cost of services 9,052 3,993 13,045 ------------------------------------------------------ Gross profit 1,603 1,479 3,082 Gross profit percent 15% 27% 19% Sales and marketing 1,651 General and administrative 4,178 Restructuring charges 827 ----------------- Loss from operations $ (3,574) ================= Technology Application Services Services Total ------------------------------------------------------ Six months ended June 30, 2001 - ------------------------------ Total revenues $ 13,930 $ 8,951 $ 22,881 Cost of services 10,202 6,412 16,614 ------------------------------------------------------ Gross profit 3,728 2,539 6,267 Gross profit percent 27% 28% 27% Sales and marketing 1,650 General and administrative 6,113 Restructuring charges - ----------------- Loss from operations $ (1,496) ================= Six months ended June 30, 2000 - ------------------------------ Total revenues $ 22,432 $ 11,270 $ 33,702 Cost of services 19,330 9,671 29,001 ------------------------------------------------------ Gross profit 3,102 1,599 4,701 Gross profit percent 14% 14% 14% Sales and marketing 3,441 General and administrative 8,642 Restructuring charges 827 ----------------- Loss from operations $ (8,209) =================
- -------------------------------------------------------------------------------- 8 11. Termination of Outsourcing Agreement The Company provided on-site outsourcing services to a customer under a five-year outsourcing agreement which began January 1, 1999. On March 30, 2001, the Company entered into a termination agreement in which the outsourcing agreement terminated as of March 31, 2001. Under the termination agreement, all of the Company's on-site employees transferred to the customer effective April 1, 2001 and the customer paid the Company a transition fee of $643,000. For the three months ended June 30, 2001 the Company recorded $386,000 of the transition fee as revenue. 12. Contingencies On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998, separate complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of California. A group of shareholders has been appointed the lead plaintiffs. They filed an amended consolidated complaint on February 24, 1999 and a second amended consolidated compliant on January 21, 2000. The new complaint realleges the same theory of liability previously asserted, namely the alleged improper use of the percentage-of-completion accounting method for revenue recognition. These complaints were brought on behalf of a purported class of investors in the Company's Common Stock and do not allege specific damage amounts. In addition, on October 7, 1998 and October 15, 1998, separate complaints were filed in the Superior Court of San Diego, California. These additional complaints mirror the allegations set forth in the federal complaints and assert common law fraud and the violation of certain California statutes. By stipulation of the parties, the state court litigation has been stayed pending the resolution of a motion to dismiss, which was filed on February 22, 2000 in the federal litigation. That motion was heard on February 20, 2001 and the court took the matter under submission. The Company believes that the allegations set forth in all of the foregoing complaints are without merit and intends to defend against these allegations vigorously. No assurance as to the outcome of this matter can be given, however, and an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations and financial condition. - -------------------------------------------------------------------------------- 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "expect" or similar expressions. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and are subject to numerous known and unknown risks and uncertainties. The forward-looking statements included herein are based on current expectations and entail various risks and uncertainties as those set forth herein and in the Company's other SEC filings, including those more fully set forth in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other sections of the Company's Forms 10-K and 10-K/A-1 for the year ended December 31, 2000 on file with the SEC, and in the Company's Proxy Statement Schedule 14A Information filed with the SEC on May 14, 2001. These risks and uncertainties could cause the Company's actual results to differ materially from those projected in the forward-looking statements. The Company disclaims any obligation to update or publicly announce revisions to any such statements to reflect future events or developments. Recent Events On June 1, 2001, the Company agreed to sell 1,500,000, 150,000 and 2,500,000 shares of restricted common stock at the June 1, 2001 closing price of $.29 per share to Messers. James T. Roberto, Neil R. Cassidy and Vincent K. Roach, respectively, of the Company in exchange for full-recourse notes receivable that accrue interest at a rate of 6.75% and which are due on May 31, 2006. As part of the agreement, 1,710,000 options to purchase common stock previously granted to these executive officers were cancelled. The Company provided on-site outsourcing services to a customer under a five-year outsourcing agreement which began January 1, 1999. On March 30, 2001, the Company entered into a termination agreement in which the outsourcing agreement terminated as of March 31, 2001. Under the termination agreement, all of the Company's on-site employees transferred to the customer effective April 1, 2001 and the customer paid the Company a transition fee of $643,000. For the three months ended June 30, 2001 the Company recorded $386,000 of the transition fee as revenue. On April 24, 2001, the Company received notice from The Nasdaq Stock Market that the Company's common stock would be traded and quoted on the OTC Bulletin Board ("OTC"), under the symbol DAOU, effective immediately. The Company's common stock previously had been quoted on The Nasdaq National Market, but the Company was no longer in compliance with the $1 minimum bid price requirement for continued listing. Overview DAOU is one of the top 50 healthcare information technology (IT) companies in the United States. DAOU's services include applications consulting and implementation, traditional network services, remote help desk and related technology support services, and integrates legacy systems with emerging technologies, such as wireless and other portable computing solutions for the U.S. healthcare industry. The Company's service offerings are segmented into two divisions: Application Services and Technology Services. Application Services - provides clients with strategic consulting, software implementation, project management and support services, including staff augmentation. Technology Services - provides clients with solutions in key areas, including network infrastructure, application development and integration projects, help desk solutions and network management. The Company provides its professional services primarily on a "time and expense" basis, under which revenues are generally recognized as services are performed. Billings for these services occur on a semi-monthly or monthly basis. The Company also provides support and management services, for which revenues are recognized ratably - -------------------------------------------------------------------------------- 10 over the period that these services are provided. Revenues on fixed-fee contracts are recognized using the percentage-of-completion method with progress to completion measured by labor costs incurred to date compared to total estimated labor costs. The Company's gross margin with respect to fixed-fee contracts varies significantly depending on the percentage of such services consisting of third-party products (with respect to which the Company obtains a lower margin) versus professional services provided by the Company. Payments received in advance of services performed are recorded as deferred revenues. Certain contract payment terms may result in customer billing occurring at a pace slower than revenue recognition. The resulting revenues recognized in excess of amounts billed and project costs are included in contract work in progress on the Company's balance sheet. Results of Operations The following table sets forth, for the periods indicated, certain statement of operations data as a percentage of net revenues.
Three Months Ended Six Months Ended June 30, June 30, ---------------------------------- --------------------------------- 2001 2000 2001 2000 --------------- ------------------ ----------------- --------------- Revenues 100 % 100 % 100 % 100 % Cost of revenues 71 81 73 86 --------------- ------------------ ----------------- --------------- Gross profit 29 19 27 14 Selling, general and administrative expenses 39 36 34 36 Restructuring charges - 5 - 2 --------------- ------------------ ----------------- --------------- Loss from operations (10) (22) (7) (24) Other income, net 1 1 1 1 --------------- ------------------ ----------------- --------------- Loss before income taxes (9) (21) (6) (23) Provision for income taxes - - - - --------------- ------------------ ----------------- --------------- Net Loss (9)% (21)% (6)% (23)% =============== ================== ================= ===============
Three Months Ended June 30, 2001 and 2000 The Company's revenues decreased 37% or $6.0 million to $10.1 million for the three months ended June 30, 2001 from $16.1 million for the three months ended June 30, 2000, primarily due to the termination of a large outsourcing contract. In addition, the Company terminated two large unprofitable outsourcing contracts in the Technology Services division in the second quarter of 2000 and eliminated certain underperforming lines of services. The Company provided on-site outsourcing services to a customer under a five-year outsourcing agreement which began January 1, 1999. On March 30, 2001, the Company entered into a termination agreement in which the outsourcing agreement terminated as of March 31, 2001. Under the termination agreement, all of the Company's on-site employees transferred to the customer effective April 1, 2001 and the customer paid the Company a transition fee of $643,000. For the three months ended June 30, 2001 the Company recorded $386,000 of the transition fee as revenue. Revenues related to this contract were $386,000 and $2.2 million for the three months ended June 30, 2001 and 2000, respectively. Services to DAOU's five largest customers accounted for 30% or $3.1 million of total revenues for the three months ended June 30, 2001. Cost of revenues decreased 45% or $5.9 million to $7.1 million for the three months ended June 30, 2001 from $13.0 million for the three months ended June 30, 2000, primarily as a result of reductions in personnel and material costs in line with the decrease in revenues, the termination of the Company's largest outsourcing contract in the first quarter of 2001 and the termination of unprofitable contracts in 2000. The Company further reduced the number of - -------------------------------------------------------------------------------- 11 employees during the first quarter of 2001 in connection with its restructuring plan. Total employees as of June 30, 2001 were 247 compared to 524 as of June 30, 2000. Gross profit as a percentage of revenues increased to 29% for the three months ended June 30, 2001 compared to 19% for the three months ended June 30, 2000, primarily due to an increase in billable utilization and the termination of certain unprofitable outsourcing contracts. Sales and marketing expenses decreased 56% or $927,000 to $724,000 for the three months ended June 30, 2001 from $1.7 million for the three months ended June 30, 2000, primarily due to a restructuring of the sales force and a reduction in marketing expenses related to the Company's merger of its Enosus operating subsidiary with the Technology Services division in January 2001. Sales and marketing expenses represented approximately 7% and 10% of total revenues for the three months ended June 30, 2001 and 2000, respectively. General and administrative expenses decreased 23% or $1.0 million to $3.2 million for the three months ended June 30, 2001 from $4.2 million for the three months ended June 30, 2000, primarily due to a reduction in corporate and subsidiary personnel and related overhead expenses. The Company reduced the on-going general and administrative costs from the same period in 2000, primarily as a result of synergies related to the integration of acquired companies, the closure of certain administrative offices, a reduction in administrative staff and other cost control measures. General and administrative expenses represented approximately 32% and 26% of total revenues for the three months ended June 30, 2001 and 2000, respectively. Other income, net, was $125,000 and $164,000 for the three months ended June 30, 2001 and 2000, respectively. Other income is primarily interest income on cash and cash equivalents and short-term investments. The provision for income taxes is based on the Company's effective tax rate. Due to the Company's operating loss and the loss carryforwards, no provision for taxes was recorded for the three months ended June 30, 2001 and 2000. The Company has fully reserved for the net deferred tax assets resulting from previously recorded tax benefits. Six Months Ended June 30, 2001 and 2000 The Company's revenues decreased 32% or $10.8 million to $22.9 million for the six months ended June 30, 2001 from $33.7 million for the six months ended June 30, 2000, primarily due to the termination of a large outsourcing contract. In addition, the Company terminated two large unprofitable outsourcing contracts in the Technology Services division in the second quarter of 2000 and eliminated certain underperforming lines of services. The Company provided on-site outsourcing services to a customer under a five-year outsourcing agreement which began January 1, 1999. On March 30, 2001, the Company entered into a termination agreement in which the outsourcing agreement terminated as of March 31, 2001. Under the termination agreement, all of the Company's on-site employees transferred to the customer effective April 1, 2001 and the customer paid the Company a transition fee of $643,000. For the period ended June 30, 2001 the Company recorded $386,000 of the transition fee as revenue. Revenues related to this contract were $2.7 million and $4.7 million for the six months ended June 30, 2001 and 2000, respectively. Services to DAOU's five largest customers accounted for 35% or $7.9 million of total revenues for the six months ended June 30, 2001. Cost of revenues decreased 43% or $12.4 million to $16.6 million for the six months ended June 30, 2001 from $29.0 million for the six months ended June 30, 2000, primarily as a result of reductions in personnel and material costs in line with the decrease in revenues and the termination of unprofitable contracts. The Company further reduced the number of employees in the first quarter of 2001 in connection with its restructuring plan. Total employees as of June 30, 2001 were 247 compared to 524 as of June 30, 2000. Gross profit as a percentage of revenues increased to 27% for the six months ended June 30, 2001 compared to 14% for the six months ended June 30, 2000, primarily due to an increase in billable utilization and the termination of certain unprofitable outsourcing contracts. Sales and marketing expenses decreased 52% or $1.7 million to $1.7 million for the six months ended June 30, 2001 from $3.4 million for the six months ended June 30, 2000, primarily due to a restructuring of the sales force and a reduction in marketing expenses related to the Company's merger of its Enosus operating subsidiary with the - -------------------------------------------------------------------------------- 12 Technology Services division in January 2001. Sales and marketing expenses represented approximately 7% and 10% of total revenues for the six months ended June 30, 2001 and 2000, respectively. General and administrative expenses decreased 29% or $2.5 million to $6.1 million for the six months ended June 30, 2001 from $8.6 million for the six months ended June 30, 2000, primarily due to a reduction in corporate and subsidiary personnel and related overhead expenses. The Company reduced the on-going general and administrative costs from the same period in 2000, primarily as a result of synergies related to the integration of acquired companies, the closure of certain administrative offices, a reduction in administrative staff and other cost saving measures. General and administrative expenses represented approximately 27% and 26% of total revenues for the six months ended June 30, 2001 and 2000, respectively. Other income, net, was $264,000 and $333,000 for the six months ended June 30, 2001 and 2000, respectively. Other income is primarily interest income on cash and cash equivalents and short-term investments. Provision for income taxes was $61,000 for the six months ended June 30, 2001 due to various states' income taxes. The provision for income taxes is based on the Company's effective tax rate. Due to the Company's operating loss and the loss carryforwards, no provision for taxes was recorded for the six months ended June 30, 2000. The Company has fully reserved for the net deferred tax assets resulting from previously recorded tax benefits. Liquidity and Capital Resources On June 30, 2001, the Company had working capital of $17.4 million, a decrease of $500,000 from $17.9 million on December 31, 2000. For the six months ended June 30, 2001, cash provided by operating activities was $3.6 million compared to cash used in operating activities of $1.9 million for the six months ended June 30, 2000. The increase resulted primarily from increased gross margin and reduced operating expenses; and decreases in accounts receivable and contract work in progress; offset by decreases in accrued salaries and benefits. Net cash used in investing activities was $79,000 for the six months ended June 30, 2001, compared to net cash used in investing activities of $719,000 in the comparable prior period, primarily due to fewer equipment purchases. In July 1999, the Company issued 2,181,818 shares of Series A Preferred Stock. The Series A Preferred Stock accrues dividends at a six percent annual rate. Such rate will increase one percent each year after the second anniversary of the issue date of the Series A Preferred Stock. Accrued dividends payable in shares of Series A Preferred Stock was $1,450,000 as of June 30, 2001. On June 29, 2001, the Company's $8.0 million revolving line of credit expired. No amounts were outstanding under this revolving line of credit as of June 29, 2001. Although the Company has an accumulated deficit as of June 30, 2001, the Company believes that its existing cash and short-term investments together with anticipated cash from operating activities will be sufficient to meet its capital requirements for the next twelve months. The Company may sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities or issuance of equity securities in future acquisitions would result in dilution to the Company's stockholders and the incurrence of additional debt could result in additional interest expense. However, there can be no assurance that the Company will be able to sell additional equity or debt securities or be able to obtain additional financing on terms acceptable to it, if at all. Business Risks In addition to the factors addressed in the preceding sections, certain dynamics of the Company's markets and operations create fluctuations in the Company's quarterly results. Uncertainty and cost containment in healthcare and competitive conditions present various other risks to operating results which are more fully described in the Company's Form 10-K filed with the SEC and other SEC filings. - -------------------------------------------------------------------------------- 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to changes in interest rates, primarily if it should enter into variable-rate long-term debt arrangements and, to a lessor extent, its investments in certain available-for-sale marketable securities. Under its current policies, the Company does not use interest rate derivative instruments to manage this exposure to interest rate changes. On June 29, 2001, the Company's $8.0 million revolving line of credit expired. No amounts were outstanding under this revolving line of credit as of June 29, 2001. A hypothetical 1% adverse move in the interest rates along the entire interest rate yield curve would not materially effect the fair value of the Company's financial instruments that are exposed to changes in interest rates. - -------------------------------------------------------------------------------- 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings On August 24, 1998, August 31, 1998, September 14, 1998 and September 23, 1998, separate complaints were filed against the Company and certain of its officers and directors in the United States District Court for the Southern District of California. A group of shareholders has been appointed the lead plaintiffs. They filed an amended consolidated complaint on February 24, 1999 and a second amended consolidated compliant on January 21, 2000. The new complaint realleges the same theory of liability previously asserted, namely the alleged improper use of the percentage-of-completion accounting method for revenue recognition. These complaints were brought on behalf of a purported class of investors in the Company's Common Stock and do not allege specific damage amounts. In addition, on October 7, 1998 and October 15, 1998, separate complaints were filed in the Superior Court of San Diego, California. These additional complaints mirror the allegations set forth in the federal complaints and assert common law fraud and the violation of certain California statutes. By stipulation of the parties, the state court litigation has been stayed pending the resolution of a motion to dismiss, which was filed on February 22, 2000 in the federal litigation. That motion was heard on February 20, 2001 and the court took the matter under submission. The Company believes that the allegations set forth in all of the foregoing complaints are without merit and intends to defend against these allegations vigorously. No assurance as to the outcome of this matter can be given, however, and an unfavorable resolution of this matter could have a material adverse effect on the Company's business, results of operations and financial condition. Item 2. Changes In Securities and Use of Proceeds Treasury Stock On April 25, 2001, the Company re-purchased 992,111 shares of the Company's common stock from the former Chairman of the Board of the Company at a price equal to $.20 per share for a total purchase price of $198,000. The Company holds these shares in treasury. Employee Stock Purchase Plan Under the Company's Employee Stock Purchase Plan ("ESPP"), employees are allowed to purchase the Company's common stock at six-month intervals. Employees pay the lower of 85% of the fair market value of the common stock at the beginning of the measurement period or 85% of the fair market value of the common stock at the end of the measurement period. On June 30, 2001, the Company recorded the issuance of 205,714 shares of common stock under the ESPP with proceeds of $55,000. On June 30, 2001, 1,176,061 shares remained reserved for issuance under the ESPP. The proceeds will be used for general operating expenses. Related Party Transactions On June 1, 2001, the Company agreed to sell 1,500,000, 150,000 and 2,500,000 shares of restricted common stock at the June 1, 2001 closing price of $.29 per share to Messers. James T. Roberto, Neil R. Cassidy and Vincent K. Roach, respectively, of the Company in exchange for full-recourse notes receivable that accrue interest at a rate of 6.75% and which are due on May 31, 2006. As part of the agreement, 1,710,000 options to purchase common stock previously granted to these executive officers were cancelled. Miscellaneous On May 1, 2001, in connection with the settlement of employment litigation, the Company issued 10,000 shares of common stock and 50,000 options to purchase the Company's common stock at $.31 per share. The fair market value on the date of the settlement, May 1, 2001, was $.31 per share. On April 5, 2001, the Company issued 88,968 shares of common stock to Mr. H. Lawrence Ross for recruiting services prior to Mr. Ross' election to the Company's board of directors on June 19, 2001. The fair market value of the shares on April 5, 2001, was $.28 per share. - -------------------------------------------------------------------------------- 15 Item 4. Submission of Matters to a Vote of Security Holders The Company's 2001 Annual Meeting of Stockholders was held on June 19, 2001. The following matters were voted on by the stockholders. 1. Election of two Class 1 Directors James T. Roberto and H. Lawrence Ross were elected to the Board of Directors for terms expiring at the 2004 Annual Meeting of Stockholders and until their successors are duly qualified and elected. The vote was 13.3 million in favor of Mr. Roberto and 236,000 votes withheld, and 13.3 million in favor of Mr. Ross and 238,000 votes withheld. 2. Ratification of Independent Auditors The stockholders ratified the selection of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending December 31, 2001. Ernst & Young LLP has audited the Company's financial statements annually since March 1995. The vote was 13.3 million in favor, 233,000 votes against and no abstentions. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description - ---------- ----------- 4.1 Restricted Stock Purchase Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach 4.2 Registration Rights Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach 4.3 Stock Purchase Agreement, dated April 25, 2001, by and between the Company and Georges J. Daou 10.1 Employment Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach 10.2 Secured Promissory Note, dated June 1, 2001, by and between the Company and Vincent K. Roach 10.3 Stock Pledge Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach (b) Current Reports on Form 8-K. The Registrant did not file any Current Reports on Form 8-K with the SEC during the quarter ended June 30, 2001. - -------------------------------------------------------------------------------- 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Date: August 10, 2001 DAOU SYSTEMS, INC. By: /s/ James T. Roberto ---------------------------------- James T. Roberto President and Chief Executive Officer, duly authorized officer By: /s/ Neil R. Cassidy ---------------------------------- Neil R. Cassidy Executive Vice President, Chief Financial Officer, and Secretary, principal financial and accounting officer - -------------------------------------------------------------------------------- 17 Exhibit Index 4.1 Restricted Stock Purchase Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach 4.2 Registration Rights Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach 4.3 Stock Purchase Agreement, dated April 25, 2001, by and between the Company and Georges J. Daou 10.1 Employment Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach 10.2 Secured Promissory Note, dated June 1, 2001, by and between the Company and Vincent K. Roach 10.3 Stock Pledge Agreement, dated June 1, 2001, by and between the Company and Vincent K. Roach - -----------
EX-4.1 3 dex41.txt STOCK PURCHASE AGREEMENT/ROACH EXHIBIT 4.1 EXHIBIT B --------- RESTRICTED STOCK PURCHASE AGREEMENT This Restricted Stock Agreement is made as of June 1, 2001, by DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach ("Roach"). Background Statement In connection with Roach's providing services to the Company pursuant to an Employment Agreement of even date herewith (the "Employment Agreement"), -------------------- the Company's Board of Directors has granted to Roach the right to purchase 2,500,000 shares of Common Stock of the Company, which are subject to a limited repurchase right (such shares, as adjusted for stock splits, recapitalizations, combinations and the like, are hereinafter referred to as the "Restricted Shares"), at a purchase price of $ 0.29 per share. Agreement The parties, intending to be legally bound, agree as follows: 1. Grant of Award Subject to Right of Repurchase. 1.1 Stock Award. The Company hereby agrees to issue to Roach 2,500,000 ----------- Shares of its Common Stock upon his payment to the Company of the purchase price therefor of $0.29 per share, which shall be paid through his execution and delivery of the promissory note attached hereto. The Shares shall be subject to the limitations provided below in this Section 1. 1.2 Scope of Repurchase Right. All of the Restricted Shares shall be ------------------------- subject to a limited right (but not an obligation) of repurchase by the Company (the "Right of Repurchase"). Roach shall not transfer, assign, encumber or ------------------- otherwise dispose of any unvested Restricted Shares, except as provided in the following sentence. Roach may transfer any Restricted Shares, subject to the Right of Repurchase, (i) by beneficiary designation, will or intestate succession or (ii) to Roach's spouse, children or grandchildren or to a trust or family limited partnership established by Roach for the benefit of Roach or Roach's spouse, children or grandchildren, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If Roach transfers any Restricted Shares, then this Section 1 shall apply to the Transferee to the same extent as to Roach. 1.3 Condition Precedent to Exercise. The Right of Repurchase may be ------------------------------- exercised at any time during the term hereof and for up to sixty (60) days following the termination of Employee's employment during the Employment Period as that term is defined in the Employment Agreement; provided that the Right of Repurchase shall expire with respect to all Restricted Shares in the event that during the Employment Period (i) the Company terminates Roach's employment without Cause (as defined in the Employment Agreement); or (ii) Roach terminates his employment with Good Reason (as defined in the Employment Agreement); or (iii) or Roach's employment terminates as a result of his Disability (as defined in the Employment Agreement). 1.4 Lapse of Repurchase Right. Roach shall acquire a vested interest ------------------------- in and the Company's Right of Repurchase shall lapse with respect to 1/36th of the Restricted Shares upon Roach's completion of each of the next thirty-six (36) months of continuous Service after the date hereof, such that Roach would be fully vested in the Restricted Shares at the expiration of thirty-six (36) months from the date hereof. The Right of Repurchase shall lapse with respect to all remaining Restricted Shares if the Company is subject to a Change in Control during the Employment Period (as defined in the Employment Agreement) before Roach's employment terminates. 1.5 Repurchase Cost. If the Company exercises the Right of Repurchase, --------------- it shall pay Roach an amount in cash or Cash Equivalents equal to $.29 per share (equal to the purchase price) for each of the Restricted Shares being repurchased. "Cash Equivalents" for purposes of this Agreement includes a ---------------- reduction of all or part of any unpaid interest and principal of the above referenced promissory note. 1.6 Exercise of Repurchase Right. The Right of Repurchase shall be ---------------------------- exercisable only by written notice delivered to Roach prior to the expiration of the sixty (60) day period specified in Section 1.3 above. The notice shall set forth the date on which the repurchase is to be effected. Such date shall not be more than thirty (30) days after the date of the notice. The certificate(s) representing the Restricted Shares to be repurchased shall, prior to the close of business on the date specified for the repurchase, be delivered to the Company properly endorsed for transfer. The Company shall, concurrently with the receipt of such certificate(s), pay to Roach the purchase price determined according to Subsection 1.5 above. Payment shall be made in cash (or, in the Company's sole discretion, by a reduction of any accrued and unpaid interest or unpaid principal outstanding pursuant to the promissory note). The Right of Repurchase shall terminate with respect to any Restricted Shares for which it has not been timely exercised pursuant to this Subsection 1.6. 1.7 Additional Shares or Substituted Securities. In the event of the ------------------------------------------- declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities or other property (including money paid other than as an ordinary cash dividend) that by reason of such transaction are distributed with respect to any Restricted Shares or into which such Restricted Shares thereby become convertible shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. After each such transaction, appropriate adjustments shall also be made to the price per share to be paid upon the exercise of the Right of Repurchase in order to reflect any change in the Company's outstanding securities effected without receipt of consideration therefor; provided, however, that the aggregate purchase price payable for the Restricted Shares shall remain the same. 2 1.8 Termination of Rights as Stockholder. If the Company makes ------------------------------------ available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Restricted Shares to be repurchased in accordance with this Section 1, then after such time the person from whom such Restricted Shares are to be repurchased shall no longer have any rights as a holder of such Restricted Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Restricted Shares shall be deemed to have been repurchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement. 1.9 Escrow. The certificate(s) for Restricted Shares shall be ------ deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any new, substituted or additional securities or other property described in Section 1.7 above shall immediately be delivered to the Company to be held in escrow, but only to the extent the Shares are at the time Restricted Shares. All regular cash dividends on Restricted Shares (or other securities at the time held in escrow) shall be paid directly to Roach and shall not be held in escrow. Restricted Shares, together with any other assets or securities held in escrow hereunder, shall be (i) surrendered to the Company for repurchase and cancellation upon the Company's exercise of its Right of Repurchase or (ii) released to Roach, within ten days of Roach's request, to the extent the Shares are vested, no longer subject to the repurchase right herein and no longer pledged pursuant to that certain Stock Pledge Agreement, dated of even date herewith by and between Roach and the Company (the "Pledge Agreement") (but not more frequently than once every six (6) months). In any event, all Shares that have vested (and any other vested assets and securities attributable thereto) and are no longer subject to the repurchase right and no longer pledged pursuant to the Pledge Agreement, shall be released within sixty (60) days after Roach's cessation of Service. 2. Representations of Roach. Roach hereby represents, warrants, ------------------------ acknowledges, and agrees that Roach has the power and authority to execute and deliver this Agreement and to perform its obligations. 3. Representations of the Company. The Company hereby represents, ------------------------------ warrants, acknowledges, and agrees that: 3.1 The Company has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of the Company, enforceable in accordance with its terms and conditions. The Company need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. 3.2 Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Company is subject. 3.3 When issued upon the terms and conditions of this Agreement (and paid for as contemplated by this Agreement), the Shares will be validly issued and fully paid and 3 nonassessable, with no personal liability attached to the ownership thereof and not subject to any preemptive rights, rights of first refusal or other similar rights of the stockholders of the Company. 4. Miscellaneous. ------------- 4.1 Market Stand-Off. In connection with any underwritten public ---------------- offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, Roach shall not, without the prior written consent of the Company's managing underwriter, (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock of the Company ("Stock") or any securities convertible into or exercisable or exchangeable for Stock (whether such shares or any such securities are then owned by Roach or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise. Such restriction (the "Market Stand-Off") shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed ninety (90) days. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities that are by reason of such transaction distributed with respect to any shares of Stock subject to the Market Stand-Off, or into which such shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Stock until the end of the applicable stand-off period. The Company's underwriters shall be beneficiaries of the Agreement set forth in this Section 4.1. Roach shall be subject to this Subsection 4.1 only if all of the directors, officers and any five percent (5%) or greater shareholders of the Company are subject to similar arrangements. 4.2 Rights of the Company. The Company shall not be required to (i) --------------------- transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Shares have been transferred in contravention of this Agreement. 4.3 Successors and Assigns. Except as otherwise expressly provided to ---------------------- the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon Roach and Roach's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof. 4.4 No Retention of Rights. Nothing in this Agreement shall confer ---------------------- upon Roach any right to continue his employment for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining Roach) to terminate Roach's employment at any time and for any reason, with or 4 without cause, or of Roach under any other Agreement between Roach and the Company, which rights are hereby expressly reserved by each. 4.5 Tax Election. Subjecting the Shares to a Right of Repurchase may ------------- result in adverse tax consequences that may be avoided or mitigated by filing an election under Code Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"). Such election may be filed only within thirty (30) days after the date of purchase. Roach should consult with Roach's tax advisor to determine the tax consequences of subjecting the Shares to a Right of Repurchase and the advantages and disadvantages of filing the Code Section 83(b) election. Roach acknowledges that it is Roach's sole responsibility, and not the Company's, to file a timely election under Code Section 83(b), even if Roach requests the Company or its representatives to make this filing Roach's behalf. 4.6 Legend. All certificates evidencing Restricted Shares shall bear ------ the following legends: "THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO COMPANY CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH COMPANY. THE SECRETARY OF COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE." 4.7 Notice. Any notice required by the terms of this Agreement shall ------ be given in writing and shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid. Notice shall be addressed to the Company at its principal executive office and to Roach at the address that Roach most recently provided to the Company. 4.8 Entire Agreement. This Agreement constitutes the entire contract ---------------- between the parties hereto with regard to the subject matter hereof. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) relating to the subject matter hereof. 4.9 Governing Law. This Agreement shall be governed by, and construed ------------- in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and to be performed entirely within such State. 4.10 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 5 and the holders of a majority of the then outstanding shares of the Company's capital stock that is not owned by Roach. 4.11 Severability. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 4.12 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. COMPANY: DAOU SYSTEMS, INC. By: /s/ James T. Roberto --------------------------------------- Name: /s/ James T. Roberto --------------------------------------- Its: Chief Executive Officer ---------------------------------------- ROACH: /s/ Vincent K. Roach - ---------------------------------------- Vincent Roach Signature Page to Restricted Stock Agreement, Executed August 1, 2001, to be Effective as of the Date First Written Above 6 EXHIBIT 1 to RESTRICTED STOCK AGREEMENT --------------------------------------- SPOUSE'S AGREEMENT The undersigned, being the spouse ("Spouse") of _________________________ (the "Investor"), agrees to be bound by the provisions of this Agreement to the extent applicable to the undersigned. Name:_______________________________________ IF THE INVESTOR IS AN INDIVIDUAL WHO IS LEGALLY DOMICILED OR A RESIDENT IN THE STATE OF CALIFORNIA, OR ANY OTHER "COMMUNITY PROPERTY" STATE, THE SPOUSE OF THE INVESTOR MUST CHECK ONE OF THE FOLLOWING: _____ The Investor is acquiring the ____ The Investor is acquiring the Shares as community property Shares as separate property in one or both names (both (the Investor should consult spouses must sign) independentcounsel in making a determination as to whether he is using separate property to purchase the Shares) - -------------------------------------------- Signature of the Investor - -------------------------------------------- Type or print name of the Investor - -------------------------------------------- Signature of Spouse - -------------------------------------------- Type or print name of Spouse 7 IF SEPARATE PROPERTY IS BEING USED TO PURCHASE THE SHARES, THE SPOUSE OF THE INVESTOR MUST SIGN THE FOLLOWING ACKNOWLEDGEMENT: I hereby acknowledge that my Spouse is making this investment in the Shares with his separate property and funds. - -------------------------------------------- Signature of the Investor's Spouse - -------------------------------------------- Type or print name of the Investor's Spouse 8 EXHIBIT 2 to RESTRICTED STOCK AGREEMENT --------------------------------------- Secured Promissory Note ----------------------- US$725,000.00 San Diego, California June 1, 2001 FOR VALUE RECEIVED, the undersigned, Vincent Roach ("Maker"), hereby promises to pay to the order of DAOU Systems, Inc., a Delaware corporation (the "Company"), the principal sum of Seven Hundred Twenty Five Thousand Dollars ($725,000) with interest on the unpaid balance thereof from the date that such principal amount was advanced until maturity at the rate per annum equal to 6.75% (the "Applicable Rate") computed on the basis of a 365-day year and actual days elapsed, both principal and interest payable as hereinafter provided in lawful money of the United States of America at the offices of the Company in San Diego, California, or at such other place as from time to time may be designated by the holder of this Note. The outstanding principal balance of this Note and accrued interest thereon shall be due and payable in full on or before May 31, 2006. Maker shall have the right to prepay, without penalty, upon ten (10) business days' notice to the holder, at any time and from time to time prior to maturity, all or any part of the unpaid principal balance of this Note. All payments or prepayments received hereunder, shall first be applied to any costs or expenses of enforcing this Note, next to accrued, but unpaid interest, and then to unpaid principal. It is the intent of the payee of this Note and the undersigned in the execution of this Note to contract in strict compliance with applicable usury law. In furtherance thereof, the said payee and the undersigned stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the maximum interest rate permitted to be charged by applicable law; that neither the undersigned nor any other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. The term "applicable law" as used in this Note shall mean the laws of the State of California or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. This Note is secured pursuant to the terms of that certain Stock Pledge Agreement, dated of even date herewith, by and between the Company and Maker, pursuant to which Maker pledges to the Company, and grants the Company a security interest in 2.5 million shares of the 9 Company's common stock, par value $.001 per share (the "Pledged Shares"), issued pursuant to that certain Stock Purchase Agreement of even date herewith, by and between the Company and Maker, and any dividends or distribution received with respect to, on account of, or in substitution for, the Pledged Shares. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings or if this Note is placed in the hands of attorneys for collection after default, the undersigned and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable hereon all the costs and expenses of said holder in enforcing this Note including, without limitation, reasonable attorneys' fees and legal expenses. All notices, consents, waivers, and other communications under this Note must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to the Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, California 92122 Attention: Jim Roberto Facsimile No.: (858) 452-1338 With a copy to: Baker & McKenzie 101 W. Broadway, 12th Floor San Diego, California 92121-3890 Attention: Abby B. Silverman Facsimile No.: (619) 236-0429 If to Maker: Vincent Roach 101 West Washington Street, Suite 1110-E Indianapolis, IN 46240 With a copy to: Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, DC 20036-5306 Attention: Brian Lane Facsimile No.: (202) 530-9589 If any provision of this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 10 This Note shall bind and inure to the benefit of the successors and assigns of the holder of this Note. This Note may not be amended except by means of a written agreement signed by the holder of this Note and the Maker. No waiver of a right in any instance shall constitute a continuing waiver of successive rights, and any one waiver shall govern only the particular matters waived. THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE GOVERNED FOR ALL PURPOSES BY THE LAW OF THE STATE OF CALIFORNIA AND THE LAW OF THE UNITED STATES APPLICABLE TO TRANSACTIONS WITHIN SUCH STATE. "Maker" - -------------------------------------------- Vincent Roach Signature Page to Promissory Note Executed August __, 2001, to be Effective as of the Date First Written Above 11 EXHIBIT 3 to RESTRICTED STOCK AGREEMENT --------------------------------------- STOCK PLEDGE AGREEMENT This Stock Pledge Agreement is entered into as of June 1, 2001 (the "Effective Date"), by and among DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach (the "Pledgor"), with reference to the following facts: Background Statement The Company has agreed to sell to Pledgor 2.5 million shares of the Company's common stock, par value $.001 per share (the "Shares"), pursuant to ------ that certain Stock Purchase Agreement, by and between the Company and Pledgor, dated June 1, 2001 (the "Purchase Agreement"). ------------------ In addition the Company has agreed to loan to Pledgor $725,000 as evidenced by that certain Secured Promissory Note (the "Note") dated June 1, ---- 2001. As a material inducement for the Company to make the loan to Pledgor and to enter into the Purchase Agreement, Pledgor has agreed to secure his obligations under the Note by granting the Company a first priority security interest in the Shares. Agreement NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions contained herein, the parties hereby agree as follows: 1. Security. The term "Pledged Stock" shall mean the 2.5 million -------- ------------- Shares registered in the name of Pledgor, together with all certificates, options, rights or other distributions issued as an addition to, in substitution or in exchange for, or on account of, any such Shares, and all proceeds of the foregoing, as further described in and subject to the provisions of Section 4 below, now or hereafter owned or acquired by Pledgor. 2. Grant of Security Interest. As security for full and timely -------------------------- payment, performance and satisfaction of the Obligations (as defined in Section 3), Pledgor hereby grant to the Company a first priority security - --------- interest in the Pledged Stock. Upon the execution hereof, the Pledged Stock and any related stock powers will be deposited in escrow with the Company pursuant to Section 1.9 of the Purchase Agreement. 3. Obligations of Pledgor. As used herein, the term "Obligations" ---------------------- ----------- shall mean all of Pledgor's obligations, covenants and agreements under the Note. 4. Pledged Stock. In the event Pledgor will become entitled to ------------- receive or will receive, in connection with any of the Pledged Stock, (a) any stock certificate, including any certificate representing a stock dividend or any certificate in connection with any increase or 12 reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock split or spin-off, (b) any option, warrant or right, whether as an addition to or in substitution of any of the Pledged Stock, or otherwise, (c) any dividend or distribution payable in property, including securities issued as a dividend on the Pledged Stock, or (d) any other distributions of any kind whatsoever, Pledgor will accept the same as encumbered by the security interest created hereby, and will deliver the same forthwith to the Company as the escrow agent (the "Escrow Agent"), in the exact form received, including as appropriate, Pledgor's endorsement or appropriate stock power duly executed in blank, as appropriate, to be held by the Escrow Agent, as a part of the Pledged Stock, subject to the terms hereof; provided, however, that as long as no Default (as defined in Section 7) is in existence, Pledgor --------- will have sole voting rights with respect to the Pledged Stock. 5. Representations and Warranties of Pledgor. Pledgor warrants and ----------------------------------------- represents to the Company that: (a) he has the power and authority to enter into this Agreement and has the power and authority to pledge the Pledged Stock for the purposes described herein, (b) Pledgor is the legal and beneficial owner of all of the Pledged Stock, (c) all of the shares of the Pledged Stock are owned by Pledgor free of any pledge, mortgage, lien or security interest of any kind, except as created hereby, (d) the execution and delivery by Pledgor of this Agreement, and the performance of its terms, will not result in any violation or default under the terms of any agreement or instrument, or any law or governmental rule or regulation applicable to Pledgor or the Pledged Stock, and (e) upon execution and delivery by Pledgor of this Agreement and upon delivery of the Pledged Stock to Escrow Agent, this Agreement will create a valid and perfected first priority security interest in the Pledged Stock, and the proceeds thereof, subject to no prior security interest. 6. Transfer of Interests. Pledgor hereby covenants that, until such --------------------- time as the Obligations have been fully paid, performed and satisfied, except as set forth in Section 1.2 of the Purchase Agreement, Pledgor will not sell, convey or otherwise dispose of any of the Pledged Stock or any interest therein, or create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Pledged Stock, or the proceeds thereof, other than the security interest created hereby. No transfer shall be valid unless and until the transferee agrees that such transfer is subject to the preexisting security interest created hereby and such transferee executes a pledge agreement reasonably satisfactory to the Company. 7. Default. As used herein, the term "Default" will mean the failure ------- ------- of full and timely payment or performance and satisfaction of any of the Obligations. 8. Rights of the Company. Upon the occurrence of a Default, the --------------------- Company may, at its option, do any one or more of the following: (a) declare all indebtedness of Pledgor to Company to be immediately due and payable, whereupon all unpaid principal and interest under the Note will become and be immediately due and payable; (b) exercise any and all of the rights and remedies of a secured party as provided for by law; (c) proceed by an action or actions at law or in equity to recover the obligations secured hereby or to foreclose under the terms of this Agreement and the Note and sell the collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction; (d) proceed immediately to have any or all of the Pledged Stock registered in the Company's name or in the name of a nominee; (e) enforce 13 one or more remedies hereunder, successively or concurrently; and (f) proceed immediately to dispose of and realize upon the Pledged Stock, or any part thereof, and in connection therewith, sell or otherwise dispose of and deliver the Pledged Stock, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Company's offices or elsewhere, at such prices and on such terms as the Company may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right of the Company or any purchaser to purchase at any such sale either the whole or any part of the Pledged Stock (in connection with any such sale or disposition, the Company need not give more than thirty (30) calendar days notice of the time and place of any public sale or of the time after which a private sale may take place, which notice to Pledgor hereby acknowledges to be reasonable). 9. Proceeds. The proceeds of any disposition of all or any part of -------- the Pledged Stock, as provided in Section 8, will be applied as follows: (a) --------- first, to the costs and expenses incurred in connection therewith or incidental thereto, including the Company's attorneys' fees and legal expenses; (b) second, to the satisfaction of the Obligations; (c) third, to the payment of any other amounts required by applicable law; and (d) fourth, to Pledgor to the extent of any surplus remaining. In the event that there is any deficiency due to the fact that the proceeds from the aforesaid disposition of the Pledged Stock were inadequate to satisfy the Obligations, Pledgor will not be liable to the Company for such deficiency. 10. Private Sale. Pledgor recognize and acknowledge that the company ------------ may be unable to effect a public sale of all or a part of the Pledged Stock and may elect to resort to one or more private sales to purchasers who will be obligated to agree, among other things, to acquire the Pledged Stock for their own account, for investment, and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those of public sales, and agrees that such private sales will be deemed to have been made in a commercially reasonable manner and that the Company has no obligation to delay sale of any Pledged Stock to permit Pledgor to register it for public sale under the Securities Act of 1933, as amended. 11. Release of Pledged Stock. Upon the execution hereof, Pledgor will ------------------------ deliver to Escrow Agent the stock certificates representing the Pledged Stock, including Pledgor's endorsement thereon or appropriate stock powers duly executed in blank, as appropriate, to be held by the Escrow Agent in accordance with the terms of this Agreement and Section 1.9 of the Purchase Agreement. 12. Performance by Pledgor. Upon full payment and performance of all ---------------------- of the Obligations by Pledgor and upon payment of all additional costs and expenses provided herein, this Agreement will terminate, and the Company will deliver or caused to be delivered to Pledgor, such of the Pledged Stock that has not been sold or otherwise disposed of pursuant to this Agreement. 13. Remedies. The rights and remedies provided herein are cumulative -------- and are in addition to, and not exclusive of, any rights or remedies provided in other instruments and agreements between the Company and Pledgor, or as provided by law. 14 14. Legend. As long as the shares are subject to this Agreement, such ------ shares shall bear the following legend: THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THAT CERTAIN STOCK PLEDGE AGREEMENT, DATED JUNE 1, 2001 BY AND BETWEEN DAOU SYSTEMS, INC. AND VINCENT ROACH AND MAY NOT BE ASSIGNED, SOLD OR TRANSFERRED EXCEPT AS PROVIDED THEREIN. 15. Successors and Assigns. This Agreement is binding upon and will ---------------------- inure to the benefit of the parties hereto, and their successors and assigns. 16. Governing Law. This Agreement will be governed by and construed ------------- in accordance with California law, without regards to the principles of the conflict of laws. 17. Notices. All notices, consents, waivers, and other communications ------- under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, California 92122 Attention: Jim Roberto Facsimile No.: (858) 452-1338 With a copy to: Baker & McKenzie 101 W. Broadway, 12th Floor San Diego, California 92121-3890 Attention: Abby B. Silverman Facsimile No.: (619) 236-0429 If to Pledgor: Vincent Roach 101 West Washington Street, Suite 1110-E Indianapolis, IN 46240 15 With a copy to: Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, DC 20036-5306 Attention: Brian Lane Facsimile No.: (202) 530-9589 18. Entire Agreement. This Agreement and any other agreement expressly ---------------- referred to herein supersedes any and all other agreements, either oral or in writing, among the parties hereto, with respect to the subject matter hereof and contains all of the covenants and agreements among the parties with respect to the subject matter hereof. 19. Waiver; Modification. No term or condition of this Agreement will -------------------- be deemed to have been waived nor will there by any estoppel to enforce any provision of this Agreement except by written instrument of the party charged with such waiver or estoppel. No amendment or modification of this Agreement will be deemed effective unless and until executed in writing by all of the parties hereto. 20. Severability. All agreements and covenants contained herein are ------------ severable and in the event that any of them will be held to be invalid by any court of competent jurisdiction, this Agreement will be interpreted as if such invalid agreements or covenants were not contained herein. 21. Delay; Time of Essence. No failure or delay by a party in ---------------------- exercising any right, power, or privilege hereunder will operate as a waiver thereof, and no single or partial exercise thereof will preclude any other or further exercise or the exercise of any other right, power, or privilege. Time is of the essence of each and every provision of this Agreement of which time is an element. 22. Attorneys' Fees. In any action or proceeding brought to enforce --------------- or interpret any provision of this Agreement, the prevailing party will be entitled to recover reasonable attorneys' fees in addition to any other available remedy. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 16 IN WITNESS WHEREOF, the parties have executed this Stock Pledge Agreement effective as of the date first written above. Pledgor: By: -------------------------------------- Vincent Roach The Company DAOU Systems, Inc. By: -------------------------------------- Name: ------------------------------------ Its: ------------------------------------- Signature Page to Stock Pledge Agreement, Executed August __, 2001, to be Effective as of the Date First Written Above 17 EXHIBIT 4 to RESTRICTED STOCK AGREEMENT --------------------------------------- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement, dated as of June 1, 2001, is among DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach (the "Investor")." RECITALS WHEREAS, the Company and the Investor are parties to that certain Restricted Stock Agreement, dated June 1, 2001 (the "Purchase Agreement"); and WHEREAS, the Parties desire to enter into an agreement concerning the registration of the shares of common stock, par value $.001 per share (the "Common Stock"), to be issued pursuant to the Purchase 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 the Common Stock issued pursuant to the Purchase Agreement, 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 the number of shares of Common Stock outstanding 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 (e) the term "Form S-1" 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. 18 1.2 Form S-1 Registration. As soon as reasonably practicable after the written request of the Holders of a majority of the Registrable Securities, the Company shall file with the SEC one or more Registration Statements on Form S-1 (or other similar form) covering the continuous sale of the Registrable Securities pursuant to Rule 415 under the Securities Act or any successor thereto (each, a "Shelf Registration Statement"), in the manner specified therein. The Company shall use all reasonable efforts to cause each Shelf Registration Statement to be declared effective by the SEC as soon as reasonably practicable after its filing with the SEC, and upon reasonable notice from a Holder (and in any event no less than ten (10) days) that the Holder intends to sell pursuant to a Shelf Registration Statement, the Company will file such amendments and supplements as necessary to update the Shelf Registration Statement so that it will be effective for any such sale of Registrable Securities until the earlier of (x) such time as all of the Registrable Securities are sold pursuant to such Shelf Registration Statement or (y) each Holder is able to sell within any ninety (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 an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q or a Current Report on Form 8-K or other form, a Shelf Registration Statement may contain a material misstatement or omission, the Company may cause such 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, ninety (90) days in any twelve (12) month period. 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 thirty (30) consecutive days a 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 twenty (20) days after mailing of such notice by the Company in accordance with Section 2.5, the Company will cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 19 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: (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. 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 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, 20 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 1.7(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 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 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 1.7(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 1.7(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 1.7(b) exceed the proceeds from the offering net of sales commission, if any, received by such Holder. 21 (c) Promptly after receipt by an indemnified party under this Section 1.7 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 1.7, 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 1.7, 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 1.7. (d) If the indemnification provided for in this Section 1.7 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 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) The obligations of the Company and Holders under this Section 1.7 will survive the completion of any offering of Registrable Securities in a registration statement under this Article I, and otherwise. 1.8 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 22 sell securities of the Company to the public without registration or pursuant to a registration on Form S-1, 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. 1.9 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 Delaware. 23 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 Schedule 1 or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 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. 24 2.10 Entire Agreement, Amendment, Waiver. This Agreement (including the Schedules 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 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. 25 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: DAOU SYSTEMS, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- THE INVESTOR: - -------------------------------------------- Vincent Roach Signature Page to Registration Rights Agreement, Executed August __, 2001, to be Effective as of the Date First Written Above 26 EXHIBIT 4.1 SCHEDULE 1 INVESTOR ---------- NAME AND ADDRESS ---------- Vincent Roach 101 West Washington Street Suite 1110-E Indianapolis, IN 46240 27 EX-4.2 4 dex42.txt REGISTRATION RIGHTS AGREEMENT EXHIBIT 4.2 EXHIBIT 4 to RESTRICTED STOCK AGREEMENT --------------------------------------- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement, dated as of June 1, 2001, is among DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach (the "Investor")." RECITALS WHEREAS, the Company and the Investor are parties to that certain Restricted Stock Agreement, dated June 1, 2001 (the "Purchase Agreement"); and WHEREAS, the Parties desire to enter into an agreement concerning the registration of the shares of common stock, par value $.001 per share (the "Common Stock"), to be issued pursuant to the Purchase 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 the Common Stock issued pursuant to the Purchase Agreement, 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 the number of shares of Common Stock outstanding 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 (e) the term "Form S-1" 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-1 Registration. As soon as reasonably practicable after the written request of the Holders of a majority of the Registrable Securities, the Company shall file with the SEC one or more Registration Statements on Form S-1 (or other similar form) covering the continuous sale of the Registrable Securities pursuant to Rule 415 under the Securities Act or any successor thereto (each, a "Shelf Registration Statement"), in the manner specified therein. The Company shall use all reasonable efforts to cause each Shelf Registration Statement to be declared effective by the SEC as soon as reasonably practicable after its filing with the SEC, and upon reasonable notice from a Holder (and in any event no less than ten (10) days) that the Holder intends to sell pursuant to a Shelf Registration Statement, the Company will file such amendments and supplements as necessary to update the Shelf Registration Statement so that it will be effective for any such sale of Registrable Securities until the earlier of (x) such time as all of the Registrable Securities are sold pursuant to such Shelf Registration Statement or (y) each Holder is able to sell within any ninety (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 an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q or a Current Report on Form 8-K or other form, a Shelf Registration Statement may contain a material misstatement or omission, the Company may cause such 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, ninety (90) days in any twelve (12) month period. 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 thirty (30) consecutive days a 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 twenty (20) days after mailing of such notice by the Company in accordance with Section 2.5, the Company will cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 2 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: (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. 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 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, 3 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 1.7(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 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 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 1.7(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 1.7(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 1.7(b) exceed the proceeds from the offering net of sales commission, if any, received by such Holder. 4 (c) Promptly after receipt by an indemnified party under this Section 1.7 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 1.7, 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 1.7, 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 1.7. (d) If the indemnification provided for in this Section 1.7 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 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) The obligations of the Company and Holders under this Section 1.7 will survive the completion of any offering of Registrable Securities in a registration statement under this Article I, and otherwise. 1.8 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 5 sell securities of the Company to the public without registration or pursuant to a registration on Form S-1, 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. 1.9 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 Delaware. 6 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 Schedule 1 or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 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. 7 2.10 Entire Agreement, Amendment, Waiver. This Agreement (including the Schedules 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 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. 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: DAOU SYSTEMS, INC. By: /s/ James T. Roberto --------------------------------- Name: James T. Roberto --------------------------- Title: Chief Executive Officer --------------------------- THE INVESTOR: /s/ Vincent K. Roach - ------------------------------------ Vincent Roach Signature Page to Registration Rights Agreement, Executed August 1, 2001, to be Effective as of the Date First Written Above 9 EXHIBIT 4.2 SCHEDULE 1 INVESTOR ---------- NAME AND ADDRESS ---------- Vincent Roach 101 West Washington Street Suite 1110-E Indianapolis, IN 46240 10 EX-4.3 5 dex43.txt STOCK PURCHASE AGREEMENT/DAOU EXHIBIT 4.3 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement ("Agreement") is made as of April 25, 2001, --------- by and between DAOU Systems, Inc., a Delaware corporation ("Buyer"), and Georges ----- J. Daou ("Seller"). ------ PRELIMINARY STATEMENT Seller desires to sell, and Buyer desires to purchase, nine hundred ninety two thousand one hundred eleven (992,111) shares of the Buyer's common stock, par value $0.001 share (the "Shares"), on the terms set forth in this Agreement. ------ AGREEMENT The parties, intending to be legally bound, agree as follows: ARTICLE 1 SALE AND TRANSFER OF SHARES 1.1 SHARES Subject to the terms and conditions of this Agreement, Sellers will sell and transfer the Shares to Buyer, and Buyer will purchase the Shares from Sellers. 1.2 PURCHASE PRICE The purchase price for the Shares (the "Purchase Price") will be one -------------- hundred ninety eight thousand four hundred twenty two dollars and twenty cents ($198,422.20). 1.3 TRANSFER OF SHARES The closing of the transactions contemplated by this Agreement will take place at the offices of DAOU Systems, Inc., 5120 Shoreham Place, San Diego, California, on the date hereof, unless Buyer and Seller agree otherwise. Subject to the provisions of Article 6, failure to consummate the purchase and sale provided for in this Agreement at the place and on the date determined by the previous sentence will not result in the termination of this Agreement and will not relieve any party of any obligation under this Agreement. 1.4 CLOSING DELIVERIES At the closing of the transactions contemplated by this Agreement: (a) Seller will deliver to Buyer certificates representing the Shares, duly endorsed in blank (or accompanied by duly executed stock powers in blank). (b) Buyer will deliver a sum equal to the Purchase Price to Seller by wire transfer to the account specified by Seller. (c) In lieu of payment of any accrued and unpaid director's fees and all out of pocket expenses incurred and unpaid as of the date of this Agreement, the Buyer shall pay the Seller a total of six thousand dollars ($6,000). ARTICLE 2 REPRESENTATIONS AND WARRANTIES OF SELLER Seller represents and warrants to Buyer as follows: 2.1 OWNERSHIP OF SHARES Seller owns of record and beneficially the Shares and has good and marketable title to the Shares free and clear of all liens. 2.2 DELIVERY OF GOOD TITLE Upon delivery of the Shares to Buyer by Seller and payment of the Purchase Price to Seller by Buyer pursuant to this Agreement, Buyer will have good and marketable title to the Shares free and clear of all liens. 2.3 ENFORCEABLITY All consents, approvals, authorizations and orders necessary for execution, delivery and performance by Seller of this Agreement (including, without limitation, the transfer and sale of the Shares) have been duly and lawfully obtained, and Seller has full right, power, authority and capacity to execute and deliver this Agreement and to perform its obligations under this Agreement. This Agreement has been duly executed and delivered by Seller, and assuming the execution and delivery of this Agreement by Buyer, constitutes a legal, valid and binding agreement of Seller enforceable against Seller in accordance with its terms. 2.4 NO CONFLICTS The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not conflict with or result in the breach or violation of any term or provision of, or (with or without notice or passage of time, or both) constitute a default under, any indenture, mortgage, deed of trust, trust (constructive and other), loan agreement or other agreement or instrument to which Seller is a party or by which Seller or the Shares are bound. 2 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF BUYER Buyer represents and warrants to Seller as follows: 3.1 ORGANIZATION Buyer is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. 3.2 ENFORCEABILITY All consents, approvals, authorizations and orders necessary for execution, delivery and performance by Seller of this Agreement (including, without limitation, the transfer and sale of the Shares) have been duly and lawfully obtained, and Buyer has full right, power, authority and capacity to execute and deliver this Agreement and to perform its obligations under this Agreement, which actions have been duly authorized and approved by all necessary corporate action of Buyer. Assuming the execution and delivery of this Agreement by Seller, this Agreement constitutes the legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms. 3.3 no conflict Except for Section 7e of Buyer's 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, dated July 22, 1999, for which the holders of the Series A Preferred Stock, par value $0.001 per share, have executed this Agreement for the purposes of giving their consent to the transactions contemplated hereby, the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not (i) conflict with or result in the breach or violation of any term or provision of, or (with or without notice or passage of time, or both) constitute a default under, any indenture, mortgage, deed of trust, trust (constructive and other), loan agreement or other agreement or instrument to which Buyer is a party, (ii) result in the violation of the provisions of Buyer's Certificate of Incorporation or Bylaws, (iii) result in the creation or imposition of any lien upon any property or asset of Buyer, or (iv) otherwise adversely affect the contractual or other legal rights or privileges of Buyer. 3 ARTICLE 4 CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE Buyer's obligation to purchase the Shares and to take the other actions required to be taken by Buyer is subject to the satisfaction of each of the following conditions (any of which may be waived by Buyer, in whole or in part): 4.1 ACCURACY OF REPRESENTATIONS All of Seller's representations and warranties in this Agreement (considered both individually and collectively) must be accurate in all material respects as of the date hereof. 4.2 NO PROCEEDINGS As of the date hereof, there must not have been commenced or threatened against Buyer, or against any related person of Buyer, any proceeding (i) involving any challenge to, or seeking damages or other relief in connection with, any of the transaction contemplated by this Agreement, or (ii) that may have the effect of preventing, delaying, making illegal, or otherwise interfering with any of the transaction contemplated by this Agreement. 4.3 NO CLAIM REGARDING EQUITY OWNERSHIP OR SALE PROCEEDS There must not have been made or threatened by any person any claim asserting that such person (i) is the holder or the beneficial owner of, or has the right to acquire or to obtain beneficial ownership of, or any other voting, equity, or ownership interest in, the Shares, or (ii) is entitled to all or any portion of the Purchase Price. 4.4 NO PROHIBITION Neither the consummation nor the performance of any of the transaction contemplated by this Agreement will, directly or indirectly (with or without notice or lapse of time), contravene, or cause Buyer or any related person of Buyer to suffer any adverse consequence under, (i) any applicable legal requirement or order, or (ii) any legal requirement or order that has been published, introduced, or otherwise proposed by or before any governmental body. ARTICLE 5 CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE Seller's obligation to sell the Shares and to take the other actions required to be taken by Seller is subject to the satisfaction of each of the following conditions (any of which may be waived by Seller, in whole or in part): 4 5.1 ACCURACY OF REPRESENTATIONS All of Buyer's representations and warranties in this Agreement (considered collectively and individually) must be accurate in all material respects as of the date hereof. 5.2 NO PROHIBITION There must not be in effect any legal requirement or order that (i) prohibits the consummation of the transactions contemplated by this Agreement, and (ii) has been adopted or issued, or has otherwise become effective, since the date hereof. ARTICLE 6 TERMINATION 6.1 TERMINATION EVENTS This Agreement may, subject to Section 6.2, be terminated (i) by either Buyer or Seller if a material breach of any provision of this Agreement has been committed by the other party or parties and such breach has not been waived; or (ii) by mutual consent of Buyer and Seller. 6.2 EFFECT OF TERMINATION Each party's right of termination under Section 6.1 is in addition to any other rights it may have under this Agreement or otherwise, and the exercise of such right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 6.1, all obligations of the parties under this Agreement will terminate, except that the obligations in Sections 8.1 and 8.9 will survive; provided, however, that if this Agreement is terminated by ------------------ a party because of the breach of the Agreement by another party, the terminating party's right to pursue all legal remedies will survive such termination unimpaired. ARTICLE 7 INDEMNIFICATION; REMEDIES 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES All representations, warranties, covenants, and obligations in this Agreement and any certificates or other documents delivered pursuant to this Agreement will survive until the second anniversary of the date hereof except those representations and warranties contained in Article 3, which shall continue in full force and effect forever. 7.2 INDEMNIFICATION BY SELLER Seller agrees to indemnify and hold harmless Buyer and its representatives, equity owners, controlling persons and affiliates from and against all adverse consequences resulting 5 from, arising out of, relating to, in the nature of or caused by (i) any breach of any representation or warranty made by any Seller in this Agreement or in any certificate or document delivered by Sellers pursuant to this Agreement; or (ii) any breach by a Seller of any covenant or obligation in this Agreement; provided, however, that Buyer makes a written claim for indemnification under this Section 7 with respect to the breach on or before the expiration of the applicable survival period specified in Section 7.1. 7.3 INDEMNIFICATION BY BUYER Buyer agrees to indemnify Seller from and against all adverse consequences resulting from, arising out of, relating to, in the nature of or caused by (i) any breach of any representation or warranty made by any Buyer in this Agreement or in any certificate or document delivered by Buyer pursuant to this Agreement; or (ii) any breach by a Buyer of any covenant or obligation in this Agreement; provided, however, that Seller makes a written claim for indemnification under this Section 7 with respect to the breach on or before the expiration of the applicable survival period specified in Section 7.1. ARTICLE 8 GENERAL PROVISIONS 8.1 EXPENSES Except as otherwise expressly provided in this Agreement, each party to this Agreement will bear its respective expenses incurred in connection with the preparation, execution, and performance of this Agreement and the transaction contemplated by this Agreement, including all fees and expenses of its representatives. If this Agreement is terminated, the obligation of each party to pay its own expenses will be subject to any rights of such party arising from a breach of this Agreement by another party. 8.2 PUBLIC ANNOUNCEMENTS Any public announcement or similar publicity with respect to this Agreement or the transaction contemplated by this Agreement will be issued, if at all, at such time and in such manner as Buyer and Seller mutually determine, except as otherwise required by law. Seller will not make any disclosure of the transaction contemplated by this Agreement, except with the prior written consent of Buyer or as otherwise required by law. Seller and Buyer will consult with each other concerning the means by which Buyer's employees, customers, suppliers and others having dealings with Buyer will be informed of transaction contemplated by this Agreement. 8.3 FURTHER ASSURANCES The parties agree (i) to furnish upon request to each other such further information, (ii) to execute and deliver to each other such other documents, and (iii) to do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the transaction contemplated by this Agreement. 6 8.4 ENTIRE AGREEMENT AND MODIFICATION This Agreement supersedes all prior agreements among the parties with respect to its subject matter and constitutes a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may not be amended, supplemented or otherwise modified except by a written agreement executed by the party to be charged with the modification. 8.5 SEVERABILITY If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 8.6 ASSIGNMENTS, SUCCESSORS, AND NO THIRD PARTY RIGHTS No party may assign any of its rights or delegate any of its obligations under this Agreement without the prior written consent of the other parties, which will not be unreasonlably withheld, except that Buyer may assign any of its rights and delegate any of its obligations under this Agreement to any subsidiary of Buyer or to any subsequent acquirer of the Shares or of all or substantially all of the business of the Buyer. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of Seller's heirs, executors, administrators and permitted assigns and Buyer's successors and permitted assigns. Nothing expressed or referred to in this Agreement will be construed to give any person, other than the parties to this Agreement, any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement except such rights as shall inure to a successor or permitted assignee pursuant to this Section. 8.7 ENFORCEMENT OF AGREEMENT Seller acknowledges and agrees that Buyer could be damaged irreparably if any of the provisions of this Agreement are not performed in accordance with the specific terms and that any breach of this Agreement by Seller could not be adequately compensated in all cases by monetary damages alone. Accordingly, Seller agrees that, in addition to any other right or remedy to which Buyer may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of this Agreement, without posting any bond or other undertaking. 8.8 WAIVER The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither any failure nor any delay by any party in exercising any right, power, or privilege under this Agreement or any of the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent 7 permitted by applicable law, (a) no claim or right arising out of this Agreement or any of the documents referred to in this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of that party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. 8.9 JURISDICTION; SERVICE OF PROCESS Any proceeding arising out of or relating to this Agreement or any transaction contemplated by this Agreement may be brought in the courts of the State of California, or, if it has or can acquire jurisdiction, in the United States District Court for the Southern District of California, and each of the parties irrevocably submits to the exclusive jurisdiction of each such court in any such proceeding, waives any objection it may now or hereafter have to venue or to convenience of forum, agrees that all claims in respect of the proceeding shall be heard and determined only in any such court, and agrees not to bring any proceeding arising out of or relating to this Agreement or any transaction contemplated by this Agreement in any other court. The parties agree that any or all of them may file a copy of this Section with any court as written evidence of the knowing, voluntary and bargained agreement between the parties irrevocably to waive any objections to venue or to convenience of forum. Process in any proceeding referred to in this Section may be served on any party anywhere in the world.- 8.10 GOVERNING LAW This Agreement will be governed by and construed under the laws of State of California without regard to conflicts of laws principles that would require the application of any other law. 8.11 COUNTERPARTS This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. 8 The parties have executed and delivered this Agreement as of the date indicated in the first sentence of this Agreement. BUYER DAOU SYSTEMS, INC. By: /s/ Neil R. Cassidy ---------------------- [Name] Neil R. Cassidy [Title] Executive Vice President and Chief Financial Officer SELLER /s/ Georges J. Daou ------------------- Georges J. Daou, in his individual capacity 9 EX-10.1 6 dex101.txt EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made as of June 1, 2001 --------- by and between DAOU Systems, Inc., a Delaware corporation ("Employer"), and -------- Vincent Roach, an individual resident of Florida ("Employee"). -------- AGREEMENT 1. Employment Terms and Duties. --------------------------- 1.1 Employment. Employer employs Employee, and Employee accepts ---------- employment by Employer, upon the terms and conditions set forth in this Agreement. 1.2 Employment Period. This Agreement will govern Employee's ----------------- employment during the Employment Period. For purposes of this Agreement, the "Employment Period" shall be defined as that period of time commencing June 1, ----------------- 2001 and ending on December 31, 2004, unless terminated earlier pursuant to this Agreement. 1.3 Duties. Employee will hold the title of Corporate Officer, ------ Director and President of the Application Services Division ("ASD") of Employer --- and will have such duties as are reasonably assigned or delegated to him by Employer's Chief Executive Officer or his designee and by the Board of Directors of Employer (the "Board"). Employee will devote his entire business time, ----- attention, skill, and energy exclusively to the business of Employer, will use his best efforts to promote the success of Employer's business, and will cooperate fully with the Board in the advancement of the best interests of Employer; provided however that nothing in this Agreement shall prohibit Employee from devoting reasonable time and attention to teach and managing his real estate and other investments, consistent with the performance of his duties under this Agreement. Except as otherwise provided in this Agreement, the Chief Executive Officer, his designee or the Board may reasonably assign, change or delegate additional and/or different duties to Employee in the future at his or its discretion. 1.4 Compliance with Employer's Policies. Employee acknowledges and ----------------------------------- agrees to comply with Employer's Confidentiality, Inventions and Non-Compete Agreement ("Confidentiality Agreement"). The Confidentiality Agreement is ------------------------- attached to this Agreement as Exhibit A and is incorporated by reference. --------- 2. Compensation. ------------ 2.1 Signing Bonus. Within two weeks of executing this Agreement, ------------- shall be paid a signing bonus ("Signing Bonus") of Two Hundred Thousand Dollars ------------- ($200,000), less all authorized and required withholdings and deductions. 2.2 Base Salary. Employee shall be paid an annual base salary ----------- ("Base Salary") of Two Hundred and Forty Thousand Dollars ($240,000), less ----------- all authorized and required withholdings and deductions. 2.3 Commission; Additional Incentive. -------------------------------- (a) Employee shall receive a ("Commission") payment in an amount ---------- equal to two and one-half percent (2.5%) of annual ASD Net Revenues. For purposes of this Agreement, "ASD Net Revenues" is defined as billings to clients ---------------- for services performed by ASD net of any allowance and subject to Employer's standard reserve provision for uncollectible accounts (the business units of which shall be the same as those which exist as of the effective date of this Agreement). For 2001 only, ASD Net Revenues shall exclude revenues earned by the TMI business unit of ASD during the first six months of the calendar year (i.e. on or before June 30, 2001). (b) Employee shall receive an "Additional Incentive" payment in -------------------- an amount equal to ten percent (10%) of the annual Operating Profits of ASD. For purposes of this Agreement, "Operating Profits of ASD" is defined as revenue ------------------------ earned by ASD before taxes and interest, including depreciation and amortization but excluding allocation of corporate overhead, as determined in accordance with generally accepted accounting principles consistently applied. For 2001 only, any Additional Incentive paid to Employee will be net of any payments made to Employee based on profits earned by the TMI business unit of ASD during the first six months of the calendar year. In 2001 only, any losses incurred by the RHI business unit of ASD will not be deducted from ASD's Operating Profits. (c) Commission not otherwise paid as part of the "Draw" defined in Section 2.4 of this Agreement will be paid within 45 days of the end of each quarter in the relevant year of employment. Additional Incentive not otherwise paid as part of the "Draw" defined in Section 2.4 of this Agreement will be paid within 45 days of December 31 in the relevant year of employment. 2.4 Draw. Employee's Base Salary and an advance on the Commission ---- and Additional Incentive will be paid in the form of a "Draw", which for ---- purposes of this Agreement is defined as a non-refundable payment in the amount of Thirty Thousand Dollar ($30,000) per month, to be paid in semi-monthly installments, or according to Employer's regular payroll practices. Any Commission or Additional Incentive above the Draw will be paid according to the schedule described in Section 2.3. 2.5 Interest Amounts. Employer will pay Employee additional ---------------- compensation in an amount equal to Employee's interest obligations less applicable taxes ("Interest Amounts") pursuant to the Promissory Note executed ---------------- by Employee in favor of Employer, a form of which is attached as Exhibit 2 to Exhibit B of this Agreement. 2.6 Minimum and Maximum Compensation. For purposes of this -------------------------------- Agreement, "Compensation" shall be defined to include Base Salary, Commission, ------------ Additional Incentive and Draw. For the period from July 1, 2001 to December 31, 2001, the Compensation of Employee (exclusive of Interest Amounts) shall not be less than Two Hundred Fifty Thousand Dollars ($250,000) with any shortfall to be paid on or before February 15, 2002. From July 1, 2001 to December 31, 2001, the Compensation of Employee (exclusive of Interest Amounts) shall not be more than Seven Hundred and Fifty Thousand Dollars ($750,000). During the calendar years 2002, 2003 and 2004, if Employee remains eligible for Compensation under this Agreement, 2 Employee's Compensation (exclusive of Interest Amounts) shall not be less than Five Hundred Thousand Dollars ($500,000) and not more than One Million Five Hundred Thousand Dollars ($1,500,000) per year, with any shortfall to be paid on or before February 15 of the relevant following year. 3. Benefits. -------- 3.1 Employee will, during the Employment Period, be permitted to participate in such pension, profit sharing, bonus, life insurance, hospitalization, major medical and other employee benefit plans of Employer that may be in effect from time to time, to the extent Employee is eligible under the terms of those plans (collectively, the "Benefits"). -------- 3.2 Employer will reimburse Employee for the reasonable annual premium cost to Employee for a disability policy on behalf of Employee with a maximum face value equal to Eighty Percent (80%) of Employee's Draw, with his specification of ownership and beneficiary. In the event of a dispute as to whether Employee is "disabled" as defined by the disability policy, Employer and Employee will have equal rights in securing a confirming or countervailing professional opinion. 3.3 Employee will allow Employer to obtain and maintain a "key man" life insurance policy in the amount of $2,000,000 with Employer as owner and sole beneficiary. 4. Vacations and Holidays. Employee will be entitled to paid vacation in an ---------------------- amount of four weeks per year. Employee may carry-over from one year to the next any accrued but unused vacation up to a maximum of six weeks of vacation. Once Employee accrues the maximum vacation, he will not accrue additional vacation until he takes enough vacation to bring his accrual below the maximum. Employee may take vacation at such time or times as approved by the Board. Employee is entitled to holidays in accordance with the holiday policies of the Company in effect for its employees from time to time. 5. Equity Interest. --------------- 5.1 Employer shall offer, and Employee shall purchase, an aggregate of 2.5 million shares of Employer's common stock, par value $.001 per share (the "Shares"), at the closing price of the Common Stock on June 1, 2001 ------ substantially in accordance with the terms of the Restricted Stock Agreement (the "Purchase Agreement"), attached to this Agreement as Exhibit B. ------------------ --------- 5.2 Employer shall register the Shares for resale on a Form S-1 with the Securities and Exchange Commission (the "SEC") pursuant to the Registration --- Rights Agreement, attached as Exhibit 4 to Exhibit B. --------- --------- 5.3 As of the date of this Agreement, all unexercised stock options previously granted to the Employee, which are set forth on Exhibit C, will be --------- cancelled and/or terminated, as appropriate, and such options will cease to be outstanding and such agreements will no longer be of any force or effect. The Employee agrees to do all things necessary or desirable, as reasonably requested by the Employer, to effect such cancellations or terminations, including the surrender of any stock option agreements related thereto. 3 5.4 "Equity Interest" shall mean the equity described in Section 5.1 --------------- combined with existing shares acquired by Employee prior this Agreement, which the parties agree, for purposes of this Agreement, is 3.0 Million Shares. 6. Termination. ----------- 6.1 Termination by Employer for Cause or because of Employee's Disability; Termination by Employee without Good Reason. (a) Termination by Employer for Cause or because of Employee's ---------------------------------------------------------- Disability. At any time during the Employment Period Employer may terminate - ---------- Employee's employment for Cause or because of Employee's Disability. In the event that Employee's employment terminates for one of the reasons set forth in this Section 6.1(a), Employer will pay Employee within thirty days after the effective date of termination (i) the greater of the pro rata portion of his minimum Compensation as defined by Section 2.6 or his Base Salary combined with a pro-rata portion of Commission earned through the effective date of termination (the "Termination Date"); and (ii) any vacation, accrued and owing ---------------- through the Termination Date. Employee will not be entitled to any other Compensation. Employer's right under such circumstances to repurchase shares granted to Employee pursuant to the Purchase Agreement is governed by the Purchase Agreement. (b) Definition of Cause. For purposes of this Agreement, "Cause" ------------------- ----- is defined as (i) knowing and willful misconduct in the performance of his duties under this Agreement where such misconduct causes substantial harm to the Company; (ii) Employee's material breach of Section 5.2 of the Confidentiality Agreement; (iii) the conviction of, or the entering of a guilty plea or plea of no contest with respect to, a Class A felony as defined under Indiana law, or its equivalent. Where possible, Employee shall be provided a period of fifteen days from Employee's receipt of the written notice of the existence of Cause to cure the harm or breach that gives rise to the determination that Cause exists for termination. (c) Definition of Disability. For purposes of this Agreement, ------------------------ "Disability" shall be defined as a mental or physical impairment of Employee ---------- that renders him unable to perform the essential functions of his position, , with or without accommodation , for a period of ninety (90) days. In the event of a dispute as to whether Employee has a Disability as defined in this Agreement, Employer and Employee shall have equal rights in securing a confirming or countervailing professional opinion. (d) Termination by Employee without Good Reason. In the event ------------------------------------------- Employee terminates his employment for any reason other than Good Reason as defined in this Agreement, Employer will pay Employee within thirty days after the Termination Date Employer will pay Employee (i) the greater of the pro rata portion of his minimum Compensation as defined by Section 2.6 or his Base Salary combined with a pro-rata portion of Commission earned through the Termination Date; and (ii) any vacation, accrued and owing through the Termination Date. Employee will not be entitled to any other Compensation. Employer's right under such circumstances to repurchase shares granted to Employee pursuant to the Purchase Agreement is governed by the Purchase Agreement. 4 (e) Definition of Good Reason. For purposes of this Agreement, ------------------------- termination for "Good Reason" is defined as the termination by Employee of his ----------- employment with Employer within three (3) months after the first occurrence of any of the following events: (i) any reduction in Employee's Base Salary or material detrimental change to the terms under which Employee is eligible for Commission or Additional Incentive; (ii) any significant reduction in Employee's responsibilities and authority or a material change in Employee's responsibility or authority that would be inconsistent or interfere with the duties of the president of ASD and/or an officer of Employer; (iii) any failure by Employer to pay Employee's Compensation in a timely manner; (iv) a relocation by Employer of Employee's place of employment outside a fifty (50) mile radius of Employee's current place of employment. An event described in Section 6.1(e)(i) through (iv) will not constitute Good Reason unless Employee provides written notice to Employer of his intention to terminate his employment for Good Reason and unless Employer does not cure the Good Reason within fifteen (15) days of Employer's receipt of the written notice, except that Employer shall have only seven (7) days from Employee's written notice to cure a failure to timely pay Employee's Compensation. 6.2 Termination by Employer for Reason Other Than Cause or ------------------------------------------------------ Disability; Termination by Employee for Good Reason. - --------------------------------------------------- (a) Termination by Employer for Reason Other Than Cause or ------------------------------------------------------ Disability Before December 31, 2002. If Employer terminates Employee's - ----------------------------------- employment on or before December 31, 2002 for a Reason other than Cause or Disability, Employee shall receive a severance payment equal to the greater of minimum Compensation as defined by Section 2.6 or the actual Compensation to which Employee otherwise would have been entitled had he continued his employment with Employer through December 31, 2004. The severance payment provided for in this Section 6.2(a) shall be paid in equal semi-monthly installments, or according to Employer's regular payroll practices. Further, if Employee elects to continue insurance coverage as afforded to Employee according to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), ----- Employer (or its successor) will reimburse Employee an amount equal to Employer's portion of the premiums incurred by Employee for the lesser of eighteen month period provided by COBRA or through December 31, 2004, unless during that period Employee becomes entitled to equivalent replacement insurance at no cost to Employee. Nothing in this Agreement will extend Employee's COBRA period beyond the period allowed under COBRA, nor is the Employer assuming any responsibility Employee has for formally electing to continue coverage. Employer's right under such circumstances to repurchase shares granted to Employee pursuant to the Purchase Agreement is governed by the Purchase Agreement. (b) Termination by Employer for Reason Other Than Cause or ------------------------------------------------------ Disability After December 31, 2002. If Employer terminates Employee's employment - ---------------------------------- for a reason other 5 Cause or Disability after December 31, 2002 but before December 31, 2004, Employee shall receive a severance payment in an amount equal to the Base Salary, Commission and pro-rata Additional Incentive that Employee would earn over a twelve month period. The severance provided in this Section 6.2(b) shall be paid in equal installments according to Employer's regular payroll practices for a period of one (1) year from the Termination Date. Further, in the event Employee elects to continue health insurance coverage pursuant to COBRA, Employer will cover Employee's health insurance premiums for a period of one (1) year from the Termination Date. Employer's right under such circumstances to repurchase shares granted to Employee pursuant to the Purchase Agreement is governed by the Purchase Agreement. (c) Termination by Employee for Good Reason before December 31, ----------------------------------------------------------- 2002. If Employee terminates his employment for Good Reason before December 31, - ---- 2002, Employee shall receive a severance payment equal to the greater of minimum Compensation as defined by Section 2.6 or the actual Compensation to which Employee otherwise would have been entitled had he continued his employment with Employer through December 31, 2004. The severance payment provided for in this Section 6.2(c) shall be paid in equal semi-monthly installments, or according to Employer's regular payroll practices. Further, if Employee elects to continue insurance coverage as afforded to Employee according to the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"), Employer (or its successor) will ----- reimburse Employee an amount equal to Employer's portion of the premiums incurred by Employee for the lesser of eighteen month period provided by COBRA or through December 31, 2004, unless during that period Employee becomes entitled to equivalent replacement insurance at no cost to Employee. Nothing in this Agreement will extend Employee's COBRA period beyond the period allowed under COBRA, nor is the Employer assuming any responsibility Employee has for formally electing to continue coverage. Employer's right under such circumstances to repurchase shares granted to Employee pursuant to the Purchase Agreement is governed by the Purchase Agreement. (d) Termination by Employee for Good Reason after December 31, ---------------------------------------------------------- 2002. If Employee terminates his employment for Good Reason after December 31, - ---- 2002 but before December 31, 2004, Employee shall receive a severance payment in an amount equal to the Base Salary, Commission and pro-rata Additional Incentive that Employee would earn over a twelve month period. The severance provided in this Section 6.2(d) shall be paid in equal installments according to Employer's regular payroll practices for a period of one (1) year from the Termination Date. Further, in the event Employee elects to continue health insurance coverage pursuant to COBRA, Employer will cover Employee's health insurance premiums for a period of one (1) year from the date of termination. Employer's right under such circumstances to repurchase shares granted to Employee pursuant to the Purchase Agreement is governed by the Purchase Agreement. (e) Condition of Severance Payment and Severance Draw. Receipt ------------------------------------------------- the first installment of any severance payments described in this Section 6.2 is conditioned on Employee's executing a release of all claims against Employer, in substantially the form attached to this Agreement as Exhibit D. As a condition --------- for receipt of the remaining severance payments described in Section 6.2 (b) and (d), Employee agrees to abide by the non-compete and non-interference provisions described in Section 5 of Exhibit A for the Post Employment Period, as 6 that term is defined in Exhibit A. Further, any payment of Additional Incentive --------- contemplated by this Section 6 will be calculated and paid within 45 days of December 31 of the relevant year. 6.3 Termination for any Reason after the Employment Period. In the ------------------------------------------------------ event that his employment terminates for any reason after December 31, 2004, Employee will be entitled to receive the pro-rata portion of Base Salary and Commission, including vacation, accrued and owing to Employee through the Termination Date, but will not be entitled to any further Compensation. 6.4 Benefits. Except as otherwise provided in Section 6.2, -------- Employee's accrual of, and participation in plans providing for, Benefits will cease at the effective date of Employee's termination for any reason, and Employee will be entitled to accrued Benefits pursuant to such plans only as provided in such plans. 6.5 Subsequent Employment by Affiliate or Assignee. Employee shall ---------------------------------------------- not be deemed to have been terminated under this Agreement if he is offered employment under substantially the same or better terms by an affiliate of Employer, or by any successor in interest, assignee or purchaser of substantially all of the Employer's assets. 7. Effect of Change in Control. In the event a Change in Control results in --------------------------- Employee's Equity Interest as of the date of the Change in Control (i) having a minimum market value of Five Million Dollars ($5,000,000), excluding any amounts owed by the Employee with respect to the purchase of Shares under Section 5.1 of this Agreement, or (ii) where Employer pays the difference between $5,000,000 and said value, Employee agrees to accept a Board directive that his Compensation not exceed Five Hundred Thousand Dollars ($500,000) per year. Employee further agrees that in the event of such a Change in Control, Employee will continue his employment under this Agreement for a minimum of one (1) year following the Change in Control, and the non-compete provisions of Section 5 of Exhibit A will remain in effect for one year following the termination of Employee's employment. For purposes of this Agreement, a Change in Control is defined to have occurred if, and only if: (a) any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity or person, or any syndicate or group deemed to be a person under Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes ------------ the "beneficial owner" (as defined in Rule 13d-3 of the General Rules and Regulations under the Exchange Act), directly or indirectly, of securities of Employer representing 50% or more of the combined voting power of Employer's then outstanding securities entitled to vote in the election of directors of Employer; (b) there occurs a reorganization, merger, consolidation or other corporate transaction involving Employer ("Transaction"), in each case, ----------- with respect to which the stockholders of Employer immediately prior to such Transaction do not, immediately after the Transaction, own more than fifty percent (50%) of the combined voting power of Employer or other corporation resulting from such Transaction; or (c) all or substantially all of the assets of Employer are sold, liquidated or distributed. 7 8. General Provisions. ------------------ 8.1 Representations and Warranties by Employee. Employee represents ------------------------------------------ and warrants to Employer that the execution and delivery of this Agreement do not, and the performance by the parties of their obligations hereunder will not, with or without the giving of notice or the passage of time, or both: (a) violate any judgment, writ, injunction, or order of any court, arbitrator, or governmental agency applicable to Employee; or (b) conflict with, result in the breach of any provisions of or the termination of, or constitute a default under, any agreement to which Employee is a party or by which Employee is or may be bound. 8.2 Waiver. The rights and remedies of the parties to this Agreement ------ are cumulative and not alternative. Neither the failure nor any delay by either party in exercising any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power, or privilege or the exercise of any other right, power, or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement can be discharged by one party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of any obligation of such party or of the right of the party giving such notice or demand to take further action without notice or demand as provided in this Agreement. 8.3 Binding Effect; Delegation of Duties Prohibited. This Agreement ----------------------------------------------- shall inure to the benefit of, and shall be binding upon, the parties hereto and their respective successors, assigns, heirs, and legal representatives, including any entity with which Employer may merge or consolidate or (at Employer's election) any entity to which all or substantially all of its assets may be transferred. The duties and covenants of Employee under this Agreement, being personal, may not be delegated. 8.4 Notices. All notices, consents, waivers, and other ------- communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Employer: DAOU Systems, Inc. 5120 Shoreham Place San Diego, California 92122 Attention: Jim Roberto Facsimile No.: (858) 452-1338 8 With a copy to: Baker & McKenzie 101 W. Broadway, 12th Floor San Diego, California 92121-3890 Attention: Abby B. Silverman Facsimile No.: (619) 236-0429 If to Employee: Vincent Roach 101 West Washington Street Suite 1110-E Indianapolis, IN 46240 With a copy to: Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, DC 20036-5306 Attention: Brian Lane Facsimile No.: (202) 530-9589 8.5 Entire Agreement; Amendments. This Agreement and its Exhibits, ---------------------------- by and between Employer and Employee, contain the entire agreement between the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, between the parties to this Agreement with respect to the subject matter of this Agreement. This Agreement may not be amended orally, but only by an agreement in writing signed by the parties. 8.6 Governing Law. This Agreement will be governed by the laws of ------------- Indiana without regard to conflicts of laws principles. 8.7 Drafting Ambiguities. Each party to this Agreement has had an -------------------- opportunity to consult with counsel regarding this Agreement and its covenants. The rule of construction that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any of the amendments to this Agreement. 8.8 Binding Arbitration. Any dispute or claim arising out of this ------------------- Agreement shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (AAA) or of the Judicial Arbitration and Mediation Services (JAMS) and will be governed by the Model Employment Arbitration rules of AAA. The arbitration shall be held in Indianapolis, Indiana. The arbitrator shall have all authority to determine the arbitrability of any claim and enter a final and binding judgment at the conclusion of any proceedings in respect of the arbitration. Any final judgment only may be appealed on the grounds of improper bias or improper conduct of the arbitrator. Any arbitration award will be enforceable in any court of competent jurisdiction. The arbitrator will apply Indiana substantive law in all respects. The arbitrator shall have the power to award the party prevailing in the resolution of any such claim, in addition to such other relief as may be granted, 9 an award of all reasonable attorneys fees, expenses and costs incurred in pursuit of the claim, without regard to any statute, schedule, or rule purported to restrict such award. 8.9 Injunctive Relief. Notwithstanding the provisions of Section ----------------- 8.8, Employee acknowledges that any breach of Exhibit A to this Agreement may result in irreparable and continuing damage to Employer for which there can be no adequate remedy at law, and in the event of any such breach, Employer shall be entitled to seek immediate injunctive relief, and that Employer may seek this injunctive relief from the appropriate court of law and to this limited extent is not bound by Section 8.8. Employer's obligation to post an undertaking in support of a petition for injunction under this Section will be determined under the applicable law and in an amount to be determined by the court. 8.10 Attorneys' Fees. Employer agrees to reimburse Employee in an --------------- amount up to Ten Thousand Dollars ($10,000) for the attorneys' fees he incurs in connection with the drafting and negotiation of this Agreement. 8.11 Section Headings, Construction. The section headings in this ------------------------------ Agreement are provided for convenience only and will not affect its construction or interpretation. All references to "section" or "sections" refer to the corresponding section or sections of this Agreement unless otherwise specified. All words used in this Agreement will be construed to be of such gender or number as the circumstances require. Unless otherwise expressly provided, the word "including" does not limit the preceding words or terms. 8.12 Severability. If any provision of this Agreement is held ------------ invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 8.13 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. EMPLOYER: EMPLOYEE: DAOU Systems, Inc. By: /s/ Vincent K. Roach By: /s/ James T. Roberto ---------------------------- --------------------------------------- Vincent K. Roach James T. Roberto Its: Chief Executive Officer -------------------------------------- Signature Page to Employment Agreement, Executed as of August 1, 2001, to be Effective as of the Date First Written Above 10 EXHIBIT A --------- CONFIDENTIALITY, INVENTIONS AND NON-COMPETE AGREEMENT This Confidentiality, Inventions and Non-Compete Agreement (this "Confidentiality Agreement"), confirms the agreement between Vincent Roach ------------------------- ("Employee") and DAOU Systems, Inc., a Delaware corporation (the "Employer"), -------- -------- which is a material part of the consideration for the June 1, 2001 Employment Agreement between Employee and Employer (the "Employment Agreement"). -------------------- 1. Acknowledgments by Employee. Employee acknowledges that (a) during the --------------------------- Employment Period, as that term is defined in the Employment Agreement, and as a part of the Employment, Employee will be afforded access to Employer's Confidential Information; (b) public disclosure of such Confidential Information could have an adverse effect on Employer and its business; (c) because Employee possesses substantial technical expertise and skill with respect to Employer's business, Employer desires to obtain exclusive ownership of each Employee Invention, and Employer will be at a substantial competitive disadvantage if it fails to acquire exclusive ownership of each Employee Invention; and (d) the provisions of this Confidentiality Agreement are reasonable and necessary to prevent the improper use or disclosure of Confidential Information and to provide Employer with exclusive ownership of all Employee Inventions. For purposes of this Agreement, "Confidential Information" is defined as information ------------------------ which Employer reasonably considers to be confidential and proprietary to Employer. 2. Confidential and Trade Secret Information. ----------------------------------------- 2.1 Employee acknowledges and agrees that all Confidential Information known or obtained by Employee, whether before or after the date of this Confidentiality Agreement, is the property of Employer. Therefore, Employee agrees that Employee shall hold in confidence the Confidential Information and shall not disclose it to any Person, including disclosures for the benefit of competitors of Employer, or use for personal gain any Confidential Information, whether Employee has such information in Employee's memory or embodied in writing or other physical form, except with the specific prior written consent of Employer or except as otherwise expressly permitted by the terms of this Confidentiality Agreement or unless and to the extent that the Confidential Information is or becomes generally known to and available for use by the public other than as a result of Employee's fault or the fault of any other person bound by a duty of confidentiality to Employer. Employee agrees to deliver or make available to Employer at any reasonable time Employer may request, all documents, memoranda, notes, plans, records, reports, and other documentation, models, components, devices, or computer software, whether embodied in a disk or in other form (and all copies of all of the foregoing), relating to the businesses, operations or affairs of Employer and any other Confidential Information that Employee may then possess or have under his control. Employee's obligations under this Confidentiality Agreement are in addition to and cumulative with those he owes Employer under the Indiana Uniform Trade Secrets Act and any other applicable law. 11 2.2 Any trade secrets of Employer will be entitled to all of the protections and benefits under the Indiana Uniform Trade Secrets Act and any other applicable law. 2.3 None of the foregoing obligations and restrictions applies to any part of the Confidential Information that: (a) that Employee demonstrates was or became generally available to the public other than as a result of an improper disclosure by Employee; (b) Employee demonstrates was independently developed by Employee prior to receipt of the Confidential Information from Employer; (c) was approved for release by written authorization from Employer or (d) where disclosure was ordered by a court of competent jurisdiction. 2.4 Employee will not remove from Employer's premises (except to the extent such removal is for purposes of the performance of Employee's duties at home or while traveling, or except as otherwise specifically authorized by Employer) any document, record, notebook, plan, model, component, device or computer software or code, whether embodied in a disk or in any other form, (but not including devices, software or code owned by Employee and used by Employee in personal applications not involving Employer's business), that relates in any way to, or is useful in any manner in, the business then being conducted or proposed to be conducted by Employer (collectively, the "Proprietary Items"). ----------------- Employee recognizes that, as between Employer and Employee, all of the Proprietary Items, whether or not developed by Employee, are the exclusive property of Employer. Upon termination of this Confidentiality Agreement by either party, or upon the request of Employer during the Employment Period, Employee will return to Employer all of the Proprietary Items in Employee's possession or subject to Employee's control, and Employee shall not retain any copies, abstracts, sketches or other physical embodiment of any of the Proprietary Items. Notwithstanding the foregoing, upon the reasonable request of Employee, Employer will permit Employee to obtain copies of specifically identified Proprietary Items that are necessary for Employee to respond to legal, tax or other regulatory proceedings. 3. Employee Inventions. For purposes of this Agreement, "Employee ------------------- -------- Inventions" shall be defined to include any discoveries, improvements, - ---------- developments, tools, machines, apparatus, appliances, concepts, designs, computer software programs, promotional ideas, production processes or techniques, practices, formula methods and new products, useful in or related to the business in which Employer is engaged, whether patentable, copyrightable or otherwise, that are made, discovered, developed or secured by the Employee while employed by Employer and that pertain to the subject matter of Employee's employment with Employer. Each such Employee Invention shall belong exclusively to Employer. Employee acknowledges that all of Employee's Employee Inventions are works made for hire and the property of Employer including any copyrights, patents or other intellectual property rights pertaining thereto. Unless it is determined by a court of competent jurisdiction that any Employee Inventions were not made within the scope of the Employment], Employee hereby assigns to Employer all of Employee's right, title, and interest, including all rights of copyright, patent, trademark and other intellectual property rights, to or in such Employee Inventions. Employee covenants that he will promptly: 3.1 disclose to Employer in writing any Employee Invention; 12 3.2 assign to Employer or to a party designated by Employer, at Employer's request and without additional compensation, all of Employee's right to the Employee Invention for the United States and all foreign jurisdictions; 3.3 execute and deliver to Employer such applications, assignments, and other documents as Employer may request in order to apply for and obtain patents or other registrations with respect to any Employee Invention in the United States and any foreign jurisdictions; 3.4 sign all other papers necessary to carry out the above obligations; and 3.5 give testimony and render any other assistance in support of Employer's rights to any Employee Invention. 4. Client Confidential Information. "Client Confidential Information" is ------------------------------- ------------------------------- information disclosed to Employee by a client or customer ("Client") of Employer ------ or other parties involved in a business arrangement between Employer and a Client, which at the time of disclosure is (a) designated by the Client as confidential; or (b) which by its nature or by the circumstances of its disclosure reasonably should be confidential; or (c) which is subject to a confidentiality agreement between Employer and the Client; or (d) because the information disclosed is not generally known by persons other than employees or representatives of Employer and the Client. Employee acknowledges and agrees that all Client Confidential Information known or obtained by Employee, whether before or after the date of this Agreement, is the property of the Client. Therefore, Employee agrees that, at any time during or after the Employment Period, Employee shall hold in confidence the Client Confidential Information and shall not disclose it to any Person or use for his personal gain or for the benefit of any third party competitor of said Client any Client Confidential Information, whether Employee has such information in Employee's memory or embodied in writing or other physical form, except (a) to the extent that the Client Confidential Information is or becomes generally known to and available for use by the public other than as a result of Employee's fault or the fault of any other Person bound by a duty of confidentiality to the Client; (b) that the Client Confidential Information was independently developed by Employee prior to receipt of it from the Client; (c) with the specific prior written consent of an authorized representative of the Client or; (d) if the disclosure thereof was ordered by a court of competent jurisdiction. Employee agrees to deliver to Employer at any reasonable time Employer or the Client may request, all documents, memoranda, notes, plans, records, reports, and other documentation, models, components, devices, or computer software, whether embodied in a disk or in other form (and all copies of all of the foregoing), relating to the Client Confidential Information that Employee may then possess or have under his control. 5. Non-competition and Non-interference. ------------------------------------ 5.1 Acknowledgments by Employee. Employee acknowledges that: (a) the --------------------------- services to be performed by him under this Agreement are of a special, unique, unusual, extraordinary and intellectual character; (b) Employer's business is national in scope and its products and services are marketed throughout the United States; (c) Employer competes with other businesses that are or could be located in any part of the United States; and (d) the provisions of this Section 5 are reasonable and necessary to protect Employer's business. 13 5.2 Covenants of Employee. In consideration of the acknowledgments --------------------- by Employee, and in consideration of the compensation and benefits to be paid or provided to Employee by Employer, Employee covenants that he will not knowingly, directly or indirectly: (a) during the Employment Period, except in the course of his employment, and during the Post-Employment Period, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, associated with, or in any manner connected with, lend Employee's name or any similar name to, lend Employee's credit to or render services or advice to, any business that has products or activities which compete in whole or in part with any of Employee's products or activities which existed during his employment, anywhere within the United States where Employer, at the time Employee's employment terminates, is doing business or marketing the services of Employer in the areas of healthcare information technology services that are related to planning, selecting, implementing or manufacturing general purpose computer networks and associated software for healthcare providers and consulting on or about healthcare information processing systems in the healthcare and healthcare finance industries; provided, however, that Employee may purchase or otherwise acquire -------- ------- up to (but not more than) five percent (5%) of any class of securities of any enterprise (but without otherwise participating in the activities of such enterprise) if such securities are listed on any national or regional securities exchange or have been registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. For any other exceptions to this non-compete Employee must seek and obtain express permission from Employer's Board of Directors, which permission will not be unreasonably refused. (b) Employee acknowledges and agrees that Employer is currently performing and marketing the above described services through Employee in a majority of states throughout the United States, but particularly in the states of California, Connecticut, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan, New York, Pennsylvania, and Wisconsin. Employee acknowledges and agrees that this list of states may expand during his employment such that this Section may, at the time his employment is terminated, apply to states not listed at the time this Confidentiality Agreement is executed. Employee agrees that this covenant is reasonable with respect to its duration, geographical area and scope. Notwithstanding the foregoing, following the Employment Period, Employee shall not be prohibited from engaging or investing in, owning, managing, operating, financing, controlling, or participating in the ownership, management, operation, financing, or control of, being employed by, associated with, or in any manner connected with, lending Employee's name or any similar name to, lending Employee's credit to or rendering services or advice to, any business whose products or activities do not compete with the above described services of Employer; (c) whether for Employee's own account or for the account of any other person, at any time during the Employment Period and the Post-Employment Period, accept, divert or solicit business of the same or similar type being carried on by Employer, from any individual or entity known to be a customer of Employer where Employee had personal contact or relationship with such individual or entity during and by reason of his employment; (d) whether for Employee's own account or the account of any other Person (i) at any time during the Employment Period and the Post-Employment Period, solicit, employ, or otherwise engage as an employee, independent contractor, or otherwise, any Person who is or 14 was an employee of Employer at any time during the Employment Period or in any manner induce or attempt to induce any employee of Employer to terminate his employment with Employer; or (ii) at any time during the Employment Period or the Post-Employment Period, interfere with Employer's relationship with any Person, including any Person who at any time during the Employment Period was an employee, contractor, supplier, or customer of Employer; or (e) at any time during or after the Employment Period, disparage Employer or any of its shareholders, directors, officers, employees or agents. 5.3 For purposes of Section 5.2, the term "Post-Employment Period" ---------------------- means one (1) year after the date Employee's employment is terminated for "Cause" by Employer or is terminated without "Good Reason" by Employee as those terms are defined in Section 6 of the Employment Agreement. Employee is not bound by the non-compete provisions of Section 5.2(a) in the event Employee's employment is terminated without "Cause" or Employee terminates the Employment with Good Reason or Employment terminates as a result of Employee's "Disability" as defined in Section 6 of the Employment Agreement. Further, the Employee is not bound by the non-compete provisions of Section 5.2(a) if (i) Employee remains employed for the entire Employment Period; and (ii) the total value of Employee's equity interest (as defined in Section 5 of the Employment Agreement) does not have a minimum value of Five Million Dollars ($5,000,000) and Employer does not agree to pay the difference between $5,000,000 and said value. 5.4 If any covenant in this Section 5 is held to be unreasonable, arbitrary or against public policy, such covenant will be considered to be divisible with respect to scope, time and geographic area, and such lesser scope, time or geographic area, or all of them, as a court of competent jurisdiction may determine to be reasonable, not arbitrary and not against public policy, will be effective, binding and enforceable against Employee. 5.5 The period of time applicable to any covenant in this Section 5 will be extended by the duration of any violation by Employee of such covenant. 5.6 Employee will, while the covenant under this Section 5.2 is in effect, give notice to Employer, within ten (10) days after accepting any other employment, of the identity of Employee's employer. Employer may notify such employer that Employee is bound by this Confidentiality Agreement and, at Employer's election, furnish such employer with a copy of this Confidentiality Agreement or relevant portions thereof. 6. Disputes or Controversies. Employee recognizes that should a dispute or ------------------------- controversy arising from or relating to this Confidentiality Agreement be submitted for adjudication to any court, arbitration panel or other third party, the preservation of the secrecy of Confidential Information may be jeopardized. All pleadings, documents, testimony, and records relating to any such adjudication will be maintained in secrecy and, subject to the order of such court, arbitration panel or other third party, will be available for inspection by Employer, Employee, and their respective attorneys and experts, who will agree, in advance and in writing, to receive and maintain all such information in secrecy, except as may be limited by them in writing. 15 7. Injunctive Relief. Employee acknowledges that any breach of this ----------------- Confidentiality Agreement may result in irreparable and continuing damage to Employer for which there can be no adequate remedy at law, and in the event of any such breach, Employer shall be entitled to seek immediate injunctive relief and other equitable remedies in addition to such other and further relief as may be proper. Employer's obligation to post an undertaking in support of a petition for injunction under this Section will be determined under the applicable law and in an amount to be determined by the court. 8. No Contrary Agreement. Employee represents that his performance of all --------------------- the terms of the Employment Agreement and this Confidentiality Agreement will not breach any agreement to keep in confidence any proprietary information acquired by him in confidence or in trust prior to his employment by Employer. Employee has not entered into, and will not enter into, any agreement either written or oral in conflict with this Confidentiality Agreement or in conflict with the Employment Agreement. 9. Term of Employment. Nothing in this Confidentiality Agreement is ------------------ intended to describe or define the conditions under which Employee's employment may be terminated, which conditions are described in the Employment Agreement. 10. Limitation. Employee agrees that this Confidentiality Agreement does ---------- not purport to set forth all of the terms and conditions of his employment, and that as an employee of Employer he has obligations to Employer which are not set forth in this Confidentiality Agreement. 11. Applicable Law. Employee agrees that any dispute in the meaning, effect -------------- or validity of this Confidentiality Agreement will be resolved in accordance with the laws of Indiana without regard to the conflict of laws provisions to this Confidentiality Agreement. Employee further agrees that if one or more provisions of this Confidentiality Agreement are held to be illegal or unenforceable under applicable Indiana law, such illegal or unenforceable portion(s) will be revised to make them legal and enforceable. The remainder of this Confidentiality Agreement will otherwise remain in full force and effect and enforceable in accordance with its terms. 12. Binding Nature. This Confidentiality Agreement will be effective as of -------------- the date executed and will be binding upon Employee, his heirs, executors, assigns, and administrators and will inure to the benefit of Employer, its subsidiaries, successors and assigns. Further, this Confidentiality Agreement supersedes prior or contemporaneous agreements and understandings on the same subject. 13. Modification. This Confidentiality Agreement only can be modified by ------------ a subsequent written agreement executed by the Chief Executive Officer of Employer. Effective as of June 1, 2001 -------------------------------------------- Vincent Roach Signature Page to Confidentiality, Inventions and Non-Compete Agreement, Executed as of August ___, 2001, to be Effective as of the Date First Written Above 16 EXHIBIT B --------- RESTRICTED STOCK PURCHASE AGREEMENT This Restricted Stock Agreement is made as of June 1, 2001, by DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach ("Roach"). Background Statement In connection with Roach's providing services to the Company pursuant to an Employment Agreement of even date herewith (the "Employment Agreement"), -------------------- the Company's Board of Directors has granted to Roach the right to purchase 2,500,000 shares of Common Stock of the Company, which are subject to a limited repurchase right (such shares, as adjusted for stock splits, recapitalizations, combinations and the like, are hereinafter referred to as the "Restricted Shares"), at a purchase price of $ 0.29 per share. Agreement The parties, intending to be legally bound, agree as follows: 1. Grant of Award Subject to Right of Repurchase. 1.1 Stock Award. The Company hereby agrees to issue to Roach ----------- 2,500,000 Shares of its Common Stock upon his payment to the Company of the purchase price therefor of $0.29 per share, which shall be paid through his execution and delivery of the promissory note attached hereto. The Shares shall be subject to the limitations provided below in this Section 1. 1.2 Scope of Repurchase Right. All of the Restricted Shares shall be ------------------------- subject to a limited right (but not an obligation) of repurchase by the Company (the "Right of Repurchase"). Roach shall not transfer, assign, encumber or ------------------- otherwise dispose of any unvested Restricted Shares, except as provided in the following sentence. Roach may transfer any Restricted Shares, subject to the Right of Repurchase, (i) by beneficiary designation, will or intestate succession or (ii) to Roach's spouse, children or grandchildren or to a trust or family limited partnership established by Roach for the benefit of Roach or Roach's spouse, children or grandchildren, provided in either case that the Transferee agrees in writing on a form prescribed by the Company to be bound by all provisions of this Agreement. If Roach transfers any Restricted Shares, then this Section 1 shall apply to the Transferee to the same extent as to Roach. 1.3 Condition Precedent to Exercise. The Right of Repurchase may be ------------------------------- exercised at any time during the term hereof and for up to sixty (60) days following the termination of Employee's employment during the Employment Period as that term is defined in the Employment Agreement; provided that the Right of Repurchase shall expire with respect to all Restricted Shares in the event that during the Employment Period (i) the Company terminates Roach's employment without Cause (as defined in the Employment Agreement); or (ii) Roach terminates his employment with Good Reason (as defined in the Employment Agreement); or 17 (iii) or Roach's employment terminates as a result of his Disability (as defined in the Employment Agreement). 1.4 Lapse of Repurchase Right. Roach shall acquire a vested interest ------------------------- in and the Company's Right of Repurchase shall lapse with respect to [OBJECT OMITTED]th of the Restricted Shares upon Roach's completion of each of the next thirty-six (36) months of continuous Service after the date hereof, such that Roach would be fully vested in the Restricted Shares at the expiration of thirty-six (36) months from the date hereof. The Right of Repurchase shall lapse with respect to all remaining Restricted Shares if the Company is subject to a Change in Control during the Employment Period (as defined in the Employment Agreement) before Roach's employment terminates. 1.5 Repurchase Cost. If the Company exercises the Right of --------------- Repurchase, it shall pay Roach an amount in cash or Cash Equivalents equal to $.29 per share (equal to the purchase price) for each of the Restricted Shares being repurchased. "Cash Equivalents" for purposes of this Agreement includes a ---------------- reduction of all or part of any unpaid interest and principal of the above referenced promissory note. 1.6 Exercise of Repurchase Right. The Right of Repurchase shall be ---------------------------- exercisable only by written notice delivered to Roach prior to the expiration of the sixty (60) day period specified in Section 1.3 above. The notice shall set forth the date on which the repurchase is to be effected. Such date shall not be more than thirty (30) days after the date of the notice. The certificate(s) representing the Restricted Shares to be repurchased shall, prior to the close of business on the date specified for the repurchase, be delivered to the Company properly endorsed for transfer. The Company shall, concurrently with the receipt of such certificate(s), pay to Roach the purchase price determined according to Subsection 1.5 above. Payment shall be made in cash (or, in the Company's sole discretion, by a reduction of any accrued and unpaid interest or unpaid principal outstanding pursuant to the promissory note). The Right of Repurchase shall terminate with respect to any Restricted Shares for which it has not been timely exercised pursuant to this Subsection 1.6. 1.7 Additional Shares or Substituted Securities. In the event of the ------------------------------------------- declaration of a stock dividend, the declaration of an extraordinary dividend payable in a form other than stock, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities or other property (including money paid other than as an ordinary cash dividend) that by reason of such transaction are distributed with respect to any Restricted Shares or into which such Restricted Shares thereby become convertible shall immediately be subject to the Right of Repurchase. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number and/or class of the Restricted Shares. After each such transaction, appropriate adjustments shall also be made to the price per share to be paid upon the exercise of the Right of Repurchase in order to reflect any change in the Company's outstanding securities effected without receipt of consideration therefor; provided, however, that the aggregate purchase price payable for the Restricted Shares shall remain the same. 18 1.8 Termination of Rights as Stockholder. If the Company makes ------------------------------------ available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Restricted Shares to be repurchased in accordance with this Section 1, then after such time the person from whom such Restricted Shares are to be repurchased shall no longer have any rights as a holder of such Restricted Shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such Restricted Shares shall be deemed to have been repurchased in accordance with the applicable provisions hereof, whether or not the certificate(s) therefor have been delivered as required by this Agreement. 1.9 Escrow. The certificate(s) for Restricted Shares shall be ------ deposited in escrow with the Company to be held in accordance with the provisions of this Agreement. Any new, substituted or additional securities or other property described in Section 1.7 above shall immediately be delivered to the Company to be held in escrow, but only to the extent the Shares are at the time Restricted Shares. All regular cash dividends on Restricted Shares (or other securities at the time held in escrow) shall be paid directly to Roach and shall not be held in escrow. Restricted Shares, together with any other assets or securities held in escrow hereunder, shall be (i) surrendered to the Company for repurchase and cancellation upon the Company's exercise of its Right of Repurchase or (ii) released to Roach, within ten days of Roach's request, to the extent the Shares are vested, no longer subject to the repurchase right herein and no longer pledged pursuant to that certain Stock Pledge Agreement, dated of even date herewith by and between Roach and the Company (the "Pledge Agreement") (but not more frequently than once every six (6) months). In any event, all Shares that have vested (and any other vested assets and securities attributable thereto) and are no longer subject to the repurchase right and no longer pledged pursuant to the Pledge Agreement, shall be released within sixty (60) days after Roach's cessation of Service. 2. Representations of Roach. Roach hereby represents, warrants, ------------------------ acknowledges, and agrees that Roach has the power and authority to execute and deliver this Agreement and to perform its obligations. 3. Representations of the Company. The Company hereby represents, ------------------------------ warrants, acknowledges, and agrees that: 3.1 The Company has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of the Company, enforceable in accordance with its terms and conditions. The Company need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. 3.2 Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which the Company is subject. 3.3 When issued upon the terms and conditions of this Agreement (and paid for as contemplated by this Agreement), the Shares will be validly issued and fully paid and 19 nonassessable, with no personal liability attached to the ownership thereof and not subject to any preemptive rights, rights of first refusal or other similar rights of the stockholders of the Company. 4. Miscellaneous. ------------- 4.1 Market Stand-Off. In connection with any underwritten public ---------------- offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, Roach shall not, without the prior written consent of the Company's managing underwriter, (i) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock of the Company ("Stock") or any securities convertible into or exercisable or exchangeable for Stock (whether such shares or any such securities are then owned by Roach or are thereafter acquired), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Stock, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Stock or such other securities, in cash or otherwise. Such restriction (the "Market Stand-Off") shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriters. In no event, however, shall such period exceed ninety (90) days. In the event of the declaration of a stock dividend, a spin-off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company's outstanding securities without receipt of consideration, any new, substituted or additional securities that are by reason of such transaction distributed with respect to any shares of Stock subject to the Market Stand-Off, or into which such shares thereby become convertible, shall immediately be subject to the Market Stand-Off. In order to enforce the Market Stand-Off, the Company may impose stop-transfer instructions with respect to the Stock until the end of the applicable stand-off period. The Company's underwriters shall be beneficiaries of the Agreement set forth in this Section 4.1. Roach shall be subject to this Subsection 4.1 only if all of the directors, officers and any five percent (5%) or greater shareholders of the Company are subject to similar arrangements. 4.2 Rights of the Company. The Company shall not be required to (i) --------------------- transfer on its books any Shares that have been sold or transferred in contravention of this Agreement or (ii) treat as the owner of Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom Shares have been transferred in contravention of this Agreement. 4.3 Successors and Assigns. Except as otherwise expressly provided ---------------------- to the contrary, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Company and its successors and assigns and be binding upon Roach and Roach's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person has become a party to this Agreement or has agreed in writing to join herein and to be bound by the terms, conditions and restrictions hereof. 4.4 No Retention of Rights. Nothing in this Agreement shall confer ---------------------- upon Roach any right to continue his employment for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Company (or any Parent or Subsidiary employing or retaining Roach) to terminate Roach's employment at any time and for any reason, with or 20 without cause, or of Roach under any other Agreement between Roach and the Company, which rights are hereby expressly reserved by each. 4.5 Tax Election. Subjecting the Shares to a Right of Repurchase may ------------ result in adverse tax consequences that may be avoided or mitigated by filing an election under Code Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code"). Such election may be filed only within thirty (30) days after the date of purchase. Roach should consult with Roach's tax advisor to determine the tax consequences of subjecting the Shares to a Right of Repurchase and the advantages and disadvantages of filing the Code Section 83(b) election. Roach acknowledges that it is Roach's sole responsibility, and not the Company's, to file a timely election under Code Section 83(b), even if Roach requests the Company or its representatives to make this filing Roach's behalf. 4.6 Legend. All certificates evidencing Restricted Shares shall ------ bear the following legends: "THE SHARES REPRESENTED HEREBY MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN COMPANY AND THE REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO COMPANY CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH COMPANY. THE SECRETARY OF COMPANY WILL UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE." 4.7 Notice. Any notice required by the terms of this Agreement shall ------ be given in writing and shall be deemed effective upon personal delivery or upon deposit with the United States Postal Service, by registered or certified mail, with postage and fees prepaid. Notice shall be addressed to the Company at its principal executive office and to Roach at the address that Roach most recently provided to the Company. 4.8 Entire Agreement. This Agreement constitutes the entire contract ---------------- between the parties hereto with regard to the subject matter hereof. It supersedes any other agreements, representations or understandings (whether oral or written and whether express or implied) relating to the subject matter hereof. 4.9 Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and to be performed entirely within such State. 4.10 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 21 and the holders of a majority of the then outstanding shares of the Company's capital stock that is not owned by Roach. 4.11 Severability. If one or more provisions of this Agreement are ------------ held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 4.12 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. COMPANY: DAOU SYSTEMS, INC. By: ----------------------------------------- Name: --------------------------------------- Its: ---------------------------------------- ROACH: - -------------------------------------------- Vincent Roach Signature Page to Restricted Stock Agreement, Executed August ___, 2001, to be Effective as of the Date First Written Above 22 EXHIBIT 1 to RESTRICTED STOCK AGREEMENT --------------------------------------- SPOUSE'S AGREEMENT The undersigned, being the spouse ("Spouse") of _________________________ (the "Investor"), agrees to be bound by the provisions of this Agreement to the extent applicable to the undersigned. Name: --------------------------------------- IF THE INVESTOR IS AN INDIVIDUAL WHO IS LEGALLY DOMICILED OR A RESIDENT IN THE STATE OF CALIFORNIA, OR ANY OTHER "COMMUNITY PROPERTY" STATE, THE SPOUSE OF THE INVESTOR MUST CHECK ONE OF THE FOLLOWING: _____ The Investor is acquiring the ____ The Investor is acquiring the Shares as separate Shares as community property property (the Investor should consult independent in one or both names (both counsel in making a determination as to whether he is spouses must sign) using separate property to purchase the Shares) - -------------------------------------------- Signature of the Investor - -------------------------------------------- Type or print name of the Investor - -------------------------------------------- Signature of Spouse - -------------------------------------------- Type or print name of Spouse
23 IF SEPARATE PROPERTY IS BEING USED TO PURCHASE THE SHARES, THE SPOUSE OF THE INVESTOR MUST SIGN THE FOLLOWING ACKNOWLEDGEMENT: I hereby acknowledge that my Spouse is making this investment in the Shares with his separate property and funds. - -------------------------------------------- Signature of the Investor's Spouse - -------------------------------------------- Type or print name of the Investor's Spouse 24 EXHIBIT 2 to RESTRICTED STOCK AGREEMENT --------------------------------------- Secured Promissory Note ----------------------- US$725,000.00 San Diego, California June 1, 2001 FOR VALUE RECEIVED, the undersigned, Vincent Roach ("Maker"), hereby promises to pay to the order of DAOU Systems, Inc., a Delaware corporation (the "Company"), the principal sum of Seven Hundred Twenty Five Thousand Dollars ($725,000) with interest on the unpaid balance thereof from the date that such principal amount was advanced until maturity at the rate per annum equal to 6.75% (the "Applicable Rate") computed on the basis of a 365-day year and actual days elapsed, both principal and interest payable as hereinafter provided in lawful money of the United States of America at the offices of the Company in San Diego, California, or at such other place as from time to time may be designated by the holder of this Note. The outstanding principal balance of this Note and accrued interest thereon shall be due and payable in full on or before May 31, 2006. Maker shall have the right to prepay, without penalty, upon ten (10) business days' notice to the holder, at any time and from time to time prior to maturity, all or any part of the unpaid principal balance of this Note. All payments or prepayments received hereunder, shall first be applied to any costs or expenses of enforcing this Note, next to accrued, but unpaid interest, and then to unpaid principal. It is the intent of the payee of this Note and the undersigned in the execution of this Note to contract in strict compliance with applicable usury law. In furtherance thereof, the said payee and the undersigned stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the maximum interest rate permitted to be charged by applicable law; that neither the undersigned nor any other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. The term "applicable law" as used in this Note shall mean the laws of the State of California or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. This Note is secured pursuant to the terms of that certain Stock Pledge Agreement, dated of even date herewith, by and between the Company and Maker, pursuant to which Maker pledges to the Company, and grants the Company a security interest in 2.5 million shares of the 25 EXHIBIT 10.1 Company's common stock, par value $.001 per share (the "Pledged Shares"), issued pursuant to that certain Stock Purchase Agreement of even date herewith, by and between the Company and Maker, and any dividends or distribution received with respect to, on account of, or in substitution for, the Pledged Shares. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings or if this Note is placed in the hands of attorneys for collection after default, the undersigned and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable hereon all the costs and expenses of said holder in enforcing this Note including, without limitation, reasonable attorneys' fees and legal expenses. All notices, consents, waivers, and other communications under this Note must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to the Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, California 92122 Attention: Jim Roberto Facsimile No.: (858) 452-1338 With a copy to: Baker & McKenzie 101 W. Broadway, 12th Floor San Diego, California 92121-3890 Attention: Abby B. Silverman Facsimile No.: (619) 236-0429 If to Maker: Vincent Roach 101 West Washington Street, Suite 1110-E Indianapolis, IN 46240 With a copy to: Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, DC 20036-5306 Attention: Brian Lane Facsimile No.: (202) 530-9589 If any provision of this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 26 This Note shall bind and inure to the benefit of the successors and assigns of the holder of this Note. This Note may not be amended except by means of a written agreement signed by the holder of this Note and the Maker. No waiver of a right in any instance shall constitute a continuing waiver of successive rights, and any one waiver shall govern only the particular matters waived. THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE GOVERNED FOR ALL PURPOSES BY THE LAW OF THE STATE OF CALIFORNIA AND THE LAW OF THE UNITED STATES APPLICABLE TO TRANSACTIONS WITHIN SUCH STATE. "Maker" - -------------------------------------------- Vincent Roach Signature Page to Promissory Note Executed August __, 2001, to be Effective as of the Date First Written Above 27 EXHIBIT 3 to RESTRICTED STOCK AGREEMENT --------------------------------------- STOCK PLEDGE AGREEMENT This Stock Pledge Agreement is entered into as of June 1, 2001 (the "Effective Date"), by and among DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach (the "Pledgor"), with reference to the following facts: Background Statement The Company has agreed to sell to Pledgor 2.5 million shares of the Company's common stock, par value $.001 per share (the "Shares"), pursuant to ------ that certain Stock Purchase Agreement, by and between the Company and Pledgor, dated June 1, 2001 (the "Purchase Agreement"). --------- In addition the Company has agreed to loan to Pledgor $725,000 as evidenced by that certain Secured Promissory Note (the "Note") dated June 1, ---- 2001. As a material inducement for the Company to make the loan to Pledgor and to enter into the Purchase Agreement, Pledgor has agreed to secure his obligations under the Note by granting the Company a first priority security interest in the Shares. Agreement NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions contained herein, the parties hereby agree as follows: 1. Security. The term "Pledged Stock" shall mean the 2.5 -------- ------------- million Shares registered in the name of Pledgor, together with all certificates, options, rights or other distributions issued as an addition to, in substitution or in exchange for, or on account of, any such Shares, and all proceeds of the foregoing, as further described in and subject to the provisions of Section 4 below, now or hereafter owned or acquired by Pledgor. 2. Grant of Security Interest. As security for full and timely -------------------------- payment, performance and satisfaction of the Obligations (as defined in Section ------- 3), Pledgor hereby grant to the Company a first priority security interest in - - the Pledged Stock. Upon the execution hereof, the Pledged Stock and any related stock powers will be deposited in escrow with the Company pursuant to Section 1.9 of the Purchase Agreement. 3. Obligations of Pledgor. As used herein, the term ---------------------- "Obligations" shall mean all of Pledgor's obligations, covenants and agreements ----------- under the Note. 4. Pledged Stock. In the event Pledgor will become entitled to ------------- receive or will receive, in connection with any of the Pledged Stock, (a) any stock certificate, including any certificate representing a stock dividend or any certificate in connection with any increase or 28 reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock split or spin-off, (b) any option, warrant or right, whether as an addition to or in substitution of any of the Pledged Stock, or otherwise, (c) any dividend or distribution payable in property, including securities issued as a dividend on the Pledged Stock, or (d) any other distributions of any kind whatsoever, Pledgor will accept the same as encumbered by the security interest created hereby, and will deliver the same forthwith to the Company as the escrow agent (the "Escrow Agent"), in the exact form received, including as appropriate, Pledgor's endorsement or appropriate stock power duly executed in blank, as appropriate, to be held by the Escrow Agent, as a part of the Pledged Stock, subject to the terms hereof; provided, however, that as long as no Default (as defined in Section 7) is in existence, Pledgor --------- will have sole voting rights with respect to the Pledged Stock. 5. Representations and Warranties of Pledgor. Pledgor warrants ----------------------------------------- and represents to the Company that: (a) he has the power and authority to enter into this Agreement and has the power and authority to pledge the Pledged Stock for the purposes described herein, (b) Pledgor is the legal and beneficial owner of all of the Pledged Stock, (c) all of the shares of the Pledged Stock are owned by Pledgor free of any pledge, mortgage, lien or security interest of any kind, except as created hereby, (d) the execution and delivery by Pledgor of this Agreement, and the performance of its terms, will not result in any violation or default under the terms of any agreement or instrument, or any law or governmental rule or regulation applicable to Pledgor or the Pledged Stock, and (e) upon execution and delivery by Pledgor of this Agreement and upon delivery of the Pledged Stock to Escrow Agent, this Agreement will create a valid and perfected first priority security interest in the Pledged Stock, and the proceeds thereof, subject to no prior security interest. 6. Transfer of Interests. Pledgor hereby covenants that, until --------------------- such time as the Obligations have been fully paid, performed and satisfied, except as set forth in Section 1.2 of the Purchase Agreement, Pledgor will not sell, convey or otherwise dispose of any of the Pledged Stock or any interest therein, or create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Pledged Stock, or the proceeds thereof, other than the security interest created hereby. No transfer shall be valid unless and until the transferee agrees that such transfer is subject to the preexisting security interest created hereby and such transferee executes a pledge agreement reasonably satisfactory to the Company. 7. Default. As used herein, the term "Default" will mean the ------- ------- failure of full and timely payment or performance and satisfaction of any of the Obligations. 8. Rights of the Company. Upon the occurrence of a Default, --------------------- the Company may, at its option, do any one or more of the following: (a) declare all indebtedness of Pledgor to Company to be immediately due and payable, whereupon all unpaid principal and interest under the Note will become and be immediately due and payable; (b) exercise any and all of the rights and remedies of a secured party as provided for by law; (c) proceed by an action or actions at law or in equity to recover the obligations secured hereby or to foreclose under the terms of this Agreement and the Note and sell the collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction; (d) proceed immediately to have any or all of the Pledged Stock registered in the Company's name or in the name of a nominee; (e) enforce 29 one or more remedies hereunder, successively or concurrently; and (f) proceed immediately to dispose of and realize upon the Pledged Stock, or any part thereof, and in connection therewith, sell or otherwise dispose of and deliver the Pledged Stock, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Company's offices or elsewhere, at such prices and on such terms as the Company may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right of the Company or any purchaser to purchase at any such sale either the whole or any part of the Pledged Stock (in connection with any such sale or disposition, the Company need not give more than thirty (30) calendar days notice of the time and place of any public sale or of the time after which a private sale may take place, which notice to Pledgor hereby acknowledges to be reasonable). 9. Proceeds. The proceeds of any disposition of all or any part -------- of the Pledged Stock, as provided in Section 8, will be applied as follows: (a) --------- first, to the costs and expenses incurred in connection therewith or incidental thereto, including the Company's attorneys' fees and legal expenses; (b) second, to the satisfaction of the Obligations; (c) third, to the payment of any other amounts required by applicable law; and (d) fourth, to Pledgor to the extent of any surplus remaining. In the event that there is any deficiency due to the fact that the proceeds from the aforesaid disposition of the Pledged Stock were inadequate to satisfy the Obligations, Pledgor will not be liable to the Company for such deficiency. 10. Private Sale. Pledgor recognize and acknowledge that the company ------------ may be unable to effect a public sale of all or a part of the Pledged Stock and may elect to resort to one or more private sales to purchasers who will be obligated to agree, among other things, to acquire the Pledged Stock for their own account, for investment, and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those of public sales, and agrees that such private sales will be deemed to have been made in a commercially reasonable manner and that the Company has no obligation to delay sale of any Pledged Stock to permit Pledgor to register it for public sale under the Securities Act of 1933, as amended. 11. Release of Pledged Stock. Upon the execution hereof, Pledgor ------------------------ will deliver to Escrow Agent the stock certificates representing the Pledged Stock, including Pledgor's endorsement thereon or appropriate stock powers duly executed in blank, as appropriate, to be held by the Escrow Agent in accordance with the terms of this Agreement and Section 1.9 of the Purchase Agreement. 12. Performance by Pledgor. Upon full payment and performance of all ---------------------- of the Obligations by Pledgor and upon payment of all additional costs and expenses provided herein, this Agreement will terminate, and the Company will deliver or caused to be delivered to Pledgor, such of the Pledged Stock that has not been sold or otherwise disposed of pursuant to this Agreement. 13. Remedies. The rights and remedies provided herein are cumulative -------- and are in addition to, and not exclusive of, any rights or remedies provided in other instruments and agreements between the Company and Pledgor, or as provided by law. 30 14. Legend. As long as the shares are subject to this ------ Agreement, such shares shall bear the following legend: THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THAT CERTAIN STOCK PLEDGE AGREEMENT, DATED JUNE 1, 2001 BY AND BETWEEN DAOU SYSTEMS, INC. AND VINCENT ROACH AND MAY NOT BE ASSIGNED, SOLD OR TRANSFERRED EXCEPT AS PROVIDED THEREIN. 15. Successors and Assigns. This Agreement is binding upon ---------------------- and will inure to the benefit of the parties hereto, and theirsuccessors and assigns. 16. Governing Law. This Agreement will be governed by and ------------- construed in accordance with California law, without regards to the principles of the conflict of laws. 17. Notices. All notices, consents, waivers, and other ------- communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, California 92122 Attention: Jim Roberto Facsimile No.: (858) 452-1338 With a copy to: Baker & McKenzie 101 W. Broadway, 12th Floor San Diego, California 92121-3890 Attention: Abby B. Silverman Facsimile No.: (619) 236-0429 If to Pledgor: Vincent Roach 101 West Washington Street, Suite 1110-E Indianapolis, IN 46240 With a copy to: Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, DC 20036-5306 Attention: Brian Lane Facsimile No.: (202) 530-9589 31 18. Entire Agreement. This Agreement and any other agreement ---------------- expressly referred to herein supersedes any and all other agreements, either oral or in writing, among the parties hereto, with respect to the subject matter hereof and contains all of the covenants and agreements among the parties with respect to the subject matter hereof. 19. Waiver; Modification. No term or condition of this Agreement -------------------- will be deemed to have been waived nor will there by any estoppel to enforce any provision of this Agreement except by written instrument of the party charged with such waiver or estoppel. No amendment or modification of this Agreement will be deemed effective unless and until executed in writing by all of the parties hereto. 20. Severability. All agreements and covenants contained herein ------------ are severable and in the event that any of them will be held to be invalid by any court of competent jurisdiction, this Agreement will be interpreted as if such invalid agreements or covenants were not contained herein. 21. Delay; Time of Essence. No failure or delay by a party in ---------------------- exercising any right, power, or privilege hereunder will operate as a waiver thereof, and no single or partial exercise thereof will preclude any other or further exercise or the exercise of any other right, power, or privilege. Time is of the essence of each and every provision of this Agreement of which time is an element. 22. Attorneys' Fees. In any action or proceeding brought to ---------------- enforce or interpret any provision of this Agreement, the prevailing party will be entitled to recover reasonable attorneys' fees in addition to any other available remedy. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 32 IN WITNESS WHEREOF, the parties have executed this Stock Pledge Agreement effective as of the date first written above. Pledgor: By: ------------------------------------------ Vincent Roach The Company DAOU Systems, Inc. By: ------------------------------------------ Name: ---------------------------------------- Its: ----------------------------------------- Signature Page to Stock Pledge Agreement, Executed August __, 2001, to be Effective as of the Date First Written Above 33 EXHIBIT 4 to RESTRICTED STOCK AGREEMENT --------------------------------------- REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement, dated as of June 1, 2001, is among DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach (the "Investor")." RECITALS WHEREAS, the Company and the Investor are parties to that certain Restricted Stock Agreement, dated June 1, 2001 (the "Purchase Agreement"); and WHEREAS, the Parties desire to enter into an agreement concerning the registration of the shares of common stock, par value $.001 per share (the "Common Stock"), to be issued pursuant to the Purchase 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 the Common Stock issued pursuant to the Purchase Agreement, 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 the number of shares of Common Stock outstanding 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 (e) the term "Form S-1" 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. 34 1.2 Form S-1 Registration. As soon as reasonably practicable after the written request of the Holders of a majority of the Registrable Securities, the Company shall file with the SEC one or more Registration Statements on Form S-1 (or other similar form) covering the continuous sale of the Registrable Securities pursuant to Rule 415 under the Securities Act or any successor thereto (each, a "Shelf Registration Statement"), in the manner specified therein. The Company shall use all reasonable efforts to cause each Shelf Registration Statement to be declared effective by the SEC as soon as reasonably practicable after its filing with the SEC, and upon reasonable notice from a Holder (and in any event no less than ten (10) days) that the Holder intends to sell pursuant to a Shelf Registration Statement, the Company will file such amendments and supplements as necessary to update the Shelf Registration Statement so that it will be effective for any such sale of Registrable Securities until the earlier of (x) such time as all of the Registrable Securities are sold pursuant to such Shelf Registration Statement or (y) each Holder is able to sell within any ninety (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 an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q or a Current Report on Form 8-K or other form, a Shelf Registration Statement may contain a material misstatement or omission, the Company may cause such 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, ninety (90) days in any twelve (12) month period. 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 thirty (30) consecutive days a 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 twenty (20) days after mailing of such notice by the Company in accordance with Section 2.5, the Company will cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 35 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: (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. 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 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, 36 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 1.7(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 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 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 1.7(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 1.7(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 1.7(b) exceed the proceeds from the offering net of sales commission, if any, received by such Holder. 37 (c) Promptly after receipt by an indemnified party under this Section 1.7 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 1.7, 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 1.7, 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 1.7. (d) If the indemnification provided for in this Section 1.7 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 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) The obligations of the Company and Holders under this Section 1.7 will survive the completion of any offering of Registrable Securities in a registration statement under this Article I, and otherwise. 1.8 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 38 sell securities of the Company to the public without registration or pursuant to a registration on Form S-1, 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. 1.9 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 Delaware. 39 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 Schedule 1 or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 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. 40 2.10 Entire Agreement, Amendment, Waiver. This Agreement (including the Schedules 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 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. 41 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: DAOU SYSTEMS, INC. By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- THE INVESTOR: - -------------------------------------------- Vincent Roach Signature Page to Registration Rights Agreement, Executed August __, 2001, to be Effective as of the Date First Written Above 42 SCHEDULE 1 INVESTOR --------- NAME AND ADDRESS ---------------- Vincent Roach 101 West Washington Street Suite 1110-E Indianapolis, IN 46240 43 EXHIBIT C Prior Stock Option Grants Options, issued in 1998, exercisable for 60,000 shares of Common Stock at an exercise price of $5.31 per share. 44 EXHIBIT D GENERAL RELEASE THIS GENERAL RELEASE (this "Release") is entered into effective as of ------- June 1, 2001 ("Effective Date") by and between DAOU Systems, Inc., a Delaware -------------- corporation ("the Company"), and Vince Roach, an individual resident of Florida ----------- ("Employee"), with reference to the following facts: -------- RECITALS A. The parties entered into an Employment Agreement effective as of June 1, 2001 (the "Agreement"). Pursuant to the terms and conditions of the --------- Agreement, and contingent upon satisfaction of the conditions described in the Agreement, Employee would become eligible for severance payments, in exchange for Employee's release of the Company from all claims which Employee may have against the Company through the Separation Date. B. The parties desire to dispose of, fully and completely, all claims which Employee may have against the Company in the manner set forth in this Release. AGREEMENT 1. Release. In exchange for the consideration described in the ------- Agreement, receipt of which is hereby acknowledged, Employee, for himself and his heirs, successors and assigns, fully releases, and discharges the Company and its officers, directors, employees, shareholders, attorneys, accountants, other professionals, insurers and agents (collectively "Agents"), and all ------ entities related to the Company and its Agents, including, but not limited to, heirs, executors, administrators, personal representatives, assigns, parent, subsidiary and sister corporations, affiliates, partners and co-venturers (collectively, "Related Entities"), from all rights, claims, demands, actions, ---------------- causes of action, liabilities and obligations of every kind, nature and description whatsoever, Employee now has, owns or holds or has at anytime had, owned or held or may have, own or hold against the Company, Agents or Related Entities from any source whatsoever, whether or not arising from or related to the facts recited in this Release. Employee specifically releases and waives any and all claims arising under any express or implied contract, rule, regulation or ordinance, including, without limitation, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Americans with Disabilities Act, and the Age Discrimination in Employment Act, as amended ("ADEA"), and any ---- applicable state law. 2. This Release is intended as a full and complete release and discharge of any and all claims that Employee may have against the Company, Agents or Related Entities through the Separation Date. In making this release, Employee intends to release the Company, Agents and Related Entities from liability of any nature whatsoever for any claim of damages or injury or for equitable or declaratory relief of any kind, whether the claim, or any facts on which such claim might be based, is known or unknown to him. Employee acknowledges that he may discover facts different from or in addition to those that he now believes to be true with respect 45 to this Release. Employee agrees that this Release shall remain effective notwithstanding the discovery of any different or additional facts. 3. Waiver of Certain Claims. Employee acknowledges that, with ------------------------ this Release, he has been advised in writing of his right to consult with an attorney prior to executing the waivers set out in this Release, and that he has been given a 21-day period in which to consider entering into the release of ADEA claims, if any. In addition, Employee acknowledges that he has been informed that he may revoke a signed waiver of the ADEA claims for up to seven (7) days after executing this Release. 4. No Undue Influence. This Release is executed voluntarily and ------------------ without any duress or undue influence. Employee acknowledges he has read this Release and executed it with his full and free consent. No provision of this Release shall be construed against any party by virtue of the fact that such party or its counsel drafted such provision or the entirety of this Release. 5. Confidentiality of Agreement and Release. Employee further ---------------------------------------- agrees to keep confidential the terms of the Agreement and this Release and to refrain from disclosing any information regarding the Agreement, this Release and their respective terms to any third party, unless required to do so (a) by a regulatory body (e.g. filings with the Securities Exchange Commission); (b) in financial disclosures to auditors or in audited financial statements; or (c) under oath, if properly ordered, in a court of competent jurisdiction. Employee agrees to notify the Company in writing upon first notification that he may be required by law to disclose any information deemed confidential by the Agreement or this Release. Notice must be provided in sufficient time for the party receiving notice to oppose or otherwise respond to the request. 6. Governing Law. This Release is made and entered into in ------------- Indiana and accordingly the rights and obligations of the parties hereunder shall in all respects be construed, interpreted, enforced and governed in accordance with the laws of Indiana as applied to contracts entered into in Indiana to be wholly performed within Indiana. 7. Severability. If any provision of this Release is held to ------------ be invalid, void or unenforceable, the balance of the provisions of this Release shall, nevertheless, remain in full force and effect and shall in no way be affected, impaired or invalidated. 8. Counterparts. This Release may be executed simultaneously ------------ in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Release may be executed by facsimile, with originals to follow by overnight courier. 9. Arbitration. Any dispute or claim arising out of this ----------- Release shall be subject to final and binding arbitration. The arbitration will be conducted by one arbitrator who is a member of the American Arbitration Association (the "AAA") and will be governed by the Model Employment Arbitration --- rules of the AAA. All fees and costs will be allocated to the parties to the arbitration as determined by the arbitrator; provided, however, that each party -------- ------- will pay one-half of the estimated arbitrator's fees up front; and, if either party fails to do so, then a default will be entered against such party solely with respect to such fees. Any determination of 46 the arbitrator shall be final and binding on the parties. Nothing in this Release will prevent a party from applying to a court that would otherwise have jurisdiction for provisional or interim injunctive or other equitable measures. 10. Entire Agreement. This Release constitutes the entire ---------------- agreement of the parties with respect to the subject matter of this Release, and supersedes all prior and contemporaneous negotiations, agreements and understandings between the parties, oral or written. 11. Modification; Waivers. No modification, termination or --------------------- attempted waiver of this Release will be valid unless in writing, signed by the party against whom such modification, termination or waiver is sought to be enforced. 12. Amendment. This Release may be amended or supplemented only --------- by a writing signed by Employee and the Company. DAOU SYSTEMS, INC. VINCE ROACH By: --------------------------------------- Its: By: /s/ Vincent K. Roach -------------------------------------- ------------------------ Vince Roach Signature Page to General Release, Executed August __, 2001, to be Effective as of the Date First Written Above 47
EX-10.2 7 dex102.txt RESTRICTED STOCK AGREEMENT EXHIBIT 10.2 EXHIBIT 2 to RESTRICTED STOCK AGREEMENT --------------------------------------- Secured Promissory Note ----------------------- US$725,000.00 San Diego, California June 1, 2001 FOR VALUE RECEIVED, the undersigned, Vincent Roach ("Maker"), hereby promises to pay to the order of DAOU Systems, Inc., a Delaware corporation (the "Company"), the principal sum of Seven Hundred Twenty Five Thousand Dollars ($725,000) with interest on the unpaid balance thereof from the date that such principal amount was advanced until maturity at the rate per annum equal to 6.75% (the "Applicable Rate") computed on the basis of a 365-day year and actual days elapsed, both principal and interest payable as hereinafter provided in lawful money of the United States of America at the offices of the Company in San Diego, California, or at such other place as from time to time may be designated by the holder of this Note. The outstanding principal balance of this Note and accrued interest thereon shall be due and payable in full on or before May 31, 2006. Maker shall have the right to prepay, without penalty, upon ten (10) business days' notice to the holder, at any time and from time to time prior to maturity, all or any part of the unpaid principal balance of this Note. All payments or prepayments received hereunder, shall first be applied to any costs or expenses of enforcing this Note, next to accrued, but unpaid interest, and then to unpaid principal. It is the intent of the payee of this Note and the undersigned in the execution of this Note to contract in strict compliance with applicable usury law. In furtherance thereof, the said payee and the undersigned stipulate and agree that none of the terms and provisions contained in this Note, or in any other instrument executed in connection herewith, shall ever be construed to create a contract to pay for the use, forbearance or detention of money, interest at a rate in excess of the maximum interest rate permitted to be charged by applicable law; that neither the undersigned nor any other parties now or hereafter becoming liable for payment of this Note shall ever be obligated or required to pay interest on this Note at a rate in excess of the maximum interest that may be lawfully charged under applicable law; and that the provisions of this paragraph shall control over all other provisions of this Note and any other instruments now or hereafter executed in connection herewith which may be in apparent conflict herewith. The term "applicable law" as used in this Note shall mean the laws of the State of California or the laws of the United States, whichever laws allow the greater rate of interest, as such laws now exist or may be changed or amended or come into effect in the future. This Note is secured pursuant to the terms of that certain Stock Pledge Agreement, dated of even date herewith, by and between the Company and Maker, pursuant to which Maker pledges to the Company, and grants the Company a security interest in 2.5 million shares of the Company's common stock, par value $.001 per share (the "Pledged Shares"), issued pursuant to that certain Stock Purchase Agreement of even date herewith, by and between the Company and Maker, and any dividends or distribution received with respect to, on account of, or in substitution for, the Pledged Shares. Should the indebtedness represented by this Note or any part thereof be collected at law or in equity or through any bankruptcy, receivership, probate or other court proceedings or if this Note is placed in the hands of attorneys for collection after default, the undersigned and all endorsers, guarantors and sureties of this Note jointly and severally agree to pay to the holder of this Note in addition to the principal and interest due and payable hereon all the costs and expenses of said holder in enforcing this Note including, without limitation, reasonable attorneys' fees and legal expenses. All notices, consents, waivers, and other communications under this Note must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to the Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, California 92122 Attention: Jim Roberto Facsimile No.: (858) 452-1338 With a copy to: Baker & McKenzie 101 W. Broadway, 12th Floor San Diego, California 92121-3890 Attention: Abby B. Silverman Facsimile No.: (619) 236-0429 If to Maker: Vincent Roach 101 West Washington Street Suite 1110-E Indianapolis, IN 46240 With a copy to: Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, DC 20036-5306 Attention: Brian Lane Facsimile No.: (202) 530-9589 If any provision of this Note is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Note will remain in full force and effect. Any provision of this Note held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. 2 This Note shall bind and inure to the benefit of the successors and assigns of the holder of this Note. This Note may not be amended except by means of a written agreement signed by the holder of this Note and the Maker. No waiver of a right in any instance shall constitute a continuing waiver of successive rights, and any one waiver shall govern only the particular matters waived. THIS NOTE AND THE RIGHTS AND DUTIES OF THE PARTIES HEREUNDER SHALL BE GOVERNED FOR ALL PURPOSES BY THE LAW OF THE STATE OF CALIFORNIA AND THE LAW OF THE UNITED STATES APPLICABLE TO TRANSACTIONS WITHIN SUCH STATE. "Maker" /s/ Vincent K. Roach - -------------------------------- Vincent Roach Signature Page to Promissory Note Executed August 1, 2001, to be Effective as of the Date First Written Above 3 EX-10.3 8 dex103.txt STOCK PLEDGE AGREEMENT EXHIBIT 10.3 EXHIBIT 3 to RESTRICTED STOCK AGREEMENT --------------------------------------- STOCK PLEDGE AGREEMENT This Stock Pledge Agreement is entered into as of June 1, 2001 (the "Effective Date"), by and among DAOU Systems, Inc., a Delaware corporation (the "Company"), and Vincent Roach (the "Pledgor"), with reference to the following facts: Background Statement The Company has agreed to sell to Pledgor 2.5 million shares of the Company's common stock, par value $.001 per share (the "Shares"), pursuant to ------ that certain Stock Purchase Agreement, by and between the Company and Pledgor, dated June 1, 2001 (the "Purchase Agreement"). ------------------ In addition the Company has agreed to loan to Pledgor $725,000 as evidenced by that certain Secured Promissory Note (the "Note") dated June 1, ---- 2001. As a material inducement for the Company to make the loan to Pledgor and to enter into the Purchase Agreement, Pledgor has agreed to secure his obligations under the Note by granting the Company a first priority security interest in the Shares. Agreement NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions contained herein, the parties hereby agree as follows: 1. Security. The term "Pledged Stock" shall mean the 2.5 million -------- ------------- Shares registered in the name of Pledgor, together with all certificates, options, rights or other distributions issued as an addition to, in substitution or in exchange for, or on account of, any such Shares, and all proceeds of the foregoing, as further described in and subject to the provisions of Section 4 --------- below, now or hereafter owned or acquired by Pledgor. 2. Grant of Security Interest. As security for full and timely -------------------------- payment, performance and satisfaction of the Obligations (as defined in Section 3), Pledgor hereby grant to the Company a first priority security - --------- interest in the Pledged Stock. Upon the execution hereof, the Pledged Stock and any related stock powers will be deposited in escrow with the Company pursuant to Section 1.9 of the Purchase Agreement. 3. Obligations of Pledgor. As used herein, the term "Obligations" ----------------------- ----------- shall mean all of Pledgor's obligations, covenants and agreements under the Note. 4. Pledged Stock. In the event Pledgor will become entitled to ------------- receive or will receive, in connection with any of the Pledged Stock, (a) any stock certificate, including any certificate representing a stock dividend or any certificate in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock split or spin-off, (b) any option, warrant or right, whether as an addition to or in substitution of any of the Pledged Stock, or otherwise, (c) any dividend or distribution payable in property, including securities issued as a dividend on the Pledged Stock, or (d) any other distributions of any kind whatsoever, Pledgor will accept the same as encumbered by the security interest created hereby, and will deliver the same forthwith to the Company as the escrow agent (the "Escrow Agent"), in the exact form received, including as appropriate, Pledgor's endorsement or appropriate stock power duly executed in blank, as appropriate, to be held by the Escrow Agent, as a part of the Pledged Stock, subject to the terms hereof; provided, however, that as long as no Default (as defined in Section 7) is in existence, Pledgor --------- will have sole voting rights with respect to the Pledged Stock. 5. Representations and Warranties of Pledgor. Pledgor warrants and ----------------------------------------- represents to the Company that: (a) he has the power and authority to enter into this Agreement and has the power and authority to pledge the Pledged Stock for the purposes described herein, (b) Pledgor is the legal and beneficial owner of all of the Pledged Stock, (c) all of the shares of the Pledged Stock are owned by Pledgor free of any pledge, mortgage, lien or security interest of any kind, except as created hereby, (d) the execution and delivery by Pledgor of this Agreement, and the performance of its terms, will not result in any violation or default under the terms of any agreement or instrument, or any law or governmental rule or regulation applicable to Pledgor or the Pledged Stock, and (e) upon execution and delivery by Pledgor of this Agreement and upon delivery of the Pledged Stock to Escrow Agent, this Agreement will create a valid and perfected first priority security interest in the Pledged Stock, and the proceeds thereof, subject to no prior security interest. 6. Transfer of Interests. Pledgor hereby covenants that, until such --------------------- time as the Obligations have been fully paid, performed and satisfied, except as set forth in Section 1.2 of the Purchase Agreement, Pledgor will not sell, convey or otherwise dispose of any of the Pledged Stock or any interest therein, or create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Pledged Stock, or the proceeds thereof, other than the security interest created hereby. No transfer shall be valid unless and until the transferee agrees that such transfer is subject to the preexisting security interest created hereby and such transferee executes a pledge agreement reasonably satisfactory to the Company. 7. Default. As used herein, the term "Default" will mean the failure ------- ------- of full and timely payment or performance and satisfaction of any of the Obligations. 8. Rights of the Company. Upon the occurrence of a Default, the --------------------- Company may, at its option, do any one or more of the following: (a) declare all indebtedness of Pledgor to Company to be immediately due and payable, whereupon all unpaid principal and interest under the Note will become and be immediately due and payable; (b) exercise any and all of the rights and remedies of a secured party as provided for by law; (c) proceed by an action or actions at law or in equity to recover the obligations secured hereby or to foreclose under the terms of this Agreement and the Note and sell the collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction; (d) proceed immediately to have any or all of the Pledged Stock registered in the Company's name or in the name of a nominee; (e) enforce 2 one or more remedies hereunder, successively or concurrently; and (f) proceed immediately to dispose of and realize upon the Pledged Stock, or any part thereof, and in connection therewith, sell or otherwise dispose of and deliver the Pledged Stock, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Company's offices or elsewhere, at such prices and on such terms as the Company may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right of the Company or any purchaser to purchase at any such sale either the whole or any part of the Pledged Stock (in connection with any such sale or disposition, the Company need not give more than thirty (30) calendar days notice of the time and place of any public sale or of the time after which a private sale may take place, which notice to Pledgor hereby acknowledges to be reasonable). 9. Proceeds. The proceeds of any disposition of all or any part of the -------- Pledged Stock, as provided in Section 8, will be applied as follows: (a) first, --------- to the costs and expenses incurred in connection therewith or incidental thereto, including the Company's attorneys' fees and legal expenses; (b) second, to the satisfaction of the Obligations; (c) third, to the payment of any other amounts required by applicable law; and (d) fourth, to Pledgor to the extent of any surplus remaining. In the event that there is any deficiency due to the fact that the proceeds from the aforesaid disposition of the Pledged Stock were inadequate to satisfy the Obligations, Pledgor will not be liable to the Company for such deficiency. 10. Private Sale. Pledgor recognize and acknowledge that the company ------------ may be unable to effect a public sale of all or a part of the Pledged Stock and may elect to resort to one or more private sales to purchasers who will be obligated to agree, among other things, to acquire the Pledged Stock for their own account, for investment, and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those of public sales, and agrees that such private sales will be deemed to have been made in a commercially reasonable manner and that the Company has no obligation to delay sale of any Pledged Stock to permit Pledgor to register it for public sale under the Securities Act of 1933, as amended. 11. Release of Pledged Stock. Upon the execution hereof, Pledgor will ------------------------ deliver to Escrow Agent the stock certificates representing the Pledged Stock, including Pledgor's endorsement thereon or appropriate stock powers duly executed in blank, as appropriate, to be held by the Escrow Agent in accordance with the terms of this Agreement and Section 1.9 of the Purchase Agreement. 12. Performance by Pledgor. Upon full payment and performance of all of ---------------------- the Obligations by Pledgor and upon payment of all additional costs and expenses provided herein, this Agreement will terminate, and the Company will deliver or caused to be delivered to Pledgor, such of the Pledged Stock that has not been sold or otherwise disposed of pursuant to this Agreement. 13. Remedies. The rights and remedies provided herein are cumulative -------- and are in addition to, and not exclusive of, any rights or remedies provided in other instruments and agreements between the Company and Pledgor, or as provided by law. 3 14. Legend. As long as the shares are subject to this Agreement, such ------ shares shall bear the following legend: THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THAT CERTAIN STOCK PLEDGE AGREEMENT, DATED JUNE 1, 2001 BY AND BETWEEN DAOU SYSTEMS, INC. AND VINCENT ROACH AND MAY NOT BE ASSIGNED, SOLD OR TRANSFERRED EXCEPT AS PROVIDED THEREIN. 15. Successors and Assigns. This Agreement is binding upon and will ---------------------- inure to the benefit of the parties hereto, and their successors and assigns. 16. Governing Law. This Agreement will be governed by and construed in ------------- accordance with California law, without regards to the principles of the conflict of laws. 17. Notices. All notices, consents, waivers, and other communications ------- under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice to the other parties): If to Company: DAOU Systems, Inc. 5120 Shoreham Place San Diego, California 92122 Attention: Jim Roberto Facsimile No.: (858) 452-1338 With a copy to: Baker & McKenzie 101 W. Broadway, 12th Floor San Diego, California 92121-3890 Attention: Abby B. Silverman Facsimile No.: (619) 236-0429 If to Pledgor: Vincent Roach 101 West Washington Street, Suite 1110-E Indianapolis, IN 46240 4 With a copy to: Gibson, Dunn & Crutcher, LLP 1050 Connecticut Avenue, N.W. Washington, DC 20036-5306 Attention: Brian Lane Facsimile No.: (202) 530-9589 18. Entire Agreement. This Agreement and any other agreement expressly ---------------- referred to herein supersedes any and all other agreements, either oral or in writing, among the parties hereto, with respect to the subject matter hereof and contains all of the covenants and agreements among the parties with respect to the subject matter hereof. 19. Waiver; Modification. No term or condition of this Agreement will -------------------- be deemed to have been waived nor will there by any estoppel to enforce any provision of this Agreement except by written instrument of the party charged with such waiver or estoppel. No amendment or modification of this Agreement will be deemed effective unless and until executed in writing by all of the parties hereto. 20. Severability. All agreements and covenants contained herein are ------------ severable and in the event that any of them will be held to be invalid by any court of competent jurisdiction, this Agreement will be interpreted as if such invalid agreements or covenants were not contained herein. 21. Delay; Time of Essence. No failure or delay by a party in ---------------------- exercising any right, power, or privilege hereunder will operate as a waiver thereof, and no single or partial exercise thereof will preclude any other or further exercise or the exercise of any other right, power, or privilege. Time is of the essence of each and every provision of this Agreement of which time is an element. 22. Attorneys' Fees. In any action or proceeding brought to enforce or --------------- interpret any provision of this Agreement, the prevailing party will be entitled to recover reasonable attorneys' fees in addition to any other available remedy. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 5 IN WITNESS WHEREOF, the parties have executed this Stock Pledge Agreement effective as of the date first written above. Pledgor: By: /s/ Vincent K. Roach ----------------------------------------------- Vincent Roach The Company DAOU Systems, Inc. By: /s/ James T. Roberto -------------------------------------------------- Name: James T. Roberto ------------------------------------------------ Its: Chief Executive Officer ------------------------------------------------- Signature Page to Stock Pledge Agreement, Executed August 1, 2001, to be Effective as of the Date First Written Above 6
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