-----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, MCh1xgqCLnFY0uJOfgYMWFKGpU6UuxsmoUoHDyrJjIJvvakqpw+wPtyJNHGq2R+y ScNRYrVl2qXhJQIy3PAsIw== 0001047469-99-029032.txt : 19990730 0001047469-99-029032.hdr.sgml : 19990730 ACCESSION NUMBER: 0001047469-99-029032 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990727 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990729 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: 8-K SEC ACT: SEC FILE NUMBER: 000-22073 FILM NUMBER: 99672873 BUSINESS ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 BUSINESS PHONE: 6194522221 MAIL ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 8-K 1 8-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): July 27, 1999 DAOU SYSTEMS, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 0-22073 330284454 (Commission File Number) (IRS Employer Identification No.) 5120 Shoreham Place, San Diego, California 92122 (Address of principal executive offices, including zip code) (619) 452-2221 (Registrant's telephone number, including area code) ITEM 5. OTHER EVENTS. On July 27, 1999, DAOU Systems, Inc. ("DAOU") completed a $12 million private placement financing involving the sale of 2,181,818 shares of Series A Preferred Stock (the "SHARES") to certain investors at the purchase price of $5.50 per share. DAOU will use the net proceeds from the sale of the Shares for general corporate and working capital purposes. The Shares were purchased by Galen Partners III, L.P., a Delaware limited partnership ("GALEN III"), and certain affiliated entities. Each Share is convertible into one share of DAOU Common Stock, subject to certain anti-dilution adjustments. Holders of the Shares will be entitled to receive dividends at the annual rate of six percent, payable in shares of Series A Preferred Stock. The Shares are redeemable at DAOU's option on or after July 27, 2003, and at the option of the holders under specified terms and conditions. In addition, the Shares are subject to mandatory conversion in the event that the price per share of DAOU's Common Stock reaches certain specified price targets. The above summary is qualified in its entirety by the terms and provisions of the exhibits filed with this Current Report on Form 8-K. 2 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits. The following exhibits are filed herewith or incorporated by reference as part of this report:
Exhibit No. Document Description -------------- -------------------------------------------- 4.1 Certificate of Designations of DAOU, as filed with the Secretary of State of the State of Delaware on July 23, 1999. 4.2 Registration Rights Agreement, dated as of July 26, 1999, by and among DAOU, Galen III, Galen Partners International III, L.P., a Delaware limited partnership ("GALEN INTERNATIONAL"), and Galen Employee Fund III, L.P., a Delaware limited partnership ("GALEN EMPLOYEE FUND"). 10.1 Voting Agreement, dated as of July 26, 1999, by and among DAOU, Daniel J. Daou, Georges J. Daou, Galen III, Galen International and Galen Employee Fund. 10.2 Stock Purchase Agreement, dated as of July 26, 1999, by and among DAOU, Galen III, Galen International and Galen Employee Fund. 99 Press release dated July 28, 1999, entitled "DAOU Systems, Inc. Completes $12 Million Private Placement Financing from Galen Partners."
3 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Date: July 29, 1999 DAOU SYSTEMS, INC. By: /s/ FRED C. MCGEE -------------------------------------- Fred C. McGee, Chief Financial Officer 4 EXHIBIT INDEX
Exhibit No. Document Description -------------- -------------------------------------------- 4.1 Certificate of Designations of DAOU, as filed with the Secretary of State of the State of Delaware on July 23, 1999. 4.2 Registration Rights Agreement, dated as of July 26, 1999, by and among DAOU, Galen III, Galen International and Galen Employee Fund. 9 Voting Agreement, dated as of July 26, 1999, by and among DAOU, Daniel J. Daou, Georges J. Daou, Galen III, Galen International and Galen Employee Fund. 10 Stock Purchase Agreement, dated as of July 26, 1999, by and among DAOU, Galen III, Galen International and Galen Employee Fund. 99 Press release dated July 28, 1999, entitled "DAOU Systems, Inc. Completes $12 Million Private Placement Financing from Galen Partners."
5 EX-4.1 2 EXHIBIT 4.1 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF OF SERIES A PREFERRED STOCK OF DAOU SYSTEMS, INC. ------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------- DAOU Systems, Inc. (the "CORPORATION"), a corporation organized and existing under the General Corporation Law of the State of Delaware, certifies that pursuant to the authority contained in Article IV of its Restated Certificate of Incorporation (the "CERTIFICATE OF INCORPORATION") and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation by resolution dated July 22, 1999 duly approved and adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that pursuant to the authority vested in the Board of Directors by its Certificate of Incorporation, the Board of Directors does hereby designate, create, authorize and provide for the issue of Series A Preferred Stock (the "SERIES A PREFERRED STOCK"), par value $0.001 per share, consisting of Three Million Five Hundred Twenty Thousand Two Hundred Fifty-Five (3,520,255) shares, having the following voting powers, preferences and relative, participating, optional and other special rights, and qualifications, limitations and restrictions thereof as follows: 1. DIVIDEND PROVISIONS. Subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7 and the other limitations set forth in this SECTION 1, the holders of shares of the Series A Preferred Stock shall be entitled to receive dividends out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (other than a dividend payable solely in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock) on the Common Stock, at the rate (1) of six percent (6%) per annum based on the Series A Issue Price (as hereinafter defined in SUBSECTION 2(A)) per share of the Series A Preferred Stock (appropriately adjusted for any stock split, dividend, combination or other recapitalization) for the first two years after the date upon which any shares of Series A Preferred Stock were first issued (the "PURCHASE DATE" with respect to such series), plus (2) an additional one percent (1%) per annum based on the Series A Issue Price (appropriately adjusted for any stock split, dividend, combination or other recapitalization) for each successive year after the second anniversary of the Purchase Date, which shall accrue and be payable (whether or not declared) semi-annually in shares of Series A Preferred valued at such Series A Issue Price (the "PIK DIVIDEND"). The PIK Dividend shall increase to a rate of twelve percent (12%) per annum if a Registration Statement on Form S-3 (or other similar form) covering the continuous sale of the shares of Common Stock into which the Series A Preferred Stock shall have converted pursuant to Rule 415 under the Securities Act or any successor thereto has not been declared effective by the Securities and Exchange Commission ("SEC") by the date that is 120 days after the Purchase Date (the "SHELF REGISTRATION DEADLINE"). In such event, the PIK Dividend rate shall return to its prior rate (six percent (6%) as of the Purchase Date) after the date that the Registration Statement is declared effective. Such dividends shall be subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, shall be paid to the extent assets are legally available therefor and any amounts for which assets are not legally available shall be paid promptly as assets become legally available therefor; any partial payment will be made pro rata among the holders of such shares. Unless full dividends on the Series A Preferred Stock for the then current dividend period shall have been paid or declared and a sum sufficient for the payment thereof set apart, no dividend whatsoever (other than a dividend payable solely in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock) shall be paid or declared, and no distribution shall be made, on any Common Stock. After full dividends on the Series A Preferred Stock for the then current dividend period have been paid, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall participate in any further dividends on a pro rata basis determined by the number of shares of Common Stock held by each (assuming conversion of all such Series A Preferred Stock). In the event that payment of PIK Dividends on any dividend payment date would cause the Corporation to issue more than 19.9% of its outstanding shares of Common Stock at a price below the market price on the principal market on which its equity securities are traded ("PRINCIPAL MARKET"), the dividends which otherwise would be payable as PIK Dividends shall become payable in cash. 2. LIQUIDATION PREFERENCE. a. In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) Five Dollars and Fifty Cents ($5.50) for each outstanding share of Series A Preferred Stock (the "SERIES A ISSUE PRICE") and (ii) an amount in cash equal to any accrued (whether or not declared) but unpaid dividends (such amount, in the aggregate, being referred to herein as the "PREMIUM"). If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the 2 full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder. b. Upon the completion of the distribution required by SUBSECTION (a) of this SECTION 2 and any other distribution which may be required with respect to series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, remaining assets shall be distributed among the holders of the Common Stock of the Corporation. c. A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of the Corporation or the effectuation by the Corporation of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this SECTION 2, but shall instead be treated pursuant to SECTION 5. d. The Corporation shall give each holder of record of Series A Preferred Stock written notice of a liquidation, dissolution or winding up described in subsection (a), above, not later than ten (10) days prior to the stockholders' meeting called to approve such transaction, or ten (10) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this SECTION 2, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than ten (10) days after the Corporation has given the first notice provided for herein or sooner than five (5) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock which are entitled to such notice rights or similar notice rights and which represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. 3. REDEMPTION. a. Subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, within thirty (30) days after the occurrence of a Redemption Event (defined below) upon receipt by the Corporation of a written request from the holders of a majority of the then outstanding Series A Preferred Stock, that all or some of such holders' shares be redeemed, and concurrently with surrender by such holders of the certificates representing such shares to be redeemed, the Corporation shall, to the extent it may lawfully do so, redeem in cash the shares specified in such request by paying in cash therefor a sum per share equal to the Series A Issue Price plus any accrued but unpaid dividends (the "SERIES A REDEMPTION PRICE"). The Corporation shall give each holder of Series A Preferred Stock at least ten (10) days prior written notice of the date (the "REDEMPTION DATE") and place of redemption and the dollar amount of the Series A Redemption 3 Price, which notice shall be effective upon delivery or three days after deposit in the United States mail, postage prepaid and addressed to each holder of record at his address appearing on the books of the Corporation. If the certificate surrendered represents a greater number of shares than the number redeemed, the Corporation shall issue to such holder a new certificate representing the shares which remain outstanding. For purposes of this SUBSECTION (A) of SECTION 3, a Redemption Event shall be (1) the resignation of Larry D. Grandia as Chief Executive Officer of the Corporation; (2) the failure of the Corporation to hire a replacement for Larry D. Grandia as Chief Executive Officer of the Corporation within 180 days following his termination as Chief Executive Officer by the Corporation, or (3) the failure of Georges J. Daou or Daniel J. Daou to vote their shares of the Corporation in favor of a transaction described in SECTION 2(a) or (c), above, in the event that the majority of the Board of Directors of the Corporation vote in favor of such transaction. b. From and after the Redemption Date, unless there shall have been a default in payment of the Series A Redemption Price, all dividends on the Series A Preferred Stock designated for redemption in the Redemption Notice shall cease to accrue, all rights of the holders of such shares as holders of Series A Preferred Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. Subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, if the funds of the Corporation legally available for redemption of shares of Series A Preferred Stock on any Redemption Date, or any subsequent date as provided in SUBSECTION 3(a), are insufficient to redeem the total number of shares of Series A Preferred Stock to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed. The shares of Series A Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. Subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, at any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series A Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the Company has become obligated to redeem on any Redemption Date but which it has not redeemed. c. The Corporation may, upon a vote of its Board of Directors, redeem the remaining outstanding Series A Preferred Stock by payment in cash of the Series A Redemption Price in accordance with the notice and other terms and conditions set forth above in this SECTION 3 at any date which is four years after the Purchase Date. 4. CONVERSION. The holders of the Series A Preferred Stock shall have conversion rights as follows (the "CONVERSION RIGHTS"): a. RIGHT TO CONVERT. i. Subject to SUBSECTION (c), each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of 4 issuance of such share and prior to the close of business on any Redemption Date as may have been fixed in any Redemption Notice with respect to such share, at the office of the Corporation or any transfer agent for the Series A Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series A Issue Price by the Conversion Price at the time in effect for such share. The initial "CONVERSION PRICE" per share for shares of Series A Preferred Stock shall be the Series A Issue Price; provided, however, that the Conversion Price for the Series A Preferred Stock shall be subject to adjustment as set forth in SUBSECTION 4(c). ii. In the event of a call for redemption of any shares of Series A Preferred Stock pursuant to SECTION 3, unless there shall have been a default in payment of the Series A Redemption Price, the Conversion Rights shall terminate as to the shares designated for redemption at the close of business on the Redemption Date. iii. Each share of Series A Preferred Stock shall automatically and immediately be converted into shares of Common Stock at the Conversion Price at the time in effect for such Series A Preferred Stock in the event that the closing price of the Corporation's Common Stock on the Principal Market equals or exceeds $11.00 per share (appropriately adjusted for any stock split, dividend, combination or other recapitalization) for twenty (20) consecutive trading days at any time after the first anniversary date of the Purchase Date. In addition, fifty percent (50%) of the Series A Preferred Stock held by each Holder shall automatically and immediately convert into shares of Common Stock at the Conversion Price at the time in effect for such Series A Preferred Stock in the event that at any time during the period commencing 180 days from the Purchase Date and ending on the anniversary date of the Purchase Date the closing price of the Corporation's Common Stock on the Principal Market equals or exceeds $13.75 (appropriately adjusted for any stock split, dividend, combination or other recapitalization) for twenty (20) consecutive trading days. b. MECHANICS OF CONVERSION. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Series A Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. c. CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The Conversion Price of the Series A Preferred Stock shall be subject to adjustment from time to time as follows: 5 i. A. Upon each issuance by the Corporation of any Additional Stock (as defined below) after the Purchase Date and before the first anniversary date of the Purchase Date, without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this CLAUSE (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (not including shares excluded from the definition of Additional Stock by SUBSECTION 4(c)(ii)(b)) plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for such issuance of Additional Stock would purchase at such Conversion Price; and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (not including shares excluded from the definition of Additional Stock by SUBSECTION 4(c)(ii)(b)) plus the number of shares of such Additional Stock. However, the foregoing calculation shall not take into account shares deemed issued pursuant to SUBSECTION 4(c)(i)(e) on account of options, rights or convertible or exchangeable securities (or the actual or deemed consideration therefor), except to the extent (i) such options, rights or convertible or exchangeable securities have been exercised, converted or exchanged or (ii) the consideration to be paid upon such exercise, conversion or exchange per share of underlying Common Stock is less than or equal to the per share consideration for the Additional Stock which has given rise to the Conversion Price adjustment being calculated. B. Except to the limited extent provided for in SUBSECTIONS (e)(3) and (e)(4), no adjustment of such Conversion Price pursuant to this SUBSECTION 4(c)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment, and (for purposes of clarification only) in no event will such adjustment have the effect of increasing the Conversion Price above the Series A Issue Price. C. In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. D. In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. E. In the case of the issuance (whether before, on or after the applicable Purchase Date) of options to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this SUBSECTION 4(c)(i) and SUBSECTION 4(c)(ii): 6 1. The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in SUBSECTIONS 4(c)(i)(c) and (c)(i)(d)), if any, received by the Corporation upon the issuance of such options or rights plus the exercise price provided in such options or rights for the Common Stock covered thereby. 2. The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a consideration equal to the consideration, if any, received by the Corporation for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in SUBSECTIONS 4(c)(i)(c) and (c)(i)(d)). 3. In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to the Corporation upon exercise of such options or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options or rights or the conversion or exchange of such securities. 4. Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, to the extent in any way affected by or computed using such options, rights or securities or options or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities. 5. The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to SUBSECTIONS 4(c)(i)(e)(1) 7 and (2) shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either SUBSECTION 4(c)(i)(e)(3) or (4). ii. "ADDITIONAL STOCK" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to SUBSECTION 4(c)(i)(e)) by the Corporation after the Purchase Date and before the first anniversary date of the Purchase Date, other than: A. Common Stock issued pursuant to a transaction described in SUBSECTION 4(c)(iii), B. shares of Common Stock issuable or issued to employees, consultants or directors of the Corporation directly or pursuant to a stock option plan, stock option agreement, stock purchase plan or restricted stock plan approved by the Board of Directors of the Corporation, or in connection with lease lines, bank financings or other similar transactions, C. securities issued in connection with an underwritten public offering, D. securities issued in connection with a merger or stock or asset acquisition, or E. securities issued to multiple Qualified Institutional Buyers in a transaction which is managed by an investment bank and in which the gross proceeds equal or exceeds Fifty Million Dollars ($50,000,000). iii. In the event the Corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in SUBSECTION 4(c)(i)(e). iv. If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock shall be appropriately increased so that the number of shares of 8 Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. v. Notwithstanding the above, in no event shall the Conversion Price on the Series A Preferred Stock be adjusted to a price that would cause the Corporation to issue that number of shares of Common Stock upon conversion of the Series A Preferred Stock which would be greater than 19.9% of the number of outstanding shares of the Corporation's Common Stock on the Purchase Date. d. OTHER DISTRIBUTIONS. In the event the Corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in SUBSECTION 4(c)(iii), then, in each such case for the purpose of this SUBSECTION 4(d), the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Corporation into which their shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. e. RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this SECTION 4 or SECTION 5), provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this SECTION 4 with respect to the rights of the holders of the Series A Preferred Stock after the recapitalization to the end that the provisions of this SECTION 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. f. NO IMPAIRMENT. The Corporation will not, by amendment of its Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this SECTION 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock against impairment. g. NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS. i. No fractional shares shall be issued upon conversion of the Series A Preferred Stock, and the number of shares of Common Stock to be issued shall be rounded up to the nearest whole share. 9 ii. Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock pursuant to this SECTION 4, the Corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock. h. NOTICES OF RECORD DATE. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of Series A Preferred Stock, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. i. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. j. NOTICES. Any notice required by the provisions of this SECTION 4 to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. 5. MERGER, CONSOLIDATION. a. At any time, in the event of: i. any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) which will result in the Corporation's stockholders immediately prior to such transaction not holding (by virtue of such 10 shares or securities issued solely with respect thereto) at least fifty percent (50%) of the voting power of the surviving or continuing entity, ii. a sale of all or substantially all of the assets of the Corporation, unless the Corporation's stockholders immediately prior to such sale will, as a result of such sale, hold (by virtue of securities issued as consideration for the Corporation's sale) at least fifty percent (50%) of the voting power of the purchasing entity, then, subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, unless waived as evidenced by the consent of the holders of a majority of the shares of Series A Preferred Stock, holders of the Series A Preferred Stock shall receive for each share of such stock in cash or in securities received from the acquiring corporation, or in a combination thereof, at the closing of any such transaction, an amount equal to the greater of (A) the Series A Issue Price, plus an amount equal to the Premium as of the date of closing of such transaction or (B) that share of the total consideration to be paid by the acquiring entity in such transaction as equals the proportion that the number of shares of Common Stock and Common Stock issuable upon conversion of the outstanding Series A Preferred Stock then held by each of them bears to the total number of shares of outstanding Common Stock and shares of Common Stock issuable upon conversion of the outstanding Series A Preferred Stock. Such payments shall be made with respect to the Series A Preferred Stock (A) by redemption of such shares in one installment pursuant to SUBSECTION 3(b) (provided that in such event the moment immediately prior to the closing of such transaction shall, for purposes of this subparagraph, be deemed to be the "REDEMPTION DATE", only ten (10) days' prior notice of the date fixed for redemption need be given and the consent of the holders of the Series A Preferred Stock shall be deemed to have been given) or (B) by purchase of such shares of Series A Preferred Stock by the surviving corporation, entity or person or by the Corporation. In the event the proceeds of the transaction are not sufficient to make full payment of the aforesaid preferential amounts to the holders of the Series A Preferred Stock in accordance herewith, then, subject to the rights of series of Preferred Stock which may from time to time come into existence in compliance with the provisions of SECTION 7, the entire amount payable in respect of the proposed transaction shall be distributed among the holders of the Series A Preferred Stock in proportion to the amount of such stock owned by each such holder. b. Any securities to be delivered to the holders of the Series A Preferred Stock pursuant to SUBSECTION 5(a) above shall be valued as follows: i. Securities not subject to investment letter or other similar restrictions on free marketability (covered by (ii) below): A. If traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange over the 15-day period ending three (3) days prior to the closing; B. If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever are applicable) over the 15-day period ending three (3) days prior to the closing; and 11 C. If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of Preferred Stock which would be entitled to receive such securities or the same type of securities and which Preferred Stock represents at least a majority of the voting power of all then outstanding shares of such Preferred Stock. ii. The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in (i) (A), (B) or (C) to reflect the approximate fair market value thereof, as mutually determined by the Corporation and the holders of Preferred Stock which would be entitled to receive such securities or the same type of securities and which represent at least a majority of the voting power of all then outstanding shares of such Preferred Stock. c. In the event the requirements of SUBSECTION 5(a) are not complied with, the Corporation shall forthwith either: i. cause such closing to be postponed until such time as the requirements of this SECTION 5 have been complied with, or ii. cancel such transaction, in which event the rights, preferences and privileges of the holders of the Series A Preferred Stock shall revert to and be the same as such rights, preferences and privileges existing immediately prior to the date of the first notice referred to in SECTION 5. d. The Corporation shall give each holder of record of Series A Preferred Stock written notice of such impending transaction not later than ten (10) days prior to the stockholders' meeting called to approve such transaction, or ten (10) days prior to the closing of such transaction, whichever is earlier, and shall also notify such holders in writing of the final approval of such transaction. The first of such notices shall describe the material terms and conditions of the impending transaction and the provisions of this SECTION 5, and the Corporation shall thereafter give such holders prompt notice of any material changes. The transaction shall in no event take place sooner than ten (10) days after the Corporation has given the first notice provided for herein or sooner than five (5) days after the Corporation has given notice of any material changes provided for herein; provided, however, that such periods may be shortened upon the written consent of the holders of Preferred Stock which is entitled to such notice rights or similar notice rights and which represents at least a majority of the voting power of all then outstanding shares of such Preferred Stock. e. The provisions of this SECTION 5 are in addition to the protective provisions of SECTION 7. 6. VOTING RIGHTS. Except as set forth below, the holder of each share of Series A Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded up to the nearest whole share), and with respect to such vote, such holder shall have full voting rights and powers equal to the voting 12 rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the Bylaws of the Corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. 7. PROTECTIVE PROVISIONS. So long as fifty percent (50%) of the Series A Preferred Stock are outstanding, the Corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a separate class: a. liquidate or dissolve, or sell, convey, or otherwise dispose of or encumber all or substantially all of its property or business or merge into or consolidate with any other corporation (other than a wholly owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Corporation is disposed of (provided, however that the holders of Series A Preferred Stock will not be entitled to vote as a class on a liquidation, a dissolution, mergers, consolidations, sales of assets, business combinations or similar transactions in which the holders of Series A Preferred Stock receive per share consideration of at least Eight Dollars ($8.00) (appropriately adjusted for any stock split, dividend, combination or other recapitalization) after the Purchase Date; or b. alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely such shares; or c. increase the authorized number of shares of Series A Preferred Stock; or d. create any new class or reclassify any series of stock or any other securities convertible into equity securities of the Corporation having a preference over, or being on a parity with, the Series A Preferred Stock with respect to voting, redemption, dividends or upon liquidation; or e. repurchase or redeem any shares of the Corporation's capital stock other than the Series A Preferred Stock and shares repurchased at cost from employees or officers; or f. declare or pay any dividend on any shares of capital stock, except the Series A Preferred Stock; or g. increase to more than seven the authorized size of the Corporation's Board of Directors; or h. amend the Certificate of Incorporation or Bylaws of the Corporation to adversely effect the rights, preferences or privileges of the Series A Preferred Stock; or i approve any acquisitions of capital stock or assets that would require the issuance of more than ten percent (10%) of the Corporation's then outstanding 13 Common Stock (assuming conversion of the Series A Preferred Stock) or cash consideration of more than $15,000,000. 8. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of Series A Preferred Stock shall be redeemed or converted pursuant to SECTION 3 or SECTION 4, the shares so converted or redeemed shall be canceled and shall not be issuable by the Corporation. The Certificate of Incorporation of the Corporation shall be appropriately amended to effect the corresponding reduction in the Corporation's authorized capital stock. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 14 IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly executed by Larry D. Grandia, Chief Executive Officer and President, and attested by Fred C. McGee, its secretary, this 22nd day of July, 1999. DAOU SYSTEMS, INC. By: /s/ Larry D. Grandia --------------------------------- Larry D. Grandia Chief Executive Officer and President ATTEST: By: /s/ Fred C. McGee ------------------------- Fred C. McGee Secretary [SIGNATURE PAGE TO CERTIFICATE OF DESIGNATIONS] 15 EX-4.2 3 EXHIBIT 4.2 DAOU SYSTEMS, INC. REGISTRATION RIGHTS AGREEMENT --------- JULY 26, 1999 TABLE OF CONTENTS
PAGE ARTICLE I REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2 Form S-3 Registration. . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.3 Company Registration . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.4 Obligations of the Company . . . . . . . . . . . . . . . . . . . . . . . .2 1.5 Furnish Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1.6 Expenses of Registration . . . . . . . . . . . . . . . . . . . . . . . . .3 1.7 Underwriting Requirements. . . . . . . . . . . . . . . . . . . . . . . . .3 1.8 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 1.9 Reports Under 1934 Act . . . . . . . . . . . . . . . . . . . . . . . . . .6 1.10 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . . . . . .6 1.11 Rule 144 Availability. . . . . . . . . . . . . . . . . . . . . . . . . . .7 ARTICLE II MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.2 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.4 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.5 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 2.6 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 2.7 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . .8 2.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 2.9 Aggregation of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .8 2.10 Entire Agreement; Amendment; Waiver. . . . . . . . . . . . . . . . . . . .8 2.11 Adjustments for Stock Splits . . . . . . . . . . . . . . . . . . . . . . .8
-i- REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of July 26, 1999, is among DAOU SYSTEMS, INC., a Delaware corporation (the "COMPANY"), and the investors listed on SCHEDULE 1 to this Agreement, each of which is referred to in this Agreement as an "INVESTOR." RECITALS WHEREAS, the Company and the Investors are parties to the Series A Preferred Stock Purchase Agreement of even date herewith (the "SERIES A AGREEMENT"); and WHEREAS, in order to induce the Company to enter into the Series A Agreement and to induce the Investors to invest funds in the Company pursuant to the Series A Agreement, the Investors and the Company hereby agree that this Agreement will govern the rights of the Investor to cause the Company to register shares of the Company's common stock (the "COMMON STOCK") issued or issuable to the Investors and certain other matters as set forth in this Agreement; NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS: ARTICLE I REGISTRATION RIGHTS 1.1 DEFINITIONS. For purposes of this Agreement: (a) the term "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act of 1933, as amended (the "ACT"), and the declaration or ordering of effectiveness of such registration statement or document; (b) the term "REGISTRABLE SECURITIES" means (i) the Common Stock issuable or issued upon conversion of the Series A Preferred Stock (whether or not sold pursuant to the Series A Agreement), and (ii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Series A Preferred Stock or Common Stock, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which such person's rights under this ARTICLE I are not assigned; (c) the number of shares of "REGISTRABLE SECURITIES THEN OUTSTANDING" will be determined by the number of shares of Common Stock outstanding which are, and the number of shares of Common Stock issuable pursuant to then exercisable or convertible securities which are, Registrable Securities; (d) the term "HOLDER" means any person owning or having the right to acquire Registrable Securities or any permitted assignee thereof; and 1 (e) the term "FORM S-3" means such form under the Act as in effect on the date of this Agreement or any registration form under the Act subsequently adopted by the Securities and Exchange Commission ("SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. 1.2 FORM S-3 REGISTRATION. As soon as reasonably practicable after the Closing (currently anticipated to be approximately 45 days), the Company shall file with the SEC a Registration Statement on Form S-3 (or other similar form) covering the continuous sale of the Registrable Securities pursuant to Rule 415 under the Securities Act or any successor thereto (the "SHELF REGISTRATION STATEMENT"), in the manner specified therein. The Company shall use all reasonable efforts to cause the Shelf Registration Statement to be declared effective by the SEC as soon as reasonably practicable after its filing with the SEC, and to remain effective until the earlier of (x) such time as all of the Registrable Securities are sold pursuant to the Shelf Registration Statement or (y) each Holder is able to sell within any 90-day period all Registrable Securities owned by such Holder pursuant to SEC Rules as then in effect, including Rule 144 under the Securities Act, or any successor thereto ("SEC RULE 144") (the "EFFECTIVE PERIOD"); provided that in the event that Company determines in good faith that, because it has under consideration a significant (as defined under Regulation S-X of the SEC) acquisition or disposition or other material transaction or corporate event that has not been publicly disclosed or that it is in the process of preparing for filing with the SEC a Current Report on Form 8-K or other form, the Shelf Registration Statement may contain a material misstatement or omission, Parent may cause the Shelf Registration Statement to not be used during the period in question. The Company agrees it will use its best efforts to ensure that such deferral will be for the shortest period of time reasonably required not exceeding, in the aggregate, 90 days in any 12-month period. In the event the Shelf Registration Statement has not been declared effective by the SEC within 120 days after the Closing, the dividend rate on the Series A Preferred Stock shall increase in accordance with Section 1 of the Certificate of Designations until the Shelf Registration Statement has been declared effective. 1.3 COMPANY REGISTRATION. In the event that (i) the Company fails to satisfy its obligations pursuant to SECTION 1.2 or (ii) for any period of not less than 30 consecutive days the Shelf Registration Statement may not be used for any reason, and if (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration relating solely to the sale of securities to participants in a Company stock plan, or a registration on any form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities), the Company will, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within 20 days after mailing of such notice by the Company in accordance with SECTION 2.5, the Company will, subject to the provisions of SECTION 1.7, cause to be registered under the Act all of the Registrable Securities that each such Holder has requested to be registered. 1.4 OBLIGATIONS OF THE COMPANY. Except as otherwise expressly specified in this Agreement, whenever required under this ARTICLE I to effect the registration of any Registrable Securities, the Company will, as expeditiously as reasonably practicable: 2 (a) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (b) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (c) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as will be reasonably requested by the Holders, provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (d) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. Each Holder participating in such underwriting will also enter into and perform its obligations under such an agreement. (e) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 1.5 FURNISH INFORMATION. It will be a condition precedent to the obligations of the Company to take any action pursuant to this ARTICLE I with respect to the Registrable Securities of any selling Holder that such Holder will furnish to the Company such information regarding itself, the Registrable Securities held by it, the intended method of disposition of such securities and all of the other pertinent information as will be required to effect the registration of such Holder's Registrable Securities. 1.6 EXPENSES OF REGISTRATION. Subject to restrictions under applicable state securities laws, all expenses other than underwriting discounts and commissions incurred in connection with registrations, filings or qualifications pursuant to SECTIONS 1.2 and 1.3, including (without limitation) all registration, filing and qualification fees, printers' and accounting fees, and fees and disbursements of counsel for the Company and the reasonable fees and disbursements of one counsel representing the Holders will be borne by the Company. 1.7 UNDERWRITING REQUIREMENTS. In connection with any offering involving an underwriting of shares of the Company's capital stock, the Company will not be required under SECTION 1.3 to include any of the Holders' securities in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then the Company will have a 3 right to limit the number of shares to such number as it will determine in good faith will not jeopardize the success of the offering by the Company. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in such offering exceeds the amount of securities sold other than by the Company that the Company determines in good faith is compatible with the success of the offering, then the Company will be required to include in the offering only that number of such securities, including Registrable Securities, which the Company determines in good faith will not jeopardize the success of the offering (the securities so included to be apportioned pro rata first among selling shareholders which are either (i) Holders of Registrable Securities or (ii) holders of Warrants referenced in Section 2.2(c)(ii) of the Series A Agreement according to the total amount of securities entitled to be included therein owned by each such Holder or holders until all securities desired by such Holders are included, then among the other selling shareholders according to the total amount of securities entitled to be included therein owned by each other selling shareholder or in such other proportions as will mutually be agreed to by such selling shareholder; provided that any Registrable Securities held by officers and directors of the Company will be excluded from such registration to the extent required by such limitations). For purposes of the preceding parenthetical concerning apportionment, for any selling shareholder which is a Holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners an any trusts for the benefit of any of the foregoing persons will be deemed to be a single "SELLING SHAREHOLDER," and any pro-rata reduction with respect to such "selling shareholder" will be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder," as defined in this sentence. 1.8 INDEMNIFICATION. If any Registrable Securities are included in a registration statement under this ARTICLE I: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, each of its directors and each of its officers, any underwriter (as defined in the Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Act or the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, or the Exchange Act, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act, the Exchange Act, or any rule or regulation promulgated under the Act, or the Exchange Act; and the Company will pay to each such Holder, director, officer, underwriter or controlling person, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this SUBSECTION 1.8(a) will not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably withheld), nor will the Company be liable in any such case for 4 any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, director, officer, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act or the Exchange Act insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this SUBSECTION 1.8(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this SUBSECTION 1.8(b) will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent will not be unreasonably withheld; provided, that, in no event will any indemnity under this SUBSECTION 1.8(b) exceed the proceeds from the offering net of sales commission, if any, received by such Holder. (c) Promptly after receipt by an indemnified party under this SECTION 1.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this SECTION 1.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel satisfactory to the indemnified party (which shall not unreasonably withhold its approval); provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) will have the right to retain one separate counsel, with the reasonable fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party is inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under this SECTION 1.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this SECTION 1.8. (d) If the indemnification provided for in this SECTION 1.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party to this Agreement, will contribute to the amount paid or 5 payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party will be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement will control. (f) The obligations of the Company and Holders under this SECTION 1.8 will survive the completion of any offering of Registrable Securities in a registration statement under this ARTICLE I, and otherwise. 1.9 REPORTS UNDER 1934 ACT. With a view to making available to the Holders the benefits of Rule 144 promulgated under the Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company will: (a) make and keep public information available, as those terms are understood and defined in SEC Rule 144, at all times; (b) file with the SEC in a timely manner all reports and other documents required of the Company under the Act and the Exchange Act; and (c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144, the Act and the Exchange Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 1.10 "MARKET STAND-OFF" AGREEMENT. Notwithstanding the rights granted pursuant to SECTION 1.2, each Investor hereby agrees that, during the period of duration (not to exceed 180 days) specified by the Company and an underwriter of Common Stock or other securities of the Company, following the effective date of a registration statement of the Company filed under the Act, it will not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be 6 similarly bound) any securities of the Company held by it at any time during such period except Common Stock included in such registration; provided, however, that all executive officers and directors of the Company and all other persons with registration rights (whether or not pursuant to this Agreement) enter into similar agreements. The right of the Company hereunder may be exercised by it not more than once in any one-year period. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 1.11 RULE 144 AVAILABILITY. Notwithstanding anything to the contrary above in this ARTICLE I, prior to exercising any right provided for in this ARTICLE I each Holder will (i) evaluate in good faith whether such Holder is otherwise permitted to sell the entire amount of Registrable Securities it is then seeking to register within the time period it desires to sell pursuant to Rule 144 of the Exchange Act, or any successor regulation thereto and (ii) exercise such rights only in the case that it determines in good faith that such rights are necessary to sell such Registrable Securities in a timely manner. ARTICLE II MISCELLANEOUS 2.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Agreement, the terms and conditions of this Agreement will inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties to this Agreement or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 2.2 GOVERNING LAW. This Agreement will be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 2.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 2.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 2.5 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement will be given in writing and will be deemed effectively given upon personal delivery to the party to be notified, by telecopy upon the appropriate answer-back, or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page of this Agreement, or at such other address as such party may designate by ten days' advance written notice to the other parties. 7 2.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party will be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 2.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph will be binding upon each Holder of any Registrable Securities then outstanding, each future Holder of all such Registrable Securities, and the Company. 2.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms. 2.9 AGGREGATION OF STOCK. All shares of Registrable Securities held or acquired by affiliated entities or persons will be aggregated together for the purpose of determining the availability of any rights under this Agreement. 2.10 ENTIRE AGREEMENT; AMENDMENT, WAIVER. This Agreement (including the Exhibits to this Agreement, if any) constitutes the full and entire understanding and agreement between the parties with regard to the subjects of this Agreement and thereof. 2.11 ADJUSTMENTS FOR STOCK SPLITS. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or Preferred Stock of the Company of any class or series, or a reference to any amount of dollars per any such share, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares or the specific dollar amount so referenced in this Agreement will automatically be proportionately adjusted to reflect the effect on the outstanding shares of such class of series of stock by such subdivision, combination or stock dividend. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: DAOU SYSTEMS, INC. By: /s/ Larry D. Grandia ------------------------------------ Name: Larry D. Grandia Title: Chief Executive Officer THE INVESTORS: GALEN PARTNERS III, L.P., a Delaware Limited Partnership By: Claudius, L.L.C., a Delaware Limited Liability Company By: /s/ Bruce F. Wesson ------------------------------------ Senior Managing Member GALEN PARTNERS INTERNATIONAL III, L.P., a Delaware Limited Partnership By: Claudius, L.L.C., a Delaware Limited Liability Company By: /s/ Bruce F. Wesson ------------------------------------ Senior Managing Member GALEN EMPLOYEE FUND III, L.P., a Delaware Limited Partnership By: Wesson Enterprises, Inc. By: /s/ Bruce F. Wesson ------------------------------------ Bruce F. Wesson President [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT] 9 SCHEDULE 1 INVESTORS --------- NAME AND ADDRESS ---------------- Galen Partners III, L.P. 610 Fifth Avenue 5th Floor New York, NY 10020 Galen Partners International III, L.P. 610 Fifth Avenue 5th Floor New York, NY 10020 Galen Employee Fund III, L.P. 610 Fifth Avenue 5th Floor New York, NY 10020 S-1 EX-10.1 4 EXHIBIT 10.1 VOTING AGREEMENT This VOTING AGREEMENT (the "AGREEMENT") is made and entered into this 26th day of July 1999, by and among DAOU Systems, Inc., a Delaware corporation (the "COMPANY"), Daniel J. Daou and Georges J. Daou (the "SHAREHOLDERS"), and the persons listed on EXHIBIT A hereto (the "INVESTORS"). WITNESSETH: WHEREAS, the Shareholders are the beneficial owners of shares of the Common Stock of the Company; and WHEREAS, the Company proposes to sell shares of its Series A Preferred Stock (the "SERIES A PREFERRED STOCK") to the Investors pursuant to the Series A Preferred Stock Purchase Agreement of even date herewith (the "FINANCING"); and WHEREAS, in connection with the consummation of the Financing, the Company, the Shareholders and the Investors have agreed to provide for the future voting of capital stock of the Company, solely with respect to (1) the election of directors of the Company, as set forth below, and (2) certain corporate transactions, described below; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I VOTING 1.01. The Shareholders each agree to hold all shares of voting capital stock of the Company registered in their respective names or beneficially owned by them as of the date hereof or hereafter acquired (hereinafter collectively referred to as the "VOTING SHARES") subject to, and to vote the Voting Shares in accordance with, the provisions of this Agreement. 1.02. Each time the shareholders of the Company meet, or act by written consent in lieu of meeting, for the purpose of electing directors, each of the Shareholders agrees to vote the Voting Shares and to otherwise use their respective best efforts for the election of one nominee designated by Galen Partners III, L.P. ("GALEN") as a director of the Company (collectively, the "INVESTORS' NOMINEE"). Each of the Shareholders shall vote for the Investors' Nominee as many of the Voting Shares as are necessary to elect such Nominee as a director of the Company, assuming that each Investor also votes all of its shares as set forth in this Section 1.02. The Company shall furnish written notice to the Shareholders and the Investors at least twenty (20) days prior to any such meeting or proposed action by written consent in lieu of meeting. Galen shall furnish written notice to each of the Shareholders and to the Board of Directors, no later than ten (10) days following receipt of the Company's notice of any such meeting, or proposed action by written consent in lieu of meeting, of the name of the Investor's Nominee designated by them. In the absence of such notice, the director then serving on behalf of and/or previously nominated by Galen in accordance with this Section 1.02 shall be deemed to be the Investors' Nominee. 1.03. Each time the shareholders of the Company meet, or act by written consent in lieu of meeting, for the purpose of voting on the dissolution and liquidation of the Company or a merger or consolidation of the Company with or into, or the sale of all or substantially all of the Company's Common Stock or assets to another corporation or entity (each, a "LIQUIDATION"), each of the Shareholders agrees to vote the Voting Shares and to otherwise use their respective best efforts in favor of such Liquidation, provided that a majority of directors then constituting the Board of Directors have voted to approve such Liquidation. 1.04. Except as provided by this Agreement, each Shareholder shall exercise the full rights of a shareholder with respect to the Voting Shares. ARTICLE II EFFECT; TERMINATION 2.01. This Agreement shall continue in full force and effect with respect to the Voting Shares from the date hereof through the earliest of the following dates, on which it shall terminate in its entirety; (a) ten (10) years from the date hereof; (b) the date as of which Investors holding at least a majority in interest of all shares of the Company's stock then held by all Investors agree in writing to the termination of this Agreement; (c) the date as of which Galen, together with its affiliates, cease to hold, in the aggregate, at least twenty-five percent (25%) of the Series A Preferred Stock which it originally purchased in the Financing or a corresponding amount of the Company's Common Stock into which the Series A Preferred Stock is convertible. ARTICLE III MISCELLANEOUS 3.01. Each Shareholder represents and warrants to the Investors hereto that such Shareholder has full power and capacity to execute, deliver and perform this Agreement, which has been duly executed and delivered by, and evidences the valid and binding obligation of, such Shareholder enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. 3.02. The parties hereto hereby declare that the terms of this Agreement shall be specifically enforceable. -2- 3.03. This Agreement, and the rights of the parties hereto, shall be governed by and construed in accordance with the laws of the State of Delaware. 3.04. This Agreement may be amended only by an instrument in writing signed by a majority in interest of the Investors, provided that no amendment shall be made which would adversely affect a Shareholder without such Shareholder's written consent. 3.05. If any provision of this Agreement is held to be invalid or unenforceable, the validity and enforceability of the remaining provisions of this Agreement shall not be affected thereby. 3.06. This Agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitutes one and the same agreement. 3.07. No waivers of any breach of this Agreement extended by any party hereto to any other party shall be construed as a waiver of any rights or remedies of any other party hereto or with respect to any subsequent breach. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -3- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. DAOU SYSTEMS, INC. By: /s/ Larry D. Grandia ------------------------------------ President SHAREHOLDERS: /s/ Georges J. Daou --------------------------------------- Georges J. Daou /s/ Daniel J. Daou --------------------------------------- Daniel J. Daou INVESTORS: GALEN PARTNERS III, L.P. By: /s/ Bruce F. Wesson ------------------------------------ Title ---------------------------------- GALEN PARTNERS INTERNATIONAL III, By: /s/ Bruce F. Wesson ------------------------------------ Title ---------------------------------- GALEN EMPLOYEE FUND III, L.P. By: /s/ Bruce F. Wesson ------------------------------------ Title ---------------------------------- -4- [SIGNATURE PAGE TO VOTING AGREEMENT] -5- EXHIBIT A TO VOTING AGREEMENT Galen Associates III, L.P. Galen Associates International III, L.P. Galen Employee Fund III, L.P. -6- EX-10.2 5 EXHIBIT 10.2 DAOU SYSTEMS, INC. SERIES A PREFERRED STOCK PURCHASE AGREEMENT ------------------- JULY 26, 1999 TABLE OF CONTENTS
PAGE ---- ARTICLE I PURCHASE AND SALE OF STOCK ........................................... 1 1.1 Sale and Issuance of Series A Preferred Stock ........................ 1 1.2 Closing .............................................................. 1 ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY ............. 2 2.1 Organization, Good Standing and Qualification ........................ 2 2.2 Capitalization and Voting Rights ..................................... 2 2.3 Subsidiaries ......................................................... 3 2.4 Authorization ........................................................ 3 2.5 Valid Issuance of Preferred and Common Stock ......................... 3 2.6 Governmental Consents ................................................ 4 2.7 Litigation ........................................................... 4 2.8 Patents and Trademarks ............................................... 4 2.9 Compliance with Other Instruments .................................... 4 2.10 Agreements; Action ................................................... 5 2.11 Changes .............................................................. 5 2.12 Employee Benefit Plans ............................................... 6 2.13 Tax Returns, Payments and Elections .................................. 6 2.14 Labor Agreements and Actions ......................................... 7 2.15 Insurance ............................................................ 7 2.16 Disclosure ........................................................... 7 2.17 Use of Proceeds ...................................................... 8 2.18 Year 2000 Compliance ................................................. 8 ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR............. 9 3.1 Authorization ........................................................ 9 3.2 Purchase Entirely for Own Account .................................... 9 3.3 Due Diligence; Disclosure of Information ............................. 9 3.4 Investment Experience ................................................ 9 3.5 Accredited Investor; Investor Status ................................. 9 3.6 Restricted Securities ................................................10 3.7 Further Limitations on Disposition ...................................10 3.8 No Transfers Except Pursuant to Registration Statement ...............10 3.9 Legends ..............................................................10 3.10 Securities Law Compliance ............................................11 ARTICLE IV CALIFORNIA COMMISSIONER OF CORPORATIONS ..............................12 4.1 Corporate Securities Law .............................................12 -i- TABLE OF CONTENTS (continued) PAGE ---- ARTICLE V CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING ......................12 5.1 Representations and Warranties .......................................12 5.2 Performance ..........................................................12 5.3 Compliance Certificate ...............................................12 5.4 Charter Document .....................................................12 5.5 Proceedings and Documents ............................................12 5.6 Board of Directors ...................................................13 5.7 Opinion of Company Counsel ...........................................13 5.8 Other Agreements .....................................................13 ARTICLE VI CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING ...................13 6.1 Representations and Warranties .......................................13 6.2 Payment of Purchase Price ............................................13 6.3 Other Agreements .....................................................13 ARTICLE VII MISCELLANEOUS ........................................................13 7.1 Survival of Warranties ...............................................13 7.2 Successors and Assigns ...............................................13 7.3 Governing Law ........................................................14 7.4 Counterparts .........................................................14 7.5 Titles and Subtitles .................................................14 7.6 Notices ..............................................................14 7.7 Finders' Fee or Commission ...........................................14 7.8 Expenses .............................................................14 7.9 Amendments and Waivers ...............................................14 7.10 Severability .........................................................15 7.11 Aggregation of Stock .................................................15 7.12 Entire Agreement .....................................................15
-ii- SERIES A PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT, ("AGREEMENT") dated July 26, 1999, is among DAOU SYSTEMS, INC., a Delaware corporation (the "COMPANY"), and the investors listed on SCHEDULE 1, each of which is referred to in this Agreement as an "INVESTOR." THE PARTIES HEREBY AGREE AS FOLLOWS: ARTICLE I PURCHASE AND SALE OF STOCK 1.1 SALE AND ISSUANCE OF SERIES A PREFERRED STOCK. (a) The Company will adopt and file with the Secretary of State of Delaware on or before the Closing (as defined below) a Certificate of Designations in the form attached to this Agreement as EXHIBIT A (the "CERTIFICATE OF DESIGNATIONS"). (b) Subject to the terms and conditions of this Agreement, each Investor will purchase at the Closing and the Company will sell and issue to each Investor at the Closing that number of shares of the Company's Series A Preferred Stock set forth opposite each Investor's name on SCHEDULE 1 for the purchase price set forth thereon. (c) Any such Investor will become a party to this Agreement and that certain Registration Rights Agreement of even date herewith, by and among the Company and the Investors, the form of which is attached to this Agreement as EXHIBIT B (the "REGISTRATION RIGHTS AGREEMENT") and will have the rights and obligations under this Agreement and thereunder, unless such Investor enters into an agreement which provides otherwise. 1.2 CLOSING. The purchase and sale of the Series A Preferred Stock will take place at the offices of Baker & McKenzie, 101 West Broadway, Suite 1200, San Diego, California, at 10:00 A.M., on July 26, 1999, or at such other time and place as the Company and Investors acquiring in the aggregate more than half the shares of Series A Preferred Stock sold pursuant to this Agreement mutually agree upon orally or in writing (which time and place are designated as the "CLOSING"). At the Closing the Company will deliver to each Investor a certificate representing the Series A Preferred Stock which such Investor is purchasing against delivery to the Company by such Investor of a check or wire transfer in the amount of the purchase price therefor payable to the Company's order. ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY The Company hereby represents and warrants to each Investor that the statements in the following Sections are true and correct, except as set forth on a Schedule of Exceptions furnished each Investor, and special counsel for the Investors, which exceptions will be deemed to be representations and warranties as if made pursuant to this Agreement. 2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company and each of its subsidiaries ("SUBSIDIARIES") is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted. The Company and each Subsidiary is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify would have a material adverse effect on the business or properties of the Company and its Subsidiaries taken as a whole (a "MATERIAL ADVERSE EFFECT"). 2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the Company at June 30, 1998 consisted of: (a) PREFERRED STOCK. Five Million (5,000,000) shares of Preferred Stock, par value .001 par share (the "PREFERRED STOCK"), of which Three Million Five Hundred Twenty Thousand Two Hundred Fifty Five (3,520,255) shares have been designated Series A Preferred Stock and Two Million One Hundred Eighty-One Thousand Eight Hundred Eighteen (2,181,818) of which will be sold pursuant to this Agreement and One Million Three Hundred Thirty-Eight Thousand Four Hundred Thirty-Seven (1,338,437) of which have been reserved for payment of payment-in-kind dividends and possible issuance pursuant to adjustment of the Conversion Price pursuant to the anti-dilution provisions of the Certificate of Designations with respect to the Series A Preferred Stock. The rights, privileges and preferences of the Series A Preferred Stock will be as stated in the Company's Certificate of Designations. No Shares of Preferred Stock are outstanding. (b) COMMON STOCK. Fifty Million (50,000,000) shares of common stock, par value .001 per share ("COMMON STOCK"), of which Seventeen Million Six Hundred Eighty-Nine Thousand Seven Hundred Twenty-Eight (17,689,728) shares were issued and outstanding as of June 30, 1999. (c) Except for (i) the conversion privileges of the Series A Preferred Stock to be issued under this Agreement, (ii) warrants to purchase an aggregate of 130,393 shares of Common Stock at a price of $4.99 per share issued to Needham & Company, and Needham Capital, S.B.I.C. L.P. in connection with the Company's private placement of Preferred Stock in October 1995, (iv) options to employees pursuant to the Company's 1996 Stock Option Plan, (v) other employee options reflected in the Company's public filings with the Securities and Exchange Commission ("SEC") (the "SEC FILINGS"), or (vi) as otherwise set forth in the SEC Filings, there are no outstanding options, warrants, rights (including conversion or preemptive rights) or agreements for the purchase or acquisition from the Company of any shares of its 2 capital stock. The Company is not a party or subject to any agreement or understanding, and, to the Company's knowledge, there is no agreement or understanding between any persons and/or entities, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Company. No person holds registration rights other than pursuant to the Registration Rights Agreement, the holder or holders of the warrant referred to in CLAUSE (ii) above and as reflected in the Company's SEC Filings in connection with the Company's acquisition by merger of certain corporations in 1997 and 1998. Except with respect to the warrants referenced in CLAUSE (ii), above, no person holds registration rights senior to, or PARI PASSU with, those granted to the Investors under the Registration Rights Agreement. 2.3 SUBSIDIARIES. Except as set forth in the SEC Filings, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, or other business entity. All of the capital stock of the Subsidiaries is owned by the Company. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the Registration Rights Agreement and the Voting Agreement, the performance of all obligations of the Company pursuant to this Agreement, the Registration Rights Agreement and the Voting Agreement and the authorization, issuance (or reservation for issuance) and delivery of the Series A Preferred Stock being sold pursuant to this Agreement and the Common Stock issuable upon conversion of the Series A Preferred Stock has been taken or will be taken prior to the Closing, and this Agreement, the Registration Rights Agreement and the Voting Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (c) to the extent the indemnification provisions contained in the Registration Rights Agreement may be limited by applicable federal or state securities laws. 2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. (a) The Series A Preferred Stock which is being purchased by the Investors pursuant to this Agreement, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed in this Agreement, will be duly and validly issued, fully paid and nonassessable free of any liens, encumbrances, and restrictions (other than restrictions under this Agreement and the Registration Rights Agreement) and, based in part upon the representations of the Investors in this Agreement, will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Series A Preferred Stock purchased under this Agreement has been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Certificate of Designations, will be duly and validly issued, fully paid and nonassessable, free of any liens, encumbrances, and restrictions (other than restrictions under this Agreement and the Registration Rights Agreement) and issued in compliance with all applicable securities laws, as presently in effect, of the United States and each of the states whose securities laws govern the issuance of any of the Series A Preferred Stock pursuant to this Agreement. 3 (b) The outstanding shares of Common Stock are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in compliance with all applicable federal and state securities laws. 2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any federal, state, local or provincial governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by this Agreement, except for (a) the filing pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder, which filing will be effected within 15 days of the sale of the Series A Preferred Stock pursuant to this Agreement, (b) any filings required by the Blue Sky laws of the State of New York or Delaware and (c) any filings required pursuant to Regulation D, as amended, as promulgated by the Securities and Exchange Commission. 2.7 LITIGATION. There is no action, suit, proceeding or investigation pending or currently threatened against the Company or its Subsidiaries which questions the validity of this Agreement, or the Registration Rights Agreement or the right of the Company to enter into any of them, or to consummate the transactions contemplated hereby or thereby, or, except as set forth in the SEC Filings, which might result, either individually or in the aggregate, in a Material Adverse Effect. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any of the employees of the Company or its Subsidiaries, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, or their obligations under any agreements with prior employers. Neither the Company nor any of its Subsidiaries is a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company or any of its Subsidiaries currently pending or which the Company or its Subsidiaries intends to initiate. 2.8 PATENTS AND TRADEMARKS. To the Company's knowledge, the Company and its Subsidiaries each has sufficient title and ownership of all patents, trademarks, service marks, trade names, copyrights, trade secrets, information, proprietary rights and processes necessary for its business as now conducted without any conflict with or infringement of the rights of others. Neither the Company nor any of its Subsidiaries has received any communications alleging that the Company or its Subsidiaries has infringed or violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. Neither the Company nor any of its Subsidiaries is aware that it has or is currently infringing or violating any such rights. Neither the Company nor any of its Subsidiaries is aware of any infringement by third parties of any such rights of the Company or its Subsidiaries. As used in this SECTION 2.8 and elsewhere in this Agreement, "to the Company's knowledge" means to the Company's current, actual knowledge, without implication of a duty to investigate. 2.9 COMPLIANCE WITH OTHER INSTRUMENTS. Neither the Company nor its Subsidiaries is in violation or default of any provisions of its respective Certificate of Incorporation or Bylaws or in material violation or default of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound. To the Company's best knowledge, the Company and 4 its Subsidiaries is in compliance in all respects with all federal or state statutes, rules or regulations applicable to the Company and its Subsidiaries, the lack of compliance of which would cause a Material Adverse Effect. The execution, delivery and performance of this Agreement, the Registration Rights Agreement and the Voting Agreement and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or its Subsidiaries or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company or its Subsidiaries, their respective businesses or operations or any of their respective assets or properties. 2.10 AGREEMENTS; ACTION. (a) There are no agreements (written or oral), understandings, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company or its Subsidiaries is a party or by which it is bound which restrict or affect the development, manufacture or distribution of the products or services of the Company or its Subsidiaries. (b) Neither the Company nor any of its Subsidiaries has (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to or repurchased any class or series of its capital stock, (ii) except pursuant to its Loan Agreement dated June 30, 1999 with HCFP Funding, Inc., incurred any indebtedness for money borrowed or any other liabilities individually in excess of $100,000 or, in the case of indebtedness and/or liabilities individually less than $100,000, in excess of $500,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses which exceed, in the aggregate, $100,000, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (c) For the purposes of SUBSECTIONS (a) and (b) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company or its Subsidiaries has reason to believe are affiliated therewith) will be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (d) Neither the Company nor any of its Subsidiaries is subject to any restriction under its Restated Certificate of Incorporation or Bylaws, which adversely affects its business as now conducted. 2.11 CHANGES. Since March 31, 1999, there has not been: (a) any change in the assets, liabilities, financial condition or operating results of the Company from that reflected in the Company's quarterly report on Form 10-Q for the period ending March 31, 1999, except changes which have been reported in the SEC Filings or 5 otherwise in the ordinary course of business which have not been, in the aggregate, materially adverse. (b) any damage, destruction or loss, whether or not covered by insurance, which would have a Material Adverse Effect; (c) any waiver by the Company or any of its Subsidiaries of a material right or of a material debt owed to it; (d) any satisfaction or discharge of any lien, claim or encumbrance or payment of any obligation by the Company or its Subsidiaries, except in the ordinary course of business and which would have a Material Adverse Effect; (e) any change or amendment to, and neither the Company nor its Subsidiaries has received any notice of termination of and is not otherwise aware of any customer's intention to terminate, a material contract or arrangement by which the Company or its Subsidiaries or any of their respective assets or properties is bound or subject except as reflected in the SEC Filings; or (f) any material change in any compensation arrangement or agreement with any executive officer except as reflected in the SEC Filings. 2.12 EMPLOYEE BENEFIT PLANS. With respect to each Employee Benefit Plan (within the meaning of Section 3.3 of the Employee Retiree Income Security Act of 1974, as amended ("ERISA")) maintained by, or to which the Company or its Subsidiaries contributes to or is obligated to contribute to: (i) each such Plan satisfies all of the provisions of ERISA, to the extent applicable; (ii) each such Plan intended to qualify under Section 401(a) or the Internal Revenue Code of 1986, as amended (the "CODE") or for any other tax-exempt or tax-favored status under the Code so qualifies; (iii) except with respect to outstanding liabilities for contributions or benefits relating to each such Plan (to the extent applicable, the amount of such outstanding current liabilities for contributions or benefits having been appropriately reserved against and reflected in the Company's publicly reported financial statements), neither the Company, any of its Subsidiaries nor any member of a controlled group of corporations or other entities (within the meaning of Sections 414(b), (c), (m) or (o) of the Code that includes the Company or its Subsidiaries is subject to any outstanding or potential liabilities or obligations, direct or indirect, relating to any such Plan, and (iv) there are no actual or potential claims or actions (other than claims for benefits in the normal course) relating to any such Plan. 2.13 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company and its Subsidiaries have filed all tax returns and reports as required by federal and state law or has obtained timely extensions to filing thereof. These returns and reports are true and correct in all material respects. The Company and its Subsidiaries have paid all taxes and other assessments due, except those contested by it in good faith which are listed in the Schedule of Exceptions. The provision for taxes of the Company and its Subsidiaries as shown in the financial statements contained in the March 31, 1999 Form 10-Q is adequate for taxes due or accrued as of the date thereof. 6 2.14 LABOR AGREEMENTS AND ACTIONS. (a) Neither the Company nor any of its Subsidiaries is bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company or its Subsidiaries. There is no strike or other labor dispute involving the Company or its Subsidiaries pending, or to the knowledge of the Company threatened, which could have a Material Adverse Effect, nor is the Company aware of any labor organization activity involving the employees of the Company or its Subsidiaries. Neither the Company nor its Subsidiaries is aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company or any of its Subsidiaries, nor does the Company or its Subsidiaries have a present intention to terminate the employment of any of the foregoing. Except as set forth in the SEC Filings, subject to general principles related to wrongful termination of employees and the employment policies of the Company and its Subsidiaries regarding payment of severance pay, the employment of each executive officer of the Company and its Subsidiaries is terminable at the will of the Company. (b) Except as reflected in the SEC Filings and for regular salary payments and fringe benefits under an individual's compensation package with the Company or its Subsidiaries, none of the officers, employees, directors, shareholders, or other affiliates of the Company or its Subsidiaries, or members of their families is a party to any agreements, understandings or proposed transactions with the Company or its Subsidiaries. Neither the Company nor any of its Subsidiaries has guaranteed or assumed any obligations of its respective officers, directors, employees or affiliates of the Company or its Subsidiaries. (c) To the Company's knowledge, no employee of the Company or its Subsidiaries is, or is now expected to be, in violation of any term of any employment contract, patent assignment agreement, or any other contract or agreement or any restrictive covenant or any other common law obligation to a former employer relating to the right of any such employee to be employed by the Company or its Subsidiaries because of the nature of the business conducted, or to be conducted, by the Company or its Subsidiaries or to the use of trade secrets or proprietary information of others, and, to the Company's knowledge, the employment of the employees of the Company and its Subsidiaries does not subject the Company or its Subsidiaries to any material liability. There is neither pending nor, to the Company's best knowledge, threatened any actions, suits, proceedings or claims with respect to any contract, agreement, covenant or obligation referred to in the preceding sentence. 2.15 INSURANCE. The Company believes that it and its Subsidiaries maintain an amount of casualty and liability insurance which is reasonably adequate to protect the Company and its financial condition against material risks arising out of the current nature of its business. 2.16 DISCLOSURE. Neither this Agreement, the Registration Rights Agreement, nor any other written statements or certificates made or delivered in connection with this Agreement or therewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements made in this Agreement or therein not misleading in light of 7 the circumstances under which they were made. The Company's Form 10-K for the fiscal year ending December 31, 1998 as updated by its subsequent SEC Filings does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made not misleading in light of the circumstances under which they were made. The Company covenants that as long as Galen Partners III, L.P., Galen Partners International III, L.P. and Galen Employee Fund III, L.P. ("Galen") hold, in the aggregate, at least 25% of the Series A Preferred Stock or a corresponding amount of Common Stock into which the Series A Preferred Stock is convertible, the Company shall use its best efforts to cause to be elected one representative selected by Galen Partners III, L.P. on the Company's Board of Directors assuming that candidate is otherwise qualified for service and his or her appointment as a director will be consistent with the fiduciary duties of the Board of Directors nominating this individual as a director. It is further agreed that (1) the Board of Directors of the Company shall consist of seven individuals at the Closing, (2) that, subject to SECTION 7 of the Certificate of Designations of the Series A Preferred Stock, the size of the board may not be altered except with majority consent of the outside directors of the Company, (3) subject to compliance with fiduciary duties, that the Galen representative will be included on the audit and compensation committee and any other appropriate committee, including, but not limited to, a search committee for the new chief financial officer and any nominating committee for new or replacement directors, and (4) that all such committees will be comprised solely of outside directors. 2.17 USE OF PROCEEDS. The Company will use the proceeds from the sale of the Series A Preferred Stock for general corporate and working capital purposes. 2.18 YEAR 2000 COMPLIANCE. The Company will employ all reasonable commercial efforts to ensure that all devices, systems, machinery, information technology, computer software and hardware and other date sensitive technology (collectively, the "SYSTEMS") necessary for the Company and its Subsidiaries to carry on its business as currently conducted and as contemplated to be conducted in the future are Year 2000 Compliant or will be Year 2000 Complaint within a period of time reasonably calculated to avoid a Material Adverse Effect. For purposes of these provisions, "Year 2000 Compliant" means that such Systems are designed to be used before, during and after the Gregorian calendar year 2000 A.D. and will operate during each such time period without error related to date data, specifically including any error relating to, or the product of, date data that represents or refers to different centuries or more than one century. 8 ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INVESTOR Each Investor hereby represents, warrants and covenants that: 3.1 AUTHORIZATION. This Agreement constitutes its valid and legally binding obligation, enforceable in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally and (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made with each Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Series A Preferred Stock to be received by such Investor and the Common Stock issuable upon conversion thereof (collectively, the "SECURITIES") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, each Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. Each Investor represents that it has full power and authority to enter into this Agreement. 3.3 DUE DILIGENCE; DISCLOSURE OF INFORMATION. Each Investor has performed a due diligence investigation of the Company and its industry. Each Investor further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series A Preferred Stock. 3.4 INVESTMENT EXPERIENCE. Each Investor is a professional investor with substantial knowledge about the industry in which the Company functions. Accordingly, each Investor has such knowledge and experience regarding the industry of the Company and in financial or business matters that it is capable of evaluating fully the merits and risks of the investment in the Series A Preferred Stock. Each Investor acknowledges that it is able to fend for itself, can bear the economic risk of its investment and if other than an individual, Investor also represents it has not been organized for the purpose of acquiring the Series A Preferred Stock. Each Investor represents and warrants that it maintains its principal place of business at the address indicated for such Investor on the signature page of this Agreement and that each such Investor is organized under the laws of the state indicated for each such Investor on such signature pages. 3.5 ACCREDITED INVESTOR; INVESTOR STATUS. Each Investor is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect. Each of Galen Partners III, L.P., Galen Partners International III, L.P. and Galen Employee Fund III, L.P. is an institutional buyer as referenced in the General Business Law of the State of New York. 9 3.6 RESTRICTED SECURITIES. Each Investor understands that the shares of Series A Preferred Stock it is purchasing are characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the "ACT"), only in certain limited circumstances. In this connection, each Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth above, each Investor further will not make any disposition of all or any portion of the Series A Preferred Stock (or the Common Stock issuable upon the conversion thereof) unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this ARTICLE III and ARTICLE VII, provided and to the extent such sections are then applicable and the Registration Rights Agreement and: (a) There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or (b) (i) Such Investor will have notified the Company of any such proposed disposition (with the exception of sales pursuant to Rule 144 of the Act) and will have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor will have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Act. 3.8 NO TRANSFERS EXCEPT PURSUANT TO REGISTRATION STATEMENT. Each Investor further agrees that it may effect no transfer of the Series A Preferred Stock or the Common Stock issued upon conversion thereof except (i) pursuant to the registrations to be filed pursuant to SECTION 1.2 or 1.3 of the Registration Rights Agreement, (ii) pursuant to SECTION 1.11 of the Registration Rights Agreement, or (iii) in pro rata distribution to its partners. 3.9 LEGENDS. It is understood that the certificates evidencing the Series A Preferred Stock (and the Common Stock issuable upon conversion thereof) may bear one or all of the following legends: (a) THIS SECURITY HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 ("ACT") OR THE SECURITIES OR BLUE SKY LAWS OF CALIFORNIA, DELAWARE, NEW YORK OR ANY OTHER STATE AND MAY NOT BE OFFERED OR SOLD UNLESS REGISTERED AND/OR QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS, OR AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE. THEREFORE, NO SALE OR TRANSFER OF THIS SECURITY WILL BE MADE, NO ATTEMPTED SALE OR TRANSFER WILL BE VALID, AND THE ISSUER WILL NOT BE REQUIRED TO GIVE ANY EFFECT TO ANY SUCH TRANSACTION 10 UNLESS (A) SUCH TRANSACTION WILL HAVE BEEN DULY REGISTERED UNDER THE ACT AND QUALIFIED OR APPROVED UNDER APPROPRIATE STATE SECURITIES OR BLUE SKY LAWS, OR (B) THE ISSUER WILL BE REASONABLY SATISFIED THAT SUCH REGISTRATION, QUALIFICATION OR APPROVAL IS NOT REQUIRED. (b) THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO (A) THE RESTRICTIONS ON TRANSFER OF A CERTAIN SERIES A PREFERRED STOCK PURCHASE AGREEMENT DATED JULY 26, 1999, AS AMENDED FROM TIME TO TIME AND (B) THE TERMS AND CONDITIONS OF A CERTAIN REGISTRATION RIGHTS AGREEMENT DATED JULY 26, 1999, AS AMENDED FROM TIME TO TIME. THE CORPORATION WILL, UPON WRITTEN REQUEST, FURNISH A COPY OF EACH SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT CHARGE. (c) THE SHARES EVIDENCED HEREBY ARE CONVERTIBLE INTO SHARES OF COMMON STOCK OF THE CORPORATION AND WILL BE AUTOMATICALLY SO CONVERTED IN CERTAIN SITUATIONS, SUBJECT TO ADJUSTMENT IN CERTAIN CIRCUMSTANCES, IN EACH CASE AS MORE FULLY SET FORTH IN THE CERTIFICATE OF DESIGNATIONS TO THE CERTIFICATE OF INCORPORATION OF THE CORPORATION DATED JULY 22, 1999 (THE "CERTIFICATE OF DESIGNATIONS"). A FULL STATEMENT OF RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS GRANTED TO OR IMPOSED UPON THE RESPECTIVE CLASSES AND SERIES OF SHARES OF THE CORPORATION AND UPON THE HOLDERS THEREOF ARE SET FORTH IN THE CERTIFICATE OF DESIGNATIONS. THE CERTIFICATE OF DESIGNATIONS MAY BE OBTAINED FROM THE SECRETARY OF THE CORPORATION UPON REQUEST AND WITHOUT CHARGE. (d) Any legend required by the laws of the State of California, including any legend required by the California Department of Corporations and Sections 417 and 418 of the Code. (e) Any other legend required to comply with applicable state securities laws. 3.10 SECURITIES LAW COMPLIANCE. Each Investor acknowledges and understands that the Company is relying on the representations and warranties set forth above in this ARTICLE III for compliance with applicable federal and state securities laws. 11 ARTICLE IV CALIFORNIA COMMISSIONER OF CORPORATIONS 4.1 CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. ARTICLE V CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING The obligations of each Investor under SUBSECTION 1.1(b) are subject to the fulfillment on or before the Closing of each of the following conditions, the waiver of which will not be effective against any Investor who does not consent in writing thereto: 5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company contained in ARTICLE II will be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 5.2 PERFORMANCE. The Company will have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 5.3 COMPLIANCE CERTIFICATE. The President of the Company will deliver to each Investor at the Closing a certificate certifying that the conditions specified in SECTIONS 5.1 and 5.2 have been fulfilled and stating that there will have been no material adverse change in the business, affairs, operations, properties, assets or condition of the Company since March 31, 1999. 5.4 CHARTER DOCUMENT. The Company will have adopted and filed with the Secretary of State of the State of Delaware the Certificate of Designations and such instrument will have become effective as provided by Delaware law. 5.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto will be reasonably satisfactory in form and substance to Investors' special counsel, and they will have received all such counterpart original and certified or other copies of such documents as they may reasonably request. 12 5.6 BOARD OF DIRECTORS. As of Closing, the members of the Board of Directors of the Company shall be: Georges J. Daou, Daniel J. Daou, David W. Jahns, Richard B. Jaffe, John H. Moragne, Larry D. Grandia and Kevin M. Fickenscher, M.D. 5.7 OPINION OF COMPANY COUNSEL. Each Investor will have received from Baker & McKenzie, counsel for the Company, an opinion, dated as of the Closing, in form and substance reasonably satisfactory to the special counsel to the Investors. 5.8 OTHER AGREEMENTS. The Company and each Investor will have entered into the Registration Rights Agreement in the form attached as EXHIBIT B and each of Georges J. Daou and Daniel J. Daou and each Investor will have entered into the Voting Agreement attached as EXHIBIT C dated as of the date of this Agreement. ARTICLE VI CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor: 6.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Investor contained in ARTICLE III will be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 6.2 PAYMENT OF PURCHASE PRICE. Each Investor will have delivered the purchase price as required by SECTION 1.2. 6.3 OTHER AGREEMENTS. Each Investor will have entered into the Registration Rights Agreement dated as of the date of this Agreement. ARTICLE VII MISCELLANEOUS 7.1 SURVIVAL OF WARRANTIES. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement will survive the execution and delivery of this Agreement and the Closing for two years and will not be affected by any investigation of the subject matter thereof made by or on behalf of the Investors or the Company. 7.2 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement will not inure to the benefit of and be binding upon the respective successors and permitted assigns of Investor. The terms and conditions of this Agreement will inure to the benefit of and be binding upon the respective assigns of the Company. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties to this Agreement or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 13 7.3 GOVERNING LAW. This Agreement will be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 7.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 7.5 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement will be given in writing and will be deemed effectively given upon personal (including air-courier) delivery to the party to be notified, by telecopy upon receipt of the appropriate answer-back or 3 days following deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page of this Agreement, or at such other address as such party may designate by ten days' advance written notice to the other parties. 7.7 FINDERS' FEE OR COMMISSION. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction except with respect to the fee payable by the Company to Hambrecht & Quist in the amount previously disclosed to the Investors. Each Investor will indemnify and hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) arising out of any dealing, commitment or agreement of the Investor or any of its officers, partners, employees, or representatives. The Company will indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) arising out of any dealing, commitment or agreement of the Company or any of its officers, employees or representatives. 7.8 EXPENSES. Irrespective of whether the Closing is effected, the Company will pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement and the other Agreements and instruments contemplated hereby or entered into in connection herewith. If (and only if) the Closing is effected, the Company will reimburse up to $75,000 of the reasonable out-of-pocket expenses of Investors, including fees of special counsel and certain other professional advisers to the Investors. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement or the Certificate of Designations the prevailing party will be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company 14 and the holders of a majority of the Common Stock issued or issuable upon conversion of the Series A Preferred Stock. Any amendment or waiver effected in accordance with this SECTION 7.9 will be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities are convertible), each future holder of all such securities, and the Company. 7.10 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms. 7.11 AGGREGATION OF STOCK. All shares of the Preferred Stock held or acquired by affiliated entities or persons will be aggregated together for the purpose of determining the availability of any rights under this Agreement. 7.12 ENTIRE AGREEMENT. This Agreement and the documents referred to in this Agreement constitute the entire agreement among the parties and no party will be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth in this Agreement or therein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 15 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: DAOU SYSTEMS, INC. By: /s/ Larry D. Grandia ------------------------------------- Name: Larry D. Grandia Title: Chief Executive Officer GALEN PARTNERS III, L.P., a Delaware Limited Partnership By: Claudius, L.L.C., a Delaware Limited Liability Company By: /s/ Bruce F. Wesson ------------------------------------- Senior Managing Member GALEN PARTNERS INTERNATIONAL III, L.P., a Delaware Limited Partnership By: Claudius, L.L.C., a Delaware Limited Liability Company By: /s/ Bruce F. Wesson ------------------------------------- Senior Managing Member GALEN EMPLOYEE FUND III, L.P., a Delaware Limited Partnership By: Wesson Enterprises, Inc. By: /s/ Bruce F. Wesson ------------------------------------- Bruce F. Wesson President [SIGNATURE PAGE OF STOCK PURCHASE AGREEMENT] 16 INVESTORS ---------
- --------------------------------------------------------------------------------------- NAME PURCHASE PRICE NUMBER OF FOR SHARES SHARES TOTAL - --------------------------------------------------------------------------------------- Galen Partners III, L.P. $5.50 1,993,234 $10,962,788 - --------------------------------------------------------------------------------------- Galen Partners International III, L.P. $5.50 180,422 $992,321 - --------------------------------------------------------------------------------------- Galen Employee Fund III, L.P. $5.50 8,162 $44,891 - --------------------------------------------------------------------------------------- TOTAL 2,181,818 $12,000,000 - ---------------------------------------------------------------------------------------
S-1 EXHIBIT A CERTIFICATE OF DESIGNATIONS [SEE ATTACHED] A-1 EXHIBIT B REGISTRATION RIGHTS AGREEMENT [SEE ATTACHED] B-1 EXHIBIT C VOTING AGREEMENT [SEE ATTACHED] C-1 EX-99.1 6 EXHIBIT 99.1 NEWS RELEASE [LOGO] FOR IMMEDIATE RELEASE CONTACT: Aruna Lalwaney Corporate Marketing Director 858.452.2221 aruna.lalwaney@daou.com www.daou.com mailto.rvschultz@sentientsystems.com DAOU SYSTEMS, INC. COMPLETES $12 MILLION PRIVATE PLACEMENT FINANCING FROM GALEN PARTNERS San Diego, CA, July 28, 1999 -- DAOU Systems, Inc. (Nasdaq: DAOU) today announced that it has completed a $12 million private placement financing, consisting of 2.2 million shares of Series A Preferred Stock sold at $5.50 per share. Net proceeds of the offering will be used for general corporate and working capital purposes. The Preferred Stock was purchased by Galen Partners III and affiliated parties, the successor fund to Galen Partners II which had invested in a previous placement of DAOU Series A Preferred Stock in 1995. Those shares were since converted to shares of DAOU Common Stock in connection with the Company's initial public offering in February 1997. DAOU currently has a total of five million shares of Preferred Stock authorized, none of which was issued and outstanding prior to the current investment by Galen Partners III. "We are pleased with this follow-on investment on the part of Galen Partners," stated Larry Grandia, Chief Executive Officer and President of DAOU Systems, Inc. "Their purchase of our Preferred Stock demonstrates that substantial, quality investors have confidence in DAOU and our future opportunities. The additional financial resources provided through this financing will help us to fund our strategic plans and invest in high potential opportunities." Added David W. Jahns, General Partner of Galen Partners and a member of DAOU's Board of Directors, "We believe DAOU is uniquely positioned in the market to deliver healthcare IT solutions, and we welcome this opportunity to support the Company's ability to execute its strategy for growth and value creation on behalf of its shareholders." Each share of the Series A Preferred Stock is convertible into one share of common stock at $5.50 per share, at the option of the holder, subject to certain antidilution adjustments. Holders of shares of the Series A Preferred Stock will be entitled to receive dividends at the annual rate of six percent, payable in kind in the form of shares of Series A Preferred Stock. The Series A Preferred Stock is redeemable at the option of the Company four years after the date of issuance, and at the option of the holders under certain terms and conditions. In addition, the Preferred Stock is subject to mandatory conversion in the event DAOU's Common Stock price reaches certain predetermined price targets. A complete description of the rights, preferences and privileges of the Preferred Stock, along with other terms and conditions of the private placement transaction, is attached to DAOU's Form 8-K filed with the Securities and Exchange Commission on July 28, 1999. DAOU Systems, Inc. is a provider of integrated Information Technology (IT) solutions and services to the U.S. healthcare industry. DAOU's capabilities range from up-front strategic consulting to IT system design, implementation and long-term tactical support. DAOU's IT offerings include data, voice and video networking, applications consulting and implementation, as well as operational and Internet solutions. DAOU has nearly 800 employees, and has provided services to more than 1,300 healthcare organizations, including many of the nation's top 100 integrated delivery systems. DAOU's clients include organizations such as the Cleveland Clinic, Catholic Healthcare West, and Saint Mary's Health Network, Reno, Nevada. More information about DAOU Systems can be found at WWW.DAOU.COM on the World Wide Web. Galen Partners is a premiere private equity firm that invests exclusively in the healthcare industry and is known for highly successful mid-to-later stage investments in service, device, generic drugs and information technology. More information about Galen Partners can be found at WWW.GALEN-PARTNERS.COM on the World Wide Web. This press release contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended. Such statements are only predictions and actual events or results may differ materially. Forward- looking statements usually contain the word "estimate", "anticipate", "believe", "expect" or similar expressions. The forward-looking statements included herein are based on current expectations and certain assumptions and entail various risks and uncertainties, including uncertainties related to the intensely competitive nature of the company's marketplace and the inherent difficulties of successfully implementing staffing reorganizations. These factors and the matters set forth in the company's annual report on Form 10-K under the caption "Risk Factors" could cause actual results to differ materially from those indicated by such forward-looking statements. -----END PRIVACY-ENHANCED MESSAGE-----