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.
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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
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full aforesaid preferential amounts, then, subject to the rights of series of
Preferred Stock which may from time to time come into existence in compliance
with the provisions of SECTION 7, the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series A Preferred Stock in proportion to the amount
of such stock owned by each such holder.
b. Upon the completion of the distribution required by
SUBSECTION (a) of this SECTION 2 and any other distribution which may be
required with respect to series of Preferred Stock which may from time to time
come into existence in compliance with the provisions of SECTION 7, remaining
assets shall be distributed among the holders of the Common Stock of the
Corporation.
c. A consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale, conveyance or disposition of
all or substantially all of the assets of the Corporation or the effectuation by
the Corporation of a transaction or series of related transactions in which more
than fifty percent (50%) of the voting power of the Corporation is disposed of,
shall not be deemed to be a liquidation, dissolution or winding up within the
meaning of this SECTION 2, but shall instead be treated pursuant to SECTION 5.
d. The Corporation shall give each holder of record of Series A
Preferred Stock written notice of a liquidation, dissolution or winding up
described in subsection (a), above, not later than ten (10) days prior to the
stockholders' meeting called to approve such transaction, or ten (10) days prior
to the closing of such transaction, whichever is earlier, and shall also notify
such holders in writing of the final approval of such transaction. The first of
such notices shall describe the material terms and conditions of the impending
transaction and the provisions of this SECTION 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than ten (10) days after the
Corporation has given the first notice provided for herein or sooner than five
(5) days after the Corporation has given notice of any material changes provided
for herein; provided, however, that such periods may be shortened upon the
written consent of the holders of Preferred Stock which are entitled to such
notice rights or similar notice rights and which represent at least a majority
of the voting power of all then outstanding shares of such Preferred Stock.
3. REDEMPTION.
a. Subject to the rights of series of Preferred Stock which may
from time to time come into existence in compliance with the provisions of
SECTION 7, within thirty (30) days after the occurrence of a Redemption Event
(defined below) upon receipt by the Corporation of a written request from the
holders of a majority of the then outstanding Series A Preferred Stock, that all
or some of such holders' shares be redeemed, and concurrently with surrender by
such holders of the certificates representing such shares to be redeemed, the
Corporation shall, to the extent it may lawfully do so, redeem in cash the
shares specified in such request by paying in cash therefor a sum per share
equal to the Series A Issue Price plus any accrued but unpaid dividends (the
"SERIES A REDEMPTION PRICE"). The Corporation shall give each holder of Series
A Preferred Stock at least ten (10) days prior written notice of the date (the
"REDEMPTION DATE") and place of redemption and the dollar amount of the Series A
Redemption
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Price, which notice shall be effective upon delivery or three days after
deposit in the United States mail, postage prepaid and addressed to each
holder of record at his address appearing on the books of the Corporation.
If the certificate surrendered represents a greater number of shares than the
number redeemed, the Corporation shall issue to such holder a new certificate
representing the shares which remain outstanding.
For purposes of this SUBSECTION (A) of SECTION 3, a Redemption
Event shall be (1) the resignation of Larry D. Grandia as Chief Executive
Officer of the Corporation; (2) the failure of the Corporation to hire a
replacement for Larry D. Grandia as Chief Executive Officer of the Corporation
within 180 days following his termination as Chief Executive Officer by the
Corporation, or (3) the failure of Georges J. Daou or Daniel J. Daou to vote
their shares of the Corporation in favor of a transaction described in
SECTION 2(a) or (c), above, in the event that the majority of the Board of
Directors of the Corporation vote in favor of such transaction.
b. From and after the Redemption Date, unless there shall have
been a default in payment of the Series A Redemption Price, all dividends on the
Series A Preferred Stock designated for redemption in the Redemption Notice
shall cease to accrue, all rights of the holders of such shares as holders of
Series A Preferred Stock (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. Subject to the rights of series of Preferred Stock
which may from time to time come into existence in compliance with the
provisions of SECTION 7, if the funds of the Corporation legally available for
redemption of shares of Series A Preferred Stock on any Redemption Date, or any
subsequent date as provided in SUBSECTION 3(a), are insufficient to redeem the
total number of shares of Series A Preferred Stock to be redeemed on such date,
those funds which are legally available will be used to redeem the maximum
possible number of such shares ratably among the holders of such shares to be
redeemed. The shares of Series A Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and preferences provided herein.
Subject to the rights of series of Preferred Stock which may from time to time
come into existence in compliance with the provisions of SECTION 7, at any time
thereafter when additional funds of the Company are legally available for the
redemption of shares of Series A Preferred Stock, such funds will immediately be
used to redeem the balance of the shares which the Company has become obligated
to redeem on any Redemption Date but which it has not redeemed.
c. The Corporation may, upon a vote of its Board of Directors,
redeem the remaining outstanding Series A Preferred Stock by payment in cash of
the Series A Redemption Price in accordance with the notice and other terms and
conditions set forth above in this SECTION 3 at any date which is four years
after the Purchase Date.
4. CONVERSION. The holders of the Series A Preferred Stock shall
have conversion rights as follows (the "CONVERSION RIGHTS"):
a. RIGHT TO CONVERT.
i. Subject to SUBSECTION (c), each share of Series A
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the date of
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issuance of such share and prior to the close of business on any Redemption
Date as may have been fixed in any Redemption Notice with respect to such
share, at the office of the Corporation or any transfer agent for the Series
A Preferred Stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Series A Issue Price by the
Conversion Price at the time in effect for such share. The initial
"CONVERSION PRICE" per share for shares of Series A Preferred Stock shall be
the Series A Issue Price; provided, however, that the Conversion Price for
the Series A Preferred Stock shall be subject to adjustment as set forth in
SUBSECTION 4(c).
ii. In the event of a call for redemption of any shares of
Series A Preferred Stock pursuant to SECTION 3, unless there shall have been a
default in payment of the Series A Redemption Price, the Conversion Rights shall
terminate as to the shares designated for redemption at the close of business on
the Redemption Date.
iii. Each share of Series A Preferred Stock shall
automatically and immediately be converted into shares of Common Stock at the
Conversion Price at the time in effect for such Series A Preferred Stock in the
event that the closing price of the Corporation's Common Stock on the Principal
Market equals or exceeds $11.00 per share (appropriately adjusted for any stock
split, dividend, combination or other recapitalization) for twenty (20)
consecutive trading days at any time after the first anniversary date of the
Purchase Date. In addition, fifty percent (50%) of the Series A Preferred Stock
held by each Holder shall automatically and immediately convert into shares of
Common Stock at the Conversion Price at the time in effect for such Series A
Preferred Stock in the event that at any time during the period commencing 180
days from the Purchase Date and ending on the anniversary date of the Purchase
Date the closing price of the Corporation's Common Stock on the Principal Market
equals or exceeds $13.75 (appropriately adjusted for any stock split, dividend,
combination or other recapitalization) for twenty (20) consecutive trading days.
b. MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice by mail, postage
prepaid, to the Corporation at its principal corporate office, of the election
to convert the same and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be issued. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred Stock, or to the nominee or nominees
of such holder, a certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled as aforesaid. Such conversion
shall be deemed to have been made immediately prior to the close of business on
the date of such surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date.
c. CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK. The
Conversion Price of the Series A Preferred Stock shall be subject to adjustment
from time to time as follows:
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i. A. Upon each issuance by the Corporation of any
Additional Stock (as defined below) after the Purchase Date and before the first
anniversary date of the Purchase Date, without consideration or for a
consideration per share less than the Conversion Price for such series in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for such series in effect immediately prior to each such issuance shall
forthwith (except as otherwise provided in this CLAUSE (i)) be adjusted to a
price determined by multiplying such Conversion Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issuance (not including shares excluded from the
definition of Additional Stock by SUBSECTION 4(c)(ii)(b)) plus the number of
shares of Common Stock which the aggregate consideration received by the
Corporation for such issuance of Additional Stock would purchase at such
Conversion Price; and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issuance (not including
shares excluded from the definition of Additional Stock by SUBSECTION
4(c)(ii)(b)) plus the number of shares of such Additional Stock.
However, the foregoing calculation shall not take into account shares
deemed issued pursuant to SUBSECTION 4(c)(i)(e) on account of options, rights or
convertible or exchangeable securities (or the actual or deemed consideration
therefor), except to the extent (i) such options, rights or convertible or
exchangeable securities have been exercised, converted or exchanged or (ii) the
consideration to be paid upon such exercise, conversion or exchange per share of
underlying Common Stock is less than or equal to the per share consideration for
the Additional Stock which has given rise to the Conversion Price adjustment
being calculated.
B. Except to the limited extent provided for in
SUBSECTIONS (e)(3) and (e)(4), no adjustment of such Conversion Price pursuant
to this SUBSECTION 4(c)(i) shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment,
and (for purposes of clarification only) in no event will such adjustment have
the effect of increasing the Conversion Price above the Series A Issue Price.
C. In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
before deducting any reasonable discounts, commissions or other expenses
allowed, paid or incurred by the Corporation for any underwriting or otherwise
in connection with the issuance and sale thereof.
D. In the case of the issuance of the Common Stock
for a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair value thereof as determined by the
Board of Directors irrespective of any accounting treatment.
E. In the case of the issuance (whether before, on or
after the applicable Purchase Date) of options to purchase or rights to
subscribe for Common Stock, securities by their terms convertible into or
exchangeable for Common Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the following provisions shall
apply for all purposes of this SUBSECTION 4(c)(i) and SUBSECTION 4(c)(ii):
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1. The aggregate maximum number of shares of
Common Stock deliverable upon exercise (assuming the satisfaction of any
conditions to exercisability, including without limitation, the passage of time,
but without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed to
have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
SUBSECTIONS 4(c)(i)(c) and (c)(i)(d)), if any, received by the Corporation upon
the issuance of such options or rights plus the exercise price provided in such
options or rights for the Common Stock covered thereby.
2. The aggregate maximum number of shares of
Common Stock deliverable upon conversion of or in exchange (assuming the
satisfaction of any conditions to convertibility or exchangeability, including,
without limitation, the passage of time, but without taking into account
potential antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration, if any, received by the Corporation for any such
securities and related options or rights (excluding any cash received on account
of accrued interest or accrued dividends), plus the additional consideration, if
any, to be received by the Corporation upon the conversion or exchange of such
securities or the exercise of any related options or rights (the consideration
in each case to be determined in the manner provided in SUBSECTIONS 4(c)(i)(c)
and (c)(i)(d)).
3. In the event of any change in the number of
shares of Common Stock deliverable or in the consideration payable to the
Corporation upon exercise of such options or rights or upon conversion of or in
exchange for such convertible or exchangeable securities, including, but not
limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Series A Preferred Stock, to the extent in any way
affected by or computed using such options, rights or securities, shall be
recomputed to reflect such change, but no further adjustment shall be made for
the actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of such
securities.
4. Upon the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A Preferred Stock, to the extent
in any way affected by or computed using such options, rights or securities or
options or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
5. The number of shares of Common Stock deemed
issued and the consideration deemed paid therefor pursuant to SUBSECTIONS
4(c)(i)(e)(1)
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and (2) shall be appropriately adjusted to reflect any change, termination or
expiration of the type described in either SUBSECTION 4(c)(i)(e)(3) or (4).
ii. "ADDITIONAL STOCK" shall mean any shares of Common
Stock issued (or deemed to have been issued pursuant to SUBSECTION 4(c)(i)(e))
by the Corporation after the Purchase Date and before the first anniversary date
of the Purchase Date, other than:
A. Common Stock issued pursuant to a transaction
described in SUBSECTION 4(c)(iii),
B. shares of Common Stock issuable or issued to
employees, consultants or directors of the Corporation directly or pursuant to a
stock option plan, stock option agreement, stock purchase plan or restricted
stock plan approved by the Board of Directors of the Corporation, or in
connection with lease lines, bank financings or other similar transactions,
C. securities issued in connection with an
underwritten public offering,
D. securities issued in connection with a merger or
stock or asset acquisition, or
E. securities issued to multiple Qualified
Institutional Buyers in a transaction which is managed by an investment bank and
in which the gross proceeds equal or exceeds Fifty Million Dollars
($50,000,000).
iii. In the event the Corporation should at any time or from
time to time after the Purchase Date fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"COMMON STOCK EQUIVALENTS") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of each share of
such series shall be increased in proportion to such increase of the aggregate
of shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents with the number of shares issuable with respect to
Common Stock Equivalents determined from time to time in the manner provided for
deemed issuances in SUBSECTION 4(c)(i)(e).
iv. If the number of shares of Common Stock outstanding at
any time after the Purchase Date is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price for the Series A Preferred Stock shall be
appropriately increased so that the number of shares of
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Common Stock issuable on conversion of each share of such series shall be
decreased in proportion to such decrease in outstanding shares.
v. Notwithstanding the above, in no event shall the
Conversion Price on the Series A Preferred Stock be adjusted to a price that
would cause the Corporation to issue that number of shares of Common Stock upon
conversion of the Series A Preferred Stock which would be greater than 19.9% of
the number of outstanding shares of the Corporation's Common Stock on the
Purchase Date.
d. OTHER DISTRIBUTIONS. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in SUBSECTION 4(c)(iii), then,
in each such case for the purpose of this SUBSECTION 4(d), the holders of the
Series A Preferred Stock shall be entitled to a proportionate share of any such
distribution as though they were the holders of the number of shares of Common
Stock of the Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
e. RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this SECTION 4 or SECTION 5), provision shall be made so that the holders of the
Series A Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series A Preferred Stock the number of shares of stock or other
securities or property of the Company or otherwise, to which a holder of Common
Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this SECTION 4 with respect to the rights of
the holders of the Series A Preferred Stock after the recapitalization to the
end that the provisions of this SECTION 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series A Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
f. NO IMPAIRMENT. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this SECTION 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of the Series A Preferred Stock against
impairment.
g. NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
i. No fractional shares shall be issued upon conversion of
the Series A Preferred Stock, and the number of shares of Common Stock to be
issued shall be rounded up to the nearest whole share.
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ii. Upon the occurrence of each adjustment or readjustment
of the Conversion Price of Series A Preferred Stock pursuant to this SECTION 4,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price at the time in effect, and (C) the number
of shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of a share of Series A Preferred
Stock.
h. NOTICES OF RECORD DATE. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series A Preferred Stock, at least ten (10) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
i. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series A Preferred Stock such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of the
Series A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes.
j. NOTICES. Any notice required by the provisions of this
SECTION 4 to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
5. MERGER, CONSOLIDATION.
a. At any time, in the event of:
i. any transaction or series of related transactions
(including, without limitation, any reorganization, merger or consolidation)
which will result in the Corporation's stockholders immediately prior to such
transaction not holding (by virtue of such
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shares or securities issued solely with respect thereto) at least fifty
percent (50%) of the voting power of the surviving or continuing entity,
ii. a sale of all or substantially all of the assets of the
Corporation, unless the Corporation's stockholders immediately prior to such
sale will, as a result of such sale, hold (by virtue of securities issued as
consideration for the Corporation's sale) at least fifty percent (50%) of the
voting power of the purchasing entity, then, subject to the rights of series of
Preferred Stock which may from time to time come into existence in compliance
with the provisions of SECTION 7, unless waived as evidenced by the consent of
the holders of a majority of the shares of Series A Preferred Stock, holders of
the Series A Preferred Stock shall receive for each share of such stock in cash
or in securities received from the acquiring corporation, or in a combination
thereof, at the closing of any such transaction, an amount equal to the greater
of (A) the Series A Issue Price, plus an amount equal to the Premium as of the
date of closing of such transaction or (B) that share of the total consideration
to be paid by the acquiring entity in such transaction as equals the proportion
that the number of shares of Common Stock and Common Stock issuable upon
conversion of the outstanding Series A Preferred Stock then held by each of them
bears to the total number of shares of outstanding Common Stock and shares of
Common Stock issuable upon conversion of the outstanding Series A Preferred
Stock. Such payments shall be made with respect to the Series A Preferred Stock
(A) by redemption of such shares in one installment pursuant to SUBSECTION 3(b)
(provided that in such event the moment immediately prior to the closing of such
transaction shall, for purposes of this subparagraph, be deemed to be the
"REDEMPTION DATE", only ten (10) days' prior notice of the date fixed for
redemption need be given and the consent of the holders of the Series A
Preferred Stock shall be deemed to have been given) or (B) by purchase of such
shares of Series A Preferred Stock by the surviving corporation, entity or
person or by the Corporation. In the event the proceeds of the transaction are
not sufficient to make full payment of the aforesaid preferential amounts to the
holders of the Series A Preferred Stock in accordance herewith, then, subject to
the rights of series of Preferred Stock which may from time to time come into
existence in compliance with the provisions of SECTION 7, the entire amount
payable in respect of the proposed transaction shall be distributed among the
holders of the Series A Preferred Stock in proportion to the amount of such
stock owned by each such holder.
b. Any securities to be delivered to the holders of the Series
A Preferred Stock pursuant to SUBSECTION 5(a) above shall be valued as follows:
i. Securities not subject to investment letter or other
similar restrictions on free marketability (covered by (ii) below):
A. If traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 15-day period ending three (3) days prior to the closing;
B. If actively traded over-the-counter, the value
shall be deemed to be the average of the closing bid or sale prices (whichever
are applicable) over the 15-day period ending three (3) days prior to the
closing; and
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C. If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and the holders of Preferred Stock which would be entitled to
receive such securities or the same type of securities and which Preferred Stock
represents at least a majority of the voting power of all then outstanding
shares of such Preferred Stock.
ii. The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in (i) (A),
(B) or (C) to reflect the approximate fair market value thereof, as mutually
determined by the Corporation and the holders of Preferred Stock which would be
entitled to receive such securities or the same type of securities and which
represent at least a majority of the voting power of all then outstanding shares
of such Preferred Stock.
c. In the event the requirements of SUBSECTION 5(a) are not
complied with, the Corporation shall forthwith either:
i. cause such closing to be postponed until such time as
the requirements of this SECTION 5 have been complied with, or
ii. cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series A Preferred Stock shall
revert to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in SECTION 5.
d. The Corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than ten
(10) days prior to the stockholders' meeting called to approve such transaction,
or ten (10) days prior to the closing of such transaction, whichever is earlier,
and shall also notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this SECTION 5,
and the Corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner than ten
(10) days after the Corporation has given the first notice provided for herein
or sooner than five (5) days after the Corporation has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of Preferred Stock which is
entitled to such notice rights or similar notice rights and which represents at
least a majority of the voting power of all then outstanding shares of such
Preferred Stock.
e. The provisions of this SECTION 5 are in addition to the
protective provisions of SECTION 7.
6. VOTING RIGHTS. Except as set forth below, the holder of each
share of Series A Preferred Stock shall have the right to one vote for each
share of Common Stock into which such Series A Preferred Stock could then be
converted (with any fractional share determined on an aggregate conversion basis
being rounded up to the nearest whole share), and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting
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rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting
in accordance with the Bylaws of the Corporation, and shall be entitled to
vote, together with holders of Common Stock, with respect to any question
upon which holders of Common Stock have the right to vote.
7. PROTECTIVE PROVISIONS. So long as fifty percent (50%) of the
Series A Preferred Stock are outstanding, the Corporation shall not without
first obtaining the approval (by vote or written consent, as provided by law) of
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, voting as a separate class:
a. liquidate or dissolve, or sell, convey, or otherwise dispose
of or encumber all or substantially all of its property or business or merge
into or consolidate with any other corporation (other than a wholly owned
subsidiary corporation) or effect any transaction or series of related
transactions in which more than fifty percent (50%) of the voting power of the
Corporation is disposed of (provided, however that the holders of Series A
Preferred Stock will not be entitled to vote as a class on a liquidation, a
dissolution, mergers, consolidations, sales of assets, business combinations or
similar transactions in which the holders of Series A Preferred Stock receive
per share consideration of at least Eight Dollars ($8.00) (appropriately
adjusted for any stock split, dividend, combination or other recapitalization)
after the Purchase Date; or
b. alter or change the rights, preferences or privileges of the
shares of Series A Preferred Stock so as to affect adversely such shares; or
c. increase the authorized number of shares of Series A
Preferred Stock; or
d. create any new class or reclassify any series of stock or
any other securities convertible into equity securities of the Corporation
having a preference over, or being on a parity with, the Series A Preferred
Stock with respect to voting, redemption, dividends or upon liquidation; or
e. repurchase or redeem any shares of the Corporation's capital
stock other than the Series A Preferred Stock and shares repurchased at cost
from employees or officers; or
f. declare or pay any dividend on any shares of capital stock,
except the Series A Preferred Stock; or
g. increase to more than seven the authorized size of the
Corporation's Board of Directors; or
h. amend the Certificate of Incorporation or Bylaws of the
Corporation to adversely effect the rights, preferences or privileges of the
Series A Preferred Stock; or
i approve any acquisitions of capital stock or assets that
would require the issuance of more than ten percent (10%) of the Corporation's
then outstanding
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Common Stock (assuming conversion of the Series A Preferred Stock) or cash
consideration of more than $15,000,000.
8. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares
of Series A Preferred Stock shall be redeemed or converted pursuant to SECTION 3
or SECTION 4, the shares so converted or redeemed shall be canceled and shall
not be issuable by the Corporation. The Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
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IN WITNESS WHEREOF, the Corporation has caused this certificate to be
duly executed by Larry D. Grandia, Chief Executive Officer and President, and
attested by Fred C. McGee, its secretary, this 22nd day of July, 1999.
DAOU SYSTEMS, INC.
By: /s/ Larry D. Grandia
---------------------------------
Larry D. Grandia
Chief Executive Officer
and President
ATTEST:
By: /s/ Fred C. McGee
-------------------------
Fred C. McGee
Secretary
[SIGNATURE PAGE TO CERTIFICATE OF DESIGNATIONS]
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