-----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, WTsPVUvkjaxcYSSnlkxTpGM5N79S5UOdMWawxba279zqXES5X947mC/KBn9DzcGc +ff7dMsCY97FxgftEMiUmA== 0001047469-97-006252.txt : 19971127 0001047469-97-006252.hdr.sgml : 19971127 ACCESSION NUMBER: 0001047469-97-006252 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971015 ITEM INFORMATION: FILED AS OF DATE: 19971126 SROS: NONE 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/A SEC ACT: SEC FILE NUMBER: 000-22073 FILM NUMBER: 97729396 BUSINESS ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 BUSINESS PHONE: 6196462996 MAIL ADDRESS: STREET 1: 5120 SHOREHAM PL CITY: SAN DIEGO STATE: CA ZIP: 92122 8-K/A 1 8K FORM UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): October 15, 1997 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) This Form 8-K/A amends and completes registrant's Form 8-K filed on October 29, 1997. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of business acquired. Audited Financial Statements of On-Line Networking, Inc. Report of Independent Auditors Balance Sheets - December 31, 1996 and 1995 Statements of Operations and Retained Earnings - Years ended December 31, 1996 and 1995 Statements of Cash Flows - Years ended December 31, 1996 and 1995 Notes to Financial Statements - December 31, 1996 (b) Pro Forma Financial Information: The unaudited pro forma combined condensed balance sheets at September 30, 1997, and December 31, 1996 and the pro forma combined condensed statements of operations for the nine months ended September 30, 1997 and 1996 and for the years ended December 31, 1996 and 1995 give effect to the acquisition of On-Line Networking, Inc. as of December 31, 1996 for the combined condensed pro forma balance sheet and January 1, 1995 for the combined condensed pro forma statements of operations. The pro forma information is based on the historical financial statements of On-Line Networking, Inc. and DAOU Systems, Inc. giving effect to the transaction under the pooling-of-interests method of accounting and assumptions and adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements. 2 (c) Exhibits. The following exhibits are filed herewith or incorporated by reference as part of this report: Exhibit No. Document Description -------- ---------------------------------------------------- 2.1* Agreement and Plan of Merger, dated as of September 25, 1997, by and among DAOU Systems, Inc., a Delaware corporation, DAOU On-Line, Inc., a Delaware corporation and wholly owned subsidiary of DAOU Systems, Inc., On-Line Networking, Inc., a New Jersey corporation, and the Stockholders of On-Line Networking, Inc. 99.1** Press release entitled "DAOU Systems Merges with On-Line Networking, Inc." * Filed as an exhibit to the Company's Current Report on Form 8-K which was filed with the Securities and Exchange Commission on October 29, 1997 and incorporated herein by reference. ** Filed as an exhibit to the Company's Current Report on Form 8-K which was filed with the Securities and Exchange Commission on September 26, 1997 and incorporated herein by reference. 3 Financial Statements On-Line Networking, Inc. YEARS ENDED DECEMBER 31, 1996 AND 1995 WITH REPORT OF INDEPENDENT AUDITORS 4 On-Line Networking, Inc. Financial Statements Years ended December 31, 1996 and 1995
CONTENTS Report of Independent Auditors.......................................1 Balance Sheets.......................................................2 Statements of Operations and Retained Earnings.......................3 Statements of Cash Flows.............................................4 Notes to Financial Statements........................................5
5 Report of Independent Auditors The Board of Directors On-Line Networking, Inc. We have audited the accompanying balance sheets of On-Line Networking, Inc. as of December 31, 1996 and 1995, and the related statements of operations and retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of On-Line Networking, Inc. at December 31, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California October 3, 1997 6 On-Line Networking, Inc. Balance Sheets
DECEMBER 31, 1996 1995 ----------------------- ASSETS Current assets: Cash $ 9,594 $ 126,604 Accounts receivable, net of allowance for doubtful accounts of $10,000 in 1996 and $5,000 in 1995 884,522 783,191 Contract work in progress 155,800 54,538 Inventory 27,368 104,900 Prepaid expenses 5,483 5,087 ----------------------- Total current assets 1,082,767 1,074,320 Property and equipment: Vehicles 148,670 129,669 Furniture and equipment 52,788 28,436 ----------------------- 201,458 158,105 Less accumulated depreciation 79,460 45,514 ----------------------- 121,998 112,591 Security deposits 100,424 2,900 Cash surrender value of life insurance 2,723 3,468 ----------------------- $1,307,912 $1,193,279 ----------------------- ----------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 50,000 $ - Accounts payable 241,120 295,910 Compensation payable to stockholders 420,000 615,000 Accrued expenses and taxes 145,250 159,153 Current portion of long-term debt 25,992 31,976 ----------------------- Total current liabilities 882,362 1,102,039 Long-term debt 18,379 45,244 Stockholders' equity: Common stock, no par value; 2,500 shares authorized, 1,500 issued and outstanding 3,000 3,000 Retained earnings 404,171 42,996 ----------------------- Total stockholders' equity 407,171 45,996 ----------------------- $1,307,912 $1,193,279 ----------------------- -----------------------
SEE ACCOMPANYING NOTES. 7 On-Line Networking, Inc. Statements of Operations and Retained Earnings
YEARS ENDED DECEMBER 31, 1996 1995 ------------------------- Revenues $4,615,806 $2,984,858 Cost of revenues 3,231,801 1,685,267 ------------------------- Gross profit 1,384,005 1,299,591 Operating expenses: Compensation and related benefits 530,257 1,195,080 Selling, general and administrative expenses 477,584 370,770 Interest expense 10,374 10,915 ------------------------- Income (loss) before provision for income taxes 365,790 (277,174) Provision for income taxes 4,615 24,258 ------------------------- Net income (loss) 361,175 (301,432) Retained earnings, beginning of year 42,996 344,428 ------------------------- Retained earnings, end of year $ 404,171 $ 42,996 ------------------------- -------------------------
SEE ACCOMPANYING NOTES. 8 On-Line Networking, Inc. Statements of Cash Flows
YEAR ENDED DECEMBER 31, 1996 1995 -------------------------- OPERATING ACTIVITIES Net income (loss) $ 361,175 $(301,432) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 33,946 24,018 Cash surrender value of life insurance 745 (3,468) Changes in operating assets and liabilities: Accounts receivable (101,331) (342,681) Contract work in progress (101,262) (54,538) Inventory 77,532 (87,400) Prepaid expenses (396) (5,087) Accounts payable (54,790) 211,494 Accrued expenses and taxes 4,518 116,691 Income taxes payable (18,421) 19,196 Stockholders' bonuses payable (195,000) 615,000 -------------------------- Net cash provided by operating activities 6,716 191,793 INVESTING ACTIVITIES Purchase of vehicles, furniture and equipment (43,353) (45,118) Security deposits (97,524) (2,900) Repayment of loans to stockholders - (39,500) -------------------------- Net cash used in investing activities (140,877) (87,518) FINANCING ACTIVITIES Principal payments on long-term debt (32,849) (8,555) Line of credit 50,000 - -------------------------- Net cash provided by (used in) financing activities 17,151 (8,555) -------------------------- Net (decrease) increase in cash (117,010) 95,720 Cash at beginning of year 126,604 30,884 -------------------------- Cash at end of year $ 9,594 $ 126,604 -------------------------- -------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 10,374 $ 10,915 -------------------------- -------------------------- Income taxes $ 46,064 $ 5,062 -------------------------- --------------------------
SEE ACCOMPANYING NOTES. 9 On-Line Networking, Inc. Notes to Financial Statements December 31, 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES On-Line Networking, Inc. (the "Company") designs, installs and provides servicing of local area computer and voice network systems. The Company also provides telecommunications cabling, and is a value-added reseller for hardware products related to the aforementioned activities. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. REVENUE RECOGNITION Revenue is recognized on the percentage-of-completion method with progress to completion measured by labor costs incurred to date compared to total estimated labor costs. Provisions for estimated losses on contracts, if any, are made during the period when the loss becomes probable and can be reasonably estimated. Revenues recognized in excess of amounts billed and project costs are classified as contract work in progress. INVENTORY Inventory consists of materials used for cable installation and are stated at the lower of cost (on a first-in, first-out basis) or market value. VEHICLES, FURNITURE AND EQUIPMENT Vehicles, furniture and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful life of the assets generally five to ten years. INCOME TAXES As of January 1, 1996, the stockholders elected to be treated as an S Corporation for tax purposes with the stockholders becoming liable for tax on the Company's taxable income. As a result, the accompanying financial statements do not reflect any current or deferred tax provisions other than appropriate state franchise taxes. The Company prepares its income tax returns on the cash basis of accounting. 10 On-Line Networking, Inc. Notes to Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. LINE OF CREDIT At December 31, 1996, the Company has available a $200,000 line of credit arrangement with a bank. The agreement provides for the payment of interest at the bank's variable base rate, as defined (8.75% at December 31, 1996) plus 1% and is callable on demand. The line is secured by accounts receivable, inventories and equipment, and is personally guaranteed by the three stockholders of the Company. At December 31, 1996, $50,000 was outstanding under the line of credit. Interest expense for the year ended December 31, 1996 was $3,252. In August 1997, the Company amended the aforementioned credit agreement. The amended agreement increases the available line of credit to $500,000 expiring on March 31, 1998. The amended agreement contains substantially similar terms and covenant agreements. 3. MAJOR CUSTOMERS Revenue from three customers, each exceeding 10% of total revenue, represented 34%, 12% and 12% for the year ended December 31, 1995. Revenue from three customers, each exceeding 10% of total revenue represented 39%, 12% and 10% for the year ended December 31, 1996. The aggregate accounts receivable balances for the major customers were $510,355 and $196,425 at December 31, 1996 and 1995, respectively. 4. LONG-TERM DEBT Long-term debt at December 31, 1996 consists of secured notes payable to seven financing companies and banks. As of December 31, 1996, the notes require aggregate monthly payments of $3,138, including interest with rates ranging from 5.9% to 10.5%. The notes mature from June 1997 to October 1999 and are secured by vehicles. Interest expense for the years ended December 31, 1996 and 1995 was $3,691 and $5,684, respectively. 11 On-Line Networking, Inc. Notes to Financial Statements (continued) 4. LONG-TERM DEBT (CONTINUED) Approximate aggregate principal amounts of long-term debt maturing in each of the three fiscal years subsequent to December 31, 1996 are as follows: 1997--$25,992; 1998--$14,903; 1999--$3,476. 5. PROFIT SHARING PLAN The Company has a profit sharing plan covering substantially all employees who have completed one year of service and are twenty-one years of age. Profit sharing contributions are made at the discretion of management. Contributions vest 20% after two years and an additional 20% for each year thereafter. Profit sharing expense was $77,124 and $67,500 for the years ended December 31, 1996 and 1995, respectively. 6. LEASE COMMITMENTS The Company leases certain office space and automobiles under operating leases that expire on various dates through 1999. In 1997, the Company entered into two operating leases for certain office space which expire at various dates through 2001. Aggregate future minimum lease payments required under noncancelable operating leases in each of the five fiscal years subsequent to December 31, 1996 are as follows:
Years Ending December 31, ------------------------- 1997 $68,800 1998 85,600 1999 60,400 2000 33,700 2001 10,300
Total rental expense under the operating leases was $41,272 and $26,599 during the years ended December 31, 1996 and 1995, respectively. 7. SUBSEQUENT EVENTS In September 1997, the Company entered into a merger agreement with DAOU Systems, Inc. ("DAOU"). DAOU, a publicly traded company will exchange 150,000 shares of common stock for all of the issued and outstanding common shares of the Company. 12 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma combined condensed financial statements give effect to the Merger of DAOU Systems, Inc. ("DAOU") and On-Line Networking, Inc. ("On-Line") accounted for using the pooling-of-interests method of accounting. These pro forma financial statements are presented for illustrative purposes only and therefore are not necessarily indicative of the operating results or financial position that might have been achieved had the Merger occurred as of an earlier date, nor are they necessarily indicative of operating results or financial position which may occur in the future. A pro forma combined condensed balance sheet is provided as of September 30, 1997 and December 31, 1996, giving effect to the Merger as though it had been consummated on that date. Pro forma combined condensed statements of operations are provided for the nine-month periods ended September 30, 1997 and 1996 and the years ended December 31, 1996 and 1995, giving effect to the Merger as though it had occurred at the beginning of the earliest period presented. The pro forma combined condensed statements of operations for the years ended December 31, 1996 and 1995 are derived from the audited historical financial statements of DAOU and audited historical financial statements of On-Line. The pro forma combined condensed financial statements as of and for the nine-month periods ended September 30, 1997 and 1996 have been prepared on the same basis as the historical information derived from the audited financial statements. In the opinion of DAOU's and On-Line's management, the unaudited financial statements of DAOU and On-Line referred to above include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for such periods. 13 DAOU Systems, Inc. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS September 30, 1997 (IN THOUSANDS)
PRO FORMA ADJUSTMENTS DAOU ON-LINE FOR THE PRO FORMA HISTORICAL HISTORICAL TRANSACTION COMBINED ------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $12,029 $ 551 $ -- $ 12,580 Short-term investments 7,828 -- -- 7,828 Accounts receivable 5,629 665 -- 6,294 Contract work-in-progress 10,217 520 -- 10,737 Deferred income taxes 176 -- -- 176 Other current assets 672 10 -- 682 ------------------------------------------------------ Total current assets 36,551 1,746 -- 38,297 Due from officers/stockholders 116 -- -- 116 Equipment, furniture and fixtures, net 2,513 183 -- 2,696 Deferred income taxes 23 -- -- 23 Other assets 1,467 35 -- 1,502 ------------------------------------------------------ $40,670 $1,964 $ -- $42,634 ------------------------------------------------------ ------------------------------------------------------ LIABILTIIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 1,602 $ 144 $ -- $ 1,746 Accrued salaries and wages 1,064 745 -- 1,809 Deferred revenue 223 -- -- 223 Other accrued liabilities 2,448 337 -- 2,785 Income taxes payable 582 116 -- 698 Line of credit and long-term debt, current portion -- 34 -- 34 ------------------------------------------------------ Total current liabilities 5,919 1,376 -- 7,295 Deferred rent 38 -- -- 38 Long-term debt -- 47 -- 47 Stockholders' equity: Common stock 10 3 (3) 10 Additional paid-in capital 34,306 -- 3 34,309 Deferred compensation (972) -- -- (972) Retained earnings 1,369 538 -- 1,907 ------------------------------------------------------ Total stockholders' equity 34,713 541 -- 35,254 ------------------------------------------------------ $40,670 $1,964 $ -- $42,634 ------------------------------------------------------ ------------------------------------------------------
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS. 14 DAOU Systems, Inc. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEETS December 31, 1996 (IN THOUSANDS)
PRO FORMA ADJUSTMENTS DAOU ON-LINE FOR THE PRO FORMA HISTORICAL HISTORICAL TRANSACTION COMBINED ------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $2,447 $ 10 $ -- $ 2,457 Accounts receivable 5,287 884 -- 6,171 Contract work-in-progress 3,600 183 -- 3,783 Deferred income taxes 176 -- -- 176 Other current assets 602 6 -- 608 ---------------------------------------------------- Total current assets 12,112 1,083 -- 13,195 Due from officers/stockholders 228 -- -- 228 Equipment, furniture and fixtures, net 1,033 122 -- 1,155 Deferred income taxes 23 -- -- 23 Other assets 128 103 -- 231 ---------------------------------------------------- $13,524 $1,308 $ -- $14,832 ---------------------------------------------------- ---------------------------------------------------- LIABILTIIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 555 $ 241 $ -- $ 796 Accrued salaries and wages 875 145 -- 1,020 Deferred revenue 1,011 -- -- 1,011 Other accrued liabilities 745 420 152(2) 1,317 Income taxes payable 99 1 -- 100 Line of credit and long-term debt, current portion 150 76 -- 226 ---------------------------------------------------- Total current liabilities 3,435 883 152(2) 4,470 Deferred rent 62 -- -- 62 Redeemable preferred stock 8,190 -- -- 8,190 Long-term debt 18 -- 18 Stockholders' equity: Common stock 8 3 (3) 8 Additional paid-in capital 1,347 -- 3 1,350 Deferred compensation (1,166) -- -- (1,166) Accretion of preferred stock (572) -- -- (572) Retained earnings 2,220 404 (152)(2) 2,472 ---------------------------------------------------- Total stockholders' equity 1,837 407 (152)(2) 2,092 ---------------------------------------------------- $13,524 $1,308 $ -- $14,832 ---------------------------------------------------- ----------------------------------------------------
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS. 15 DAOU Systems, Inc. UNAUDITED PRO FORMA COMBINED CONDENSED STATMENTS OF OPERATIONS Year ended December 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS DAOU ON-LINE FOR THE PRO FORMA HISTORICAL HISTORICAL TRANSACTION COMBINED ------------------------------------------------------ Revenues $23,767 $4,616 $28,383 Cost of revenues 16,875 3,232 20,107 ---------------------- --------- Gross profit 6,892 1,384 8,276 Operating expenses: Sales and marketing 2,158 68 2,226 General and administrative 4,260 940 5,200 ---------------------- --------- 6,418 1,008 7,426 ---------------------- --------- Income from operations 474 376 850 Interest income (expense), net 208 (10) 198 ---------------------- --------- Income before income taxes 682 366 1,048 Provision for income taxes 121 5 150(1) 276 ------------------------------------------------------ Net income 561 361 (150)(1) 772 Accretion of redeemable preferred stock 485 -- 485 ------------------------------------------------------ Net income attributable to common stock $ 76 $ 361 $(150)(1) $ 287 ------------------------------------------------------ ------------------------------------------------------ Earnings per share data: Net income per common share and common share equivalents $ 0.03 --------- --------- Weighted average number of common shares and common share equivalents outstanding 9,703 --------- ---------
(1) Adjust the income tax provision for income taxes based on an incremental tax rate of 41%. Prior to merger transaction On-Line was an S corporation, therefore income taxes were the responsibility of the individual shareholders. SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS. 16 DAOU Systems, Inc. UNAUDITED PRO FORMA COMBINED CONDENSED STATMENTS OF OPERATIONS Year ended December 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS DAOU ON-LINE FOR THE PRO FORMA HISTORICAL HISTORICAL TRANSACTION COMBINED ------------------------------------------------------ Revenues $16,878 $2,985 $19,863 Cost of revenues 10,471 1,685 12,156 ----------------------- --------- Gross profit 6,407 1,300 7,707 Operating expenses: Sales and marketing 1,055 65 1,120 General and administrative 3,155 1,501 4,656 ----------------------- --------- 4,210 1,566 5,776 ----------------------- --------- Income (loss) from operations 2,197 (266) 1,931 Interest income (expense), net 73 (11) 62 ----------------------- --------- Income (loss) before income taxes 2,270 (277) 1,993 Provision (benefit) for income taxes 851 24 (114)(1) 761 ------------------------------------------------------ Net income (loss) 1,419 (301) 114 (1) 1,232 Accretion of redeemable preferred stock 87 -- -- 87 ------------------------------------------------------ Net income (loss) attributable to common stock $1,332 $ (301) $114 (1) $ 1,145 ------------------------------------------------------ ------------------------------------------------------ Earnings per share data: Net income per common share and common share equivalents $ 0.14 ---------- ---------- Weighted average number of common shares and common share equivalents outstanding 8,266 ---------- ----------
(1) Adjust the income tax provision for income taxes based on an incremental tax rate of 41%. Prior to merger transaction On-Line was an S corporation, therefore income taxes were the responsibility of the individual shareholders. SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS. 17 DAOU Systems, Inc. UNAUDITED PRO FORMA COMBINED CONDENSED STATMENTS OF OPERATIONS Nine months ended September 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS DAOU ON-LINE FOR THE PRO FORMA HISTORICAL HISTORICAL TRANSACTION COMBINED ------------------------------------------------------ Revenues $23,058 $4,133 $27,191 Cost of revenues 15,945 2,921 18,866 ----------------------- --------- Gross profit 7,113 1,212 8,325 Operating expenses: Sales and marketing 3,667 75 3,742 General and administrative 3,558 777 4,335 Merger costs 640 44 684 ----------------------- --------- 7,865 896 8,761 ----------------------- --------- Income (loss) from operations (752) 316 (436) Interest income (expense), net 551 (19) 532 Other income 34 -- 34 ----------------------- --------- Income (loss) before income taxes (167) 297 130 Provision for income taxes 590 117 707 ------------------------------------------------------ Net income (loss) $ (757) $ 180 $ (577) ------------------------------------------------------ ------------------------------------------------------ Earnings per share data: Net loss per common share $ (0.05) --------- --------- Weighted average number of common shares outstanding 11,580 --------- ---------
(1) Adjust the income tax provision for income taxes based on an effective tax rate of 41%. Prior to merger transaction On-Line was an S corporation, therefore income taxes were the responsibility of the individual shareholders. SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS. 18 DAOU Systems, Inc. UNAUDITED PRO FORMA COMBINED CONDENSED STATMENTS OF OPERATIONS Nine months ended September 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS DAOU ON-LINE FOR THE PRO FORMA HISTORICAL HISTORICAL TRANSACTION COMBINED ------------------------------------------------------ Revenues $15,796 $3,534 $19,330 Cost of revenues 11,201 2,551 13,752 ----------------------- --------- Gross profit 4,595 983 5,578 Operating expenses: Sales and marketing 1,389 37 1,426 General and administrative 2,901 742 3,643 ----------------------- --------- 4,290 779 5,069 ----------------------- --------- Income from operations 305 204 509 Interest income (expense), net 170 (9) 161 ----------------------- --------- Income before income taxes 475 195 670 Provision for income taxes 84 3 80 (1) 167 ------------------------------------------------------ Net income $ 391 $ 192 $(80)(1) $ 503 ------------------------------------------------------ ------------------------------------------------------ Earnings per share data: Net income per common share and common share equivalents $ 0.05 --------- --------- Weighted average number of common shares and common share equivalents outstanding 9,178 --------- ---------
(1) Adjust the income tax provision for income taxes based on an incremental tax rate of 41%. Prior to merger transaction On-Line was an S corporation, therefore income taxes were the responsibility of the individual shareholders. SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS. 19 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. The unaudited pro forma combined condensed financial statements of DAOU Systems, Inc. ("DAOU") and On-Line Networking, Inc. ("On-Line") give retroactive effect to the Merger using the pooling-of-interests method of accounting, and, as a result, the unaudited pro forma combined condensed balance sheets and statements of operations are presented as if the condensed financial statements will become the historical financial statements of DAOU upon issuance of financial statements for a period that includes the Merger date. The unaudited pro forma combined condensed financial statements reflect the issuance of 150,000 fully paid and nonassessable shares of DAOU's common stock for each share of On-Line common stock to effect the Merger. 2. The unaudited pro forma combined condensed balance sheets combine DAOU's September 30, 1997 unaudited balance sheet with On-Line's September 30, 1997 unaudited balance sheet. The unaudited pro forma combined condensed balance sheets combine DAOU's December 31, 1996 audited balance sheet with On-Line's December 31, 1996 audited balance sheet. The adjustment related to the estimated costs of the merger transaction and integration of the businesses and are estimated to be approximately $160,000, net of estimated tax benefits of approximately $8,000. No pro forma adjustment was reflected in the combined condensed balance sheets as of September 30, 1997 as these costs were accrued during this quarter. 3. The unaudited pro forma combined condensed statements of operations combine DAOU's historical results for the years ended December 31, 1996 and 1995 and the unaudited nine-months ended September 30, 1997 and 1996 with the On-Line historical results for the years ended December 31, 1996 and 1995 and the unaudited nine months ended September 30, 1997 and 1996, respectively. 4. The unaudited pro forma data are presented for informational purposes only and do not give effect to any synergies that may occur due to the combining of DAOU's and On-Line's existing operations. DAOU incurred charges of $152,000, net of taxes, in the quarter ending September 30, 1997, the quarter in which the Merger was consummated, to reflect costs associated with combining the operations of the two companies and transaction fees and costs incident to the Merger. This charge is reflected in the unaudited pro forma combined condensed balance sheet as of December 31, 1996 but is not included in the unaudited pro forma combined condensed statement of operations. 20 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: November 26, 1997 DAOU SYSTEMS, INC. By: /s/ Fred C. McGee ------------------------------------------ Fred C. McGee, Chief Financial Officer 21 EXHIBIT INDEX Exhibit No. Document Description -------- ---------------------------------------------------- 2.1* Agreement and Plan of Merger, dated as of September 25, 1997, by and among DAOU Systems, Inc., a Delaware corporation, DAOU On-Line, Inc., a Delaware corporation and wholly owned subsidiary of DAOU Systems, Inc., On-Line Networking, Inc., a New Jersey corporation, and the Stockholders of On-Line Networking, Inc. 99.1** Press release entitled "DAOU Systems Merges with On-Line Networking, Inc." * Filed as an exhibit to the Company's Current Report on Form 8-K which was filed with the Securities and Exchange Commission on October 29, 1997 and incorporated herein by reference. ** Filed as an exhibit to the Company's Current Report on Form 8-K which was filed with the Securities and Exchange Commission on September 26, 1997 and incorporated herein by reference. -----END PRIVACY-ENHANCED MESSAGE-----